In this two part series for the CSBR Zero-Sum blog, senior writers Lloyd Lyall and Jason Xiao go head-to-head over the Brexit debate. This week they tackle the constructive arguments for their position; next week, they will have an opportunity to respond to each other’s claims.
On June 23rd, British voters will take to the polls with a chance to shape their country’s economic future. The ballot will feature just one question: Should the United Kingdom remain a member of the European Union, or leave it? While EU membership entails a plethora of social and political issues, the economic consequences of the EU referendum will certainly be among its most far-reaching and impactful legacies. Here, I will argue what has largely been the consensus among Britain’s economic policy experts and leading academics: “Brexit” will be an economic disaster.
The first reason for Britain to stay in the EU is the enormous swath of inter-EU trade benefits it will lose by leaving. Trade with the EU is enormously important for Britain; 45% of British exports go to European Union countries. Much of this trade is only possible because of the shared regulatory standards, trade agreements and ease of movement provisions between EU member states. If the UK left, if would immediately face higher tariffs as a result of losing the preferential trade status conferred upon EU members. Non-tariff barriers to trade would also rise: most EU regulation collapses 28 national standards into one European one, but by leaving the union, UK businesses would have to navigate significantly more red-tape to sell their products. This significantly dampens Britain’s ability to do business with its most important group of trading partners.
A second reason not to go is that Britain’s departure would leave it without the ability to benefit from EU-negotiated international trade deals. The EU currently holds many major trade agreements with other economic world powers (upwards of 50 are either currently in force or provisionally applied), and as an EU member the UK benefits from the terms of these agreements. For example, the EU is currently in the midst of negotiating new major agreements with the United States (the Transatlantic Trade and Investment Partnership) and Japan. The London School of Economics estimates that these new trade deals would lower UK prices by a further 0.6% and save UK consumers £6.3 billion per year. If Britain leaves the EU, its ability to benefit from agreements like these will disappear.
Proponents of Brexit argue that the UK can simply renegotiate trade agreements with all of its current partners, but there are several reasons to believe that the renegotiation process will be both painfully long and largely unsuccessful. First, it is important to recognize the sheer logistical challenge of renegotiating hundreds of trade agreements with dozens of countries at the same time. A limited amount of UK negotiators will need to tackle a massive number of issues, and as a consequence there is likely to be a long and painful transition as new deals are ironed out.
Even in the long run, however, there is good reason to believe that UK-negotiated deals will simply be worse than the current EU deals the UK benefits from. With a combined GDP larger than any single world country, the EU bloc has tremendous power in international trade negotiations. It can negotiate from a position of strength, because its member states constitute a significant portion of other countries’ buyers. The UK alone, however, is a much less important trade partner for other countries and hence has far less ability to secure favorable deals for itself.
To illustrate, consider the role played by the United States. The US is one of the UK’s most crucial trade partners: as the UK’s largest single-country export destination it consumes $50.2 billion worth of British goods and services annually. When UK trade interests are represented by the EU block at the negotiating table, the US has an incentive to listen: the EU as a bloc does more trade with the US than any single country in the world. As only one component of that bloc, however, the UK accounts for just 3% of US total trade. If the US were instead negotiating trade deals with just the UK, it would be far easier for the US to ignore British interests and offer unfair deals: the UK needs the US far more than the US needs the UK. The result is tariffs and regulations that are more one-sided and biased against the UK than the status quo.
Even if all I have argued thus far turns out to be wrong and Britain does miraculously renegotiate outstanding deals with all of its current trade partners, the uncertainty that exists at present will impact another crucial area: investment. Foreign direct investment in particular is a crucial issue for the UK: it is the biggest net recipient of FDI in the European Union, and needs capital inflows to finance its large current-account deficit. Uncertainty over the UK’s future after a Brexit will turn away foreign investment, damning the UK to a long and painful road to recovery.
A UK exit from the EU would pose massive and long-lasting damage to the British economy. The London School of Economics has estimated such an exit could sink UK income immediately by £50 billion per year, with the long-run impacts of Brexit this figure could turn out to be far more. The magnitude of this choice is scary indeed: British voters have an opportunity this June to cripple the world’s foremost political union and launch their country to instability and recession. If they vote responsibly, they will reject Brexit and avoid this fate.
By Lloyd Lyall
"Foreign Trade." United States Census Bureau. U.S. Department of Commerce, Dec. 2015. Web. 27 Feb. 2016. https://www.census.gov/foreign-trade/statistics/highlights/toppartners.html.
“A Background Guide to “Brexit” from the European Union.” The Economist. Feb. 2016.Web. 27. Feb. 2016. http://www.economist.com/blogs/graphicdetail/2016/02/graphics-britain-s-referendum-eu-membership.
Dhingra, Swati; Gianmarco Ottaviano and Thomas Sampson. “Should We Stay or Should We Go? The Economic Consequences of Leaving the EU.” The London School of Economics and Political Science. Feb. 2016. Web. 27. Feb. 2016. http://cep.lse.ac.uk/pubs/download/EA022.pdf.
Picture taken by Pavlina Jane on July 13, 2013, titled "Time Bank, London", obtained through Creative Commons.