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The consequences of Brexit for UK trade and living standards

The most ‘optimistic’ post-Brexit scenario for UK trade – in which the country adopts Norway’s model and remains part of the European Union (EU) single market – would see average incomes fall by about £850 per household. But the post-Brexit loss of income from reduced trade and lower productivity could be as high as £6,400 per household.

These are among the findings of new research by the Centre for Economic Performance (CEP) at the London School of Economics. The second report in a series of #CEPBrexit analyses examines how leaving the EU would affect UK living standards through trade. The report shows that: The economic consequences of leaving the EU will depend on what policies the UK adopts following Brexit. But lower trade due to reduced integration with EU countries is likely to cost the UK economy far more than is gained from lower contributions to the EU budget.

The EU is the UK’s largest trade partner. Around a half of the UK’s trade is with the EU. EU membership reduces trade costs between the UK and the EU. This makes goods and services cheaper for UK consumers and allows UK businesses to export more. Brexit would lower trade between the UK and the EU because of higher tariff and non-tariff barriers to trade. In addition, the UK would benefit less from future market integration within the EU. The main economic benefit of leaving the EU would be a lower net contribution to the EU budget.

By reducing trade, Brexit would lower UK living standards. The fall in income per capita resulting from lower trade more than offsets any savings that the UK obtains from reduced fiscal contributions to the EU budget. In the baseline estimate, after accounting for fiscal savings, the effect of Brexit is equivalent to a fall in UK income of between 1.3% and 2.6% – that is, a decline in average annual household income of between £850 and £1,700 per year.

In the long run, reduced trade lowers productivity. Factoring in these effects substantially increases the costs of Brexit to a loss of 6.3% to 9.5% of GDP (£4,200 to £6,400 per household). This is a larger decline than in the decline in UK GDP during the global financial crisis in 2008-09. Even if the UK unilaterally removed all its formal trade barriers with the rest of the world after Brexit, UK incomes fall by 1% in the optimistic case and 2.3% in the pessimistic case.
CEP director Professor John Van Reenen comments:

‘Our work leaves little doubt that there is a serious cost for real wages and pensions from leaving the EU. Even ignoring any chilling effect on foreign investment and productivity from Brexit, the income losses from lower trade are clear. Regulatory overhauls are unlikely to offset these losses to any great extent.’ ‘The issue facing voters is whether they feel that the social and political benefits of Brexit outweigh the evidence that we will be poorer.’

One of the report’s authors, Thomas Sampson, adds: ‘In the optimistic scenario where incomes shrink by only 1.3% we would – like Norway and Switzerland – have to pay into the EU budget and accept EU regulations that we had no say in deciding. What’s more, there would still be free migration of labour. ‘Given the politics, this makes the pessimistic outcome more likely.’

Swati Dhingra, another member of the CEP team, says: ‘Negotiating new free trade deals is tough. The UK won’t automatically benefit from the EU’s trade deals with the United States and Japan worth around 0.6% of GDP.’ ‘We are under a fifth of the size of current single market, so although we won’t have to pool our interests with the EU, we won’t have as much bargaining clout.’

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