Will Brexit hurt trade?

The EU referendum will be a major talking point this year. But what are the facts? In the first of a series of briefings, Simon Wilson looks at the potential impact on trade with the EU.

What’s the trade case against Brexit?

If it ain’t bust, don’t fix it. Britain’s trade with European Union (EU) nations has risen greatly since 1973 – from about 30% of UK exports to about 45% now – boosted by lower trade barriers and new export opportunities. Quantifying the boost that comes directly from EU membership is hard: it’s natural that much of our trade is done with our neighbours, and we can’t be sure what might have happened had the UK never joined.

But analysts from the Centre for European Reform think tank have concluded that Britain’s trade with the rest of the EU is 55% greater than it would have been if it were outside the club. Furthermore, say the “Stay” camp, Brexit would leave firms still spending large sums to comply with EU rules so as to access the single market. Regulatory divergence would grow over time, adding to costs, affecting volumes and the UK’s place in the supply chain.

What are the potential scenarios?

Talk of post-Brexit options often focuses on Norway, or the Turkish and Swiss examples. Norway, as a member of the European Economic Area (EEA), has access to the single market, but must adopt EU standards and regulations while having no influence over formulating them. This model doesn’t address the political causes of Brexit and is unattractive and unlikely. Similarly, a Turkish-style customs union would be a poor post-Brexit compromise.

A Swiss-style model, where the UK negotiates a series of bilateral accords governing access to the single market in specific sectors, would be more palatable, but it’s not clear it would be acceptable to the EU. That leaves the most plausible post-Brexit deal: a comprehensive Free Trade Agreement (FTA – absent which the relationship would be governed by existing World Trade Organisation – WTO – rules).

Why would the EU agree?

The Stay camp argue that Brussels is unlikely to come to a favourable deal with a rich Western country that had voluntarily chosen to leave. But many other analysts, such as Capital Economics’ Roger Bootle, argue that Britain would readily be able to negotiate a free-trade deal because it would be in the overwhelming interests of both parties to do so. The UK runs a big trade deficit (in goods, not services) with the EU – ie, they sell us far more than we sell them.

So if the EU erected punitive trade barriers on a post-exit UK (and bear in mind that under WTO rules, it is hard to apply a trade barrier where one didn’t previously exist), the EU would lose more in export earnings than Britain. In other words, even if the EU were angry about Brexit, it wouldn’t actually start self-harming. Yet it might not be that simple.

Why not?

Because the trading relationship is unbalanced and unevenly spread. First, the EU buys around 45% of British exports (down from 55% in 2000), whereas the UK accounts for 16% of the EU’s (according to an in-depth analysis by the NIESR think tank’s Jonathan Portes; other sources put the figure at 10%). This means the UK wouldn’t have an especially strong hand in post-exit talks.

Second, half of the EU’s trade surplus with the UK is accounted for by Germany and the Netherlands. Most of the 27 member states don’t have substantial surpluses in trade with us, and plenty have deficits. That could make things tricky, as any deal with the UK would require the assent of all 27.

But commercial interests would likely prevail – a post-exit UK would still be the EU’s biggest export market, and it is hard to envisage a big German exporter allowing Brexit to disrupt trade for long. And it would hardly be a disaster if no formal trade deal were in place. Japan, China, India and the US lack any FTA with the EU and manage to export to it quite easily.

Which sectors would be most affected?

According to the Open Europe think tank, the 35% of the UK’s goods exports to the EU that could be subject to high external tariffs post-exit (above 4%) – such as automotive, chemicals and foods – as well as the financial services sector, would be particularly prone to initial disruption, with potential knock-on effects on foreign direct investment.

However, the same analysis also predicts that preferential trade deals covering these goods sectors are “highly likely”. When it comes to services, and financial services in particular, the report concludes that guaranteeing seamless access to EU markets will be harder, not least because the UK has a trade surplus in services with the EU.

The argument of the “Brexiteers” is that some short-term disruption is worth it in pursuit of the potential long-term gains from (a) lighter and more tailored regulation (not possible under EU membership) and (b) the freedom to negotiate new trade deals with the rest of the world. We’ll move onto this subject – the question of the UK’s trade with the rest of the world – in the next briefing.

Trade deficit and exports: the figures

According to the most recent Office for National Statistics data, Britain’s trade deficit with EU countries rose to an all time high of £89bn last year (out of a total deficit of £125bn), as we bought French wine, German cars, Spanish vegetables and Italian clothes, but economically weaker EU countries bought less from us. Exports of British goods to the EU fell 8% to a six-year low of £134bn last year (£31bn less than in 2011 when the eurozone debt crisis hit hardest). Exports to non-EU countries edged up 2% to £151bn, meaning they accounted for 53% of overseas sales by British companies.