Impact of the UK Leaving the EU on Trade Effect - Case Study Example

Impact of the UK Leaving the EU on Trade Effect

Introduction

The EU is an imperative trade partner of the UK that accounts for almost half of all total imports and exports of the UK. The exports corresponds to about 15% of the UK’s GDP (Dhingra, Ottaviano and Sampson, 2015). Therefore, the UK membership to the EU is an undebatable issue because the EU is a political and economic union that encompasses 28 member states of the European. Thus, in a world that is being driven by globalisation that is reducing the world into almost a single village, the membership of the UK to the EU is necessarily for both economic and political benefits. For this reason, the EU membership is a critical factor to the UK’s economy because of the many trade benefits that the UK enjoys by being a partner of the EU since it facilitates more exportation of goods and services by many firms in the UK (Gözkaman, 2014). Therefore, an exit by the UK from the UK would imply that the UK would have to face higher tariffs and non-tariffs that would result in lower trade activities between the UK and other EU member states (Allen, 2015). The paper explores the effects of the UK exit from the EU and its impact on trade activities with a critical examination of policies and mechanisms that would affect trade. The exit of the UK from the EU would result to decreased economic activity between the UK and other EU member states.

Impact of UK Exit on Trade

Centre for European Reform (2014) states that the EU uses three tools to promote trade among many EU member states. It eliminates tariffs imposed on goods by establishing a right for businesses and persons to export and sell their goods, labour and services to other member states without having to comply with 28 regulations of different member states. The EU accomplishes this by establishing minimum regulatory standards that permit member states to accept or allow goods complying with those standards to be freely sold or exported across the EU single market. Therefore, an exit by the UK would expose it to trade tariffs that would limit its trade activities with other EU member states since it will no longer enjoy the free trade tariffs established by the EU for its member states. Moreover, free access that is provided by EU would hinder UK firms from accessing other EU member states’ markets.

Irwin (2015) argues that the UK exit from EU would dampen trade relationships between the UK and other EU member states. He goes on to state that this can result in either a FTA-based or Swiss model relationship regulatory divergence, which adds to an increase of trading costs over time and this would damage bilateral trade volumes of the UK and its position in the EU supply chains. The researcher further notes that the UK membership in the EU has over time boosted British exports with other countries by about 55%, which was equivalent to about £130 billion in 2012 at the expense of non-EU member states, especially in sectors such as footwear, agriculture and clothing that are protected sectors. The exit of the UK from the EU would also imply that the UK will have to negotiate terms of trade for accessing particular sectors, their regulations and standards under a FTA-based or Swiss model relationship. Therefore, the UK can choose to benefit from trade harmonisation of these regulations and standards by remaining in the EU or exit and bear costs of attributed to these standards.

Brexit also implies that the UK will have less influence in development of single market in the future, especially in the service sectors that contribute about 7% of the GDP to the UK’s economy, and where regulatory standards remain a significant factor (Irwin, 2015). Moreover, a single market in provided by the EU offers the UK an opportunity for innovation, competition and economies of scale and, therefore, an exit will deny the UK a chance to replicate these essential elements fully, which are critical are critical in determining the productivity of the UK in this sector (HM Treasury, 2010). For instance, between, 1996-2004 the UK’s export productivity growth rate stood at 1.3% compared to 0.8% an implication that an exit from the EU will deny the UK these facilitative factors resulting in lower export productivity rates in the future (Irwin, 2015).

The exit of the UK from the EU will diminish the UK’s attractiveness as an entry to Europe and this would result in reduction of FDI into UK because the EU is the biggest contributor of the UK’s FDI (Haskel, Pereira and Slaughter, 2002). In 2013, for instance, 46% of stock FDI of the UK was contributed by the EU and this percentage increased to 50% in 2012, an indication that the EU plays a significant role in trade and other financial matters of the UK (Irwin, 2015).

Springford and Tilford, (2014) argue that an exit by the UK from the UK is detrimental to the many British firms because even if the UK joined the European Economic Area (EEA) to access the EU market it will still need to comply with the EU trade policy to be allowed to join EEA. The researchers go on to assert that many EEA members enjoy membership of the EEA, but largely suffer from regulations without any representation. Moreover, if any member of the EEA fails to implement a standard, the EU has right to withdraw its membership. Therefore, the UK will be mandated to incur more regulatory costs in such a case by being a signatory of EEA because it would have no influence to ensure that EU policies are proportionate but just comply with what EU member states have signed or established. Conversely, Springford and Tilford, (2014) continue to argue that UK exports to the EU would be subjectable to rules of origin if the UK withdraws its membership from the EU. Moreover, administrative costs for calculating tariff expenses of extra-EU imports into the UK can be substantial to the UK.

Brexit also implies that the UK cannot inherit a plethora of EU’s FTA’s with third nations that are composed of complex systems of unilateral preferences of trade and bilateral trade agreements. Therefore, an exit from the EU would imply that the UK will have to start renegotiating these agreements afresh with non-EU member states. The processes of these renegotiations can be costly and time consuming, and thus can expose exporters from the UK to higher trade barriers (BBC News, 2015). For instance, the EU has been negotiating with Japan and the US for significant free trade agreements on Transatlantic Trade and Investment Partnership. Thus, through this agreement is estimated that the UK will benefit through a decline in prices by about 0.6%, which is equivalent to about 6.3 billion pounds annually (Dhingra, Ottaviano and Sampson, 2015). A Brexit would, thus, imply that the UK will lose benefits associated with this agreement or incur substantial cost to renegotiate it. Therefore, this implies that the exit of the UK from the EU is a costly activity that is likely to expose the UK to tariff and non-tariff restrictions for both its exports and imports (Ottaviano et al., 2014).

Proponents of the Brexit, however, argue EU member nations are part of a union of customs without tariffs on goods exported among member states but with a common tariff that applies to goods from non-member states. Therefore, the EU member states cannot lobby for free bilateral trade agreements externally with non-EU states since all agreements are coordinated by the Common Policy Act (ACP) at the EU level by the Trade Commissioner of the EU that acts as the lead negotiator (Miller, 2016). Therefore, the proponents assert that an exit would allow the UK to negotiate both bilateral and multi-lateral trade agreements outside the EU with emerging markets such as China. However, these proponents fail to recognise that cross border trade agreements that involve services are enshrined in the EU treaties and, therefore, a Brexit would still require such agreements to comply with the EU regulations (Miller, 2016; Clement, n.d.). Therefore, the assumption that the EU has become less significant for UK exports due to recent reports on goods indicating a drop in total exports to 47% of total exports to the EU while imports were 54% of total imports as of 2015, it is evident that the EU remains a large trade partner for the UK’s exports and imports (Miller, 2016).

Conclusion

It is evident from the literature that the EU remains a big trade partner for the UK’s goods and services. The UK benefits significantly from trade agreements signed by the EU and offers the UK a large single market within the European zone where it can export and import goods and services without having to comply with both tariffs and non-tariffs of different state members. Ultimately, it is critical that the UK remains in the EU to continue benefiting from its market and trade agreements.