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Brexit Series: Brexit negotiations and the economy

To what extent will the settlement that was agreed in the first phase impact our economy?

Phase one focused on three areas:

 

  1. Citizens’ rights: Those who arrive in the UK up to the date of withdrawal, and who live continuously in the UK for five years, will be able to stay in the UK indefinitely by successfully applying for ‘settled status’.

Implications: After Brexit, although skilled workers coming to the UK with an existing job offer are unlikely to be denied entry, it would be prudent for firms to begin thinking about investing more in training UK citizens to meet future labour demand.

 

  1. Northern Ireland border: the freedom of people to move unhindered across the border will continue (an important element of the Good Friday Agreement). However, a `hard border' for goods would seem to require customs checks on goods moving across the border.

Implications: Achieving frictionless trade will require innovative trade and customs arrangements between the EU, Ireland and the UK. These arrangements could produce a ‘softer Brexit’ for the UK in general with less disruption to trade.

 

  1. Financial settlement: The UK will continue its budget contribution to the end of 2020. Then, our outstanding liabilities of around £37bn will be paid (75% by 2030 and the rest by 2064).

Implications: At less than £3bn p.a. for ten years it represents less than a quarter of one percent of our GDP. It is small change and has to be compared with the net payment of around £9bn p.a. we currently pay into the EU budget.

 

How are the negotiations going in phase two? What indicators should businesses be looking out for that might inform their planning for the future?

The second phase involves detailed discussions on the future EU/UK trading relationship; the likely result is that our EU membership will be replaced by some kind of free trade agreement (FTA).

This FTA will not provide the seamless trade in goods and services that the UK currently enjoys. Trade costs will inevitably increase and non-tariff barriers will also disrupt trade.

The main problem is that the UK and EU will have separate regulatory jurisdictions. The absence of the European Court of Justice (ECJ) will limit the UK’s ability to obtain ‘mutual recognition’ in goods and financial services.

The main issue during this phase is this: how closely can regulations be aligned? According to Michel Barnier it needs “common law, coherent supervision and one legal authority”. The key stumbling block is the role of the ECJ post Brexit: how much judicial oversight is the UK prepared to accept?

Implications: Failure to achieve mutual recognition will mean that some UK industrial sectors could be impacted by non-tariff barriers: e.g. export-intensive technology businesses in chemicals, aerospace and automotive sectors but also wholesale and financial services.

Businesses should hope that discussions on regulatory alignment are heading towards a reasonable compromise. Failure will mean that a hard Brexit is a distinct possibility - with the increased likelihood of non-tariff barriers hurting export oriented businesses.

 

What’s your view of the recently published analysis of the likely economic impact of Brexit?

In short, the economic impact of Brexit is likely to be marginal. Recent evidence on both the costs and benefits of Brexit suggests that neither will have a significant impact on GDP.

For example, recent economic forecasts suggest that UK GDP will be slightly lower after Brexit. The loss ranges from a relatively low 0.6% up to 7.8% of GDP by 2030. But these figures are cumulative – so even the higher figure (7.8%) equates to less than 1% p.a. loss of GDP.

Lower UK GDP is based on the fact that entering into an FTA will reduce the UK’s volume of trade with the EU. By how much will our EU trade contract?

About 43% of UK trade currently goes to the EU and how much we lose will depend on the ‘Brexit deal’. Leaving with ‘no deal’ - the WTO option - will have the biggest negative impact. However, an FTA, like the EU-Canada accord, (which has already been offered to us by the EU) would reduce the impact on trade. A ‘softer’ deal - a ‘Norway’ solution - would reduce the impact even further.

The WTO option is expected to result in a loss of at least 10% of our trade with the EU and this underpins the 7.8% cumulative GDP loss highlighted above. However, even in this worst case scenario the loss is only 1% p.a.

Why is this? Although 40% of our trade is with the EU, only 30% of our GDP is actually traded; i.e. exports represent 30% of UK GDP. So, 30% of 40% equals 12%. If only 12% of our GDP is affected by EU trade, and if we were to lose 10% of this figure, it still amounts to only 1% of GDP. So, the costs of Brexit are likely to be small.

Conversely, the benefits of Brexit are also likely to be small. For example, a US trade deal would boost UK GDP by only 0.2% p.a. because the current level of tariffs is already very low. Also, the gains from ‘deregulation’ are likely to be low - most deregulation has been ruled out by UK ministers.

Putting these (small) costs and (small) benefits together suggest that the UK economy is NOT heading for a recession because of Brexit. Indeed, some alternative economic forecasts, suggest increased GDP growth in the medium term.

If you have any questions about this article please get in touch at emailus@acuitylegal.co.uk or ring 02920 482288

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