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The EU Single Market and the Economics of Brexit

The EU Single Market and the Economics of Brexit

The future of the United Kingdom’s relationship with the European Union is unknown, though there has been much speculation on what the details of Brexit will entail. In regards to the Single Market, which guarantees free movement of people, goods, services, and capital among member states, some experts have called for a special deal to be made with the EU to uphold as many of these provisions as possible. While a unique agreement with the EU will help the UK maintain economic stability, it must also be met with many domestic and transnational policy reforms, as well as new trade negotiations. In light of the UK’s decision to leave the EU, it must be willing to forfeit all benefits and privileges currently enjoyed by EU agreements, including the Single Market. As such, the UK must develop a new plan to ensure continued economic growth and secure trading partners.

 

Prime Minister Theresa May has been clear on her position, stating in a speech, “It is not going to be a ‘Norway model.’ It’s not going to be a ‘Switzerland model’. It is going to be an agreement between an independent, sovereign United Kingdom and the European Union.” She went on to say that, “We will seek the best deal possible as we negotiate a new agreement [on the single market] with the European Union.” Currently, Norway and Switzerland, although not members of the EU, enjoy certain benefits of the union on an opt-in basis as established through various treaties and agreements. However, May’s statement underlines the UK’s increasingly isolationist position, and its determination to forge its own path in the international community. By insisting creating its own ‘model,’ the UK will have more opportunity to craft an agreement it sees as ideal; however, it also gives the remaining members of the EU more leverage in designing it as they see fit as well.

 

Regardless of the exact details of the new agreement, which will not be seen until well after Article 50 is triggered by March 2017, the UK will not have the same access to the EU Single Market that it does now. Even if the government secures some benefits of the current arrangement, the UK’s economy is likely to suffer from increased transaction costs in trade and limited access to the open market. In order to look for the best possible deal in the future, as May stated, it is important to understand how the UK’s economy currently interacts with the Single Market.

 

The UK’s economy is intrinsically linked to the EU Single Market. Half of the UK’s trade and foreign investments are involved with the EU, with 53 percent of imported goods and services originating in other member countries, and 44 percent of exports going to the EU. Like most developed countries, the UK primarily exports services, and this sector makes up over 75 percent of the country’s economic output. Additionally, the UK has maintained a trade surplus of about 5 percent of GDP, meaning that more is exported than imported. When the UK loses access to the Single Market, it will become more difficult to export to the EU due to higher trade barriers. Unless the UK can tap into a different export market, they are likely to lose this trade surplus and experience a decrease in economic output, leading to a higher deficit and cuts in government spending.

 

The Single Market also guarantees job mobility and free movement of people. There are currently 1.2 million Britons living abroad in the EU, with about 800,000 of them working. Furthermore, there are currently 3.3 million EU citizens living in the UK, with 2.1 million of them employed. Immigration concerns were a main cause of Brexit, so it seems unlikely that the UK will negotiate for the free movement of people in a new agreement with the EU. While proponents of Brexit might call this a success in taking ‘British’ jobs back from immigrants, the high employment rate of EU citizens in the UK is a sign of national economic prosperity, not a race to the bottom for limited jobs with low wages. Large companies located in UK cities will also look to relocate to other EU commercial centers in order to continuing benefiting from the free movement of their workers, goods, and services. The loss of both large employers and vast numbers of workers will lead to further depressed economic output in the UK.

 

Under the threat of stagnated or decreased economic growth and trade, the UK is already looking to potential new trade partners. At a state visit in early November, the president of Colombia said that a new agreement with the UK had the potential to be better than the current deal the South American country has with the EU. Colombia is part of the Pacific Alliance, a trade bloc composed of three other historically strong Latin America economics – Chile, Peru, and Mexico – which would provide an even larger opportunity for new UK trade.

 

May also visited India in early November, in her first bilateral meeting outside Europe, to discuss, among other things, a new potential trade relationship. Unlike Colombia, India does not currently have a trade deal with the EU, and any attempts to create over the last decade have ultimately been unsuccessful. As discussed earlier, the UK must secure partners that are interested in service sector exports; however, India has tough restrictions on importing professional services, such as business, banking, and legal sectors. Immigration is also a controversial issue between the two countries, and India wants more temporary student and work visas to the UK in exchange for allowing more business. However, since a main component of Brexit involves reducing the number of immigrants in the country, this seems to be an unlikely concession.

 

Finally, the UK also recently hosted China for trade talks, announcing several new agreements to strengthen investment and business between the two countries. China has committed to investing in the London Royal Albert Docks project, while the UK will reciprocate with an investment in the Asian Infrastructure Investment Bank. UK Chancellor Hammond remarked that the UK’s “trade relationship with China is now more important than ever.” Unlike India and Colombia, China will carry out this agreement before UK negotiations with the EU are finalized, signaling that China will remain a reliable trade partner regardless of the outcome of the UK’s involvement with the Single Market.

 

The decision to leave the EU, and thus the Single Market, could have devastating effects on the UK’s economy, unless it seeks new markets for service sector exports. Colombia, India, and China all represent opportunities to connect with robust economies that will provide the UK with the exit strategy it needs. However, similar to the question of Indian immigration, there are likely to be challenges along the way, especially as most countries will not negotiate a new trade until after the UK has triggered Article 50 and has completed talks with the EU. While the possibility remains that the UK will successfully negotiate to retain provisions of the current Single Market, it is extremely unlikely that the EU will let the UK cherry-pick only the parts they want. No matter what deals are struck with any country, concessions will have to be made. Thus, the UK’s economic plan moving forward must be pragmatic, as well as diplomatic.

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