June 23, 2016, is considered to be a historic day. Citizens of the United Kingdom voted to leave the European Union, which has led to a series of analysis with respect to what will happen in the trade bloc and in the United Kingdom. This article examines the effect on trade, migration, regulation and tax contributions, which has an impact on the markets (products, labor relations and capital) and on the economy (production and productivity, jobs and public finances).
Introduction
Exports from the United Kingdom to the European Union accounted for approximately 55% of its total exports in 1999, but this percentage decreased to 45% in 2014. The United Kingdom receives approximately one tenth of the exports from the European Union. In addition, the United Kingdom is the fifth largest economy in the world and continues to benefit from a significant foreign direct investment which, as it is long-term, is unlikely to fall immediately.
The free movement of labor in the European Union led to a greater net migration to the United Kingdom than to other states of the EU in the last decade. In 40 years, the UK has experienced a significant increase in its population, about 15%, distributed in 40% by population growth, 40% by migration from outside Europe and 20% by migration from the European Union. Thus, according to the laws of free movement of the European Union, migration has represented an increase in the UK population of approximately 3% since 1973.
Being a member of the European Union has had very different effects on the structure and the magnitude of the regulations in the United Kingdom by means of legislative instruments.
From 2010 to 2015, the average gross contribution of the United Kingdom to the European Union was 16.8 billion pounds; however, the UK also received tax transfers from the UE in the form of public receipts worth approximately 4.4 billion pounds per year, which are mainly paid to the private sector, but are redirected by means of government departments of the United Kingdom. The country received a rebate based on the difference between its contributions and what it received. This means that the net UK contribution to the budget of the European Union during those years was approximately 8.8 billion pounds per year, or 0.5% of GDP (the net contribution of the United Kingdom in 2015 was estimated at approximately 8.5 billion pounds).
Between 2010 and 2015, the net contributions remained stable at an average of 0.5%. However, in 2009 the net budgetary contribution from the United Kingdom was much lower, at 0.3%. The increase in the following years was mainly due to the reduction of the rebates in the differential. The public sector budget of the European Union was approximately 4.7 billion pounds between 2009 and 2015.
Possible Effects of Leaving the European Union Trade and Investment
There are a number of mechanisms by which the exit of the United Kingdom from the European Union may affect its trade: increase of trade barriers, increased non-tariff barriers, opportunity costs of subsequent reductions of non-tariff barriers within the European Union and the impact on future trade agreements with countries outside the European Union.
The exit of the United Kingdom from the European Union would cause it to run the risk of paying additional taxes or fees applied in other countries so that they can access other major European markets.
In some sectors, local regulations act as non-monetary barriers to cross-border trade. These non-tariff barriers are in addition to the costs of trade in goods and services. Non-tariff rates are the costs of crossing borders, such as the time devoted to revisions in customs and the management of imports and exports. These costs will rise when the United Kingdom leaves the European Union. According to Ciuriak (2015), cross-border costs will represent 1.2% of GDP in the United Kingdom if it fails to negotiate a favorable trade agreement after its departure. However, one should bear in mind that the characteristics of the non-tariff rates on goods and services differ significantly.
One of the main benefits of being part of the European Union market is that it has helped reduce non-tariff rates within the UE. For example, it standardized the regulations of the 28 member states to comply with a single set of rules. Therefore, non-tariff rates applied to the exchange of goods and services between the United Kingdom and the rest of the European Union can increase with the departure of the UK, due to the gradual regulatory divergence.
There is academic research that supports the fact that the costs of the non-tariff rates in trade are greater than the cost of the tariffs. Looi Kee, Nicita and Olarrega (2009) argue that, on average, non-tariff rates contribute an additional 87% to the trade restriction level imposed by tariffs. In a similar manner to the increases in tariffs, the increase in these rates would also elevate the costs of exports from the United Kingdom to the European Union.
Ottaviano and Peri (2014) estimate that the increase in non-tariff rates of the European Union and the United Kingdom will result in a reduction of GDP of the UK of between 0.4% and 0.9%, depending on whether it is able to negotiate a favorable trade agreement with the EU.
Foreign trade
One of the potential benefits of the United Kingdom leaving the European Union is that it would establish its own trade policy, independent of the interests of other member states of the EU. For example, it could make trade agreements with other major emerging economies or rapidly growing markets without having to negotiate as a trade bloc. Ciuriak (2015) emphasizes that a free trade agreement with the major economies of East Asia, including China, Japan, India and the Association of Southeast Asian Nations, would generate about 0.6% of GDP for the UK.
On the other hand, leaving the European Union means giving up the trade agreements that the EU has established with other countries. It currently has preferential trade agreements with 53 countries and is negotiating with another 72. Therefore, in practice, the UK would have to renegotiate 125 trade agreements.
Migration
Migrants from the European Union contribute to the UK economy by propping up the workforce, so that they have an important role in the economy and account for about 6% of the total active working population.
Migrants from the EU also tend to be younger than the native population. The average age of a migrant from the EU is 32.5 years, according to the statistics of 2011, compared with the average age of 40.8 years of British workers. In addition, migrants from the EU have lower levels of economic inactivity than the British.
Several studies have sought to understand the effect of migration on the economies and, in particular, on the labor markets. When migration increases the workforce of an economy, the possibility of increased economic output opens up. In the context of the EU economy, the free movement of labor within the European Union allowed companies to take advantage of a larger pool of workers. If the UK fails to retain the principle of free movement of labor, the immediate impact will be the reduction of the workforce.
There are still no solid estimates of the impact of migration on GDP of the United Kingdom after the departure, but a study by Di Giovanni et al. (2014) estimates that the recent reduction of international migration brought a loss of general social well being of the United Kingdom, which remained at less than 1.5%.
In general, economic theory does not predict any negative long-term effect. However, there could be several short-term results, depending on the economic context and the combination of skills of the workforce in sectors where migrants compete with native workers, i.e., where they are direct replacements in the market.
It is likely that there will be restrictions on migration both in the European Union and the United Kingdom. However, there may be conditions for migrants of the EU to continue working in the UK, with or without the status of permanent residence. In practice, this means that European migrants who are already in the United Kingdom could stay, while restrictions on future flows would be imposed.
Regulation
In the beginning, upon its departure from the European Union, the United Kingdom can revise or remove some or all of the regulations to which it has been subject. However, in some cases, the United Kingdom has introduced regulations that go beyond the minimal standards required by the EU, and it is possible that British lawmakers may not be willing to reverse these regulations.
An analysis of the politically viable regulatory changes in the United Kingdom due to its exit from the European Union points to a potential savings of 12.8 billion pounds per year. This is just a little more than the potential savings it would have in an extreme case without political constraints, in which the calculation of the annual savings would be 24.4 billion pounds.
A review of the regulations of the financial services notes that it is unlikely there will be major changes in many policy areas because the United Kingdom must adhere to international regulatory commitments in any event. Most EU regulations would continue to be applied in the UK, which would also make it possible to apply parliamentary or statuary proceedings so that they would be included or would remain within British law. Meanwhile, the guidelines that the application of national legislation requires will remain in force until they are amended or deleted.
Tax contribution
Upon leaving the European Union, the United Kingdom will no longer contribute to its budget, although that depends on the conditions of its departure. If the UK joins the European economic area like Norway, it would still have to make a contribution to be able to participate in this single market, albeit in a smaller proportion. On the other hand, if the United Kingdom negotiates a free trade agreement or does not pact a trade access agreement, it would not have to contribute to the European budget.
Conclusions
The decision has already been made: the United Kingdom will leave the European Union. From the date of the referendum, two years must pass before the exit from the bloc will materialize. There will be changes in trade, migration, regulations and tax contributions, and in some areas they could be drastic and change the position of the United Kingdom in the global economic context as well as establish precedents in labor relations and capital, production and productivity, employment and public finances, which would have an impact on the social sphere. It is a fact that not everything that was negotiated and established to be part of the European Union will be eliminated. However, it will have to be reconsidered, and this will change the relations not only of the United Kingdom with the European Union, but of each one inside and outside its borders.
Bibliography
Bank of England (2015b), “The impact of immigration on occupational wages: Evidence from Britain,” Staff Working Paper No. 574, December 2015.
Barrell, R. and Pain, N. (1998) “Real exchange rates, agglomerations and irreversibilities: Macroeconomic policy and FDI in EMU,” Oxford Review of Economic Policy, Vol. 14, pp. 152-167.
Department for Business, Innovation and Skills (BIS) and Home Office (2014), “Impacts of migration on UK native employment: An analytical review of the evidence,” March 2014.
Bloomberg (2016b), “The impact of ‘brexit’ on sovereign ratings for the U.K.,” February 2016.
Ciuriak Consulting (2015), “The trade-related impact of a UK exit from the EU single market,” April 25, 2015.
Deutsche Bank (2016), “The UK & EU: Exit Emergency,” February 2016.
Di Giovanni, J., Levchenko, A. and Ortega, F. (2014), “A global view of cross-border migration.”
McIntosh, S. (2013), “Hollowing out and the future of the labour market”, BIS Research Paper Number 134, Department for Business, Innovation and Skills, October 2013.
Office for National Statistics (2008), “Analysis of international trade and productivity, using the EUKLEMS database,” November 2008.
Open Europe (2015), “What if…? The consequences, challenges and opportunities facing Britain outside the EU,” March 2015.
Ottaviano, G. and Peri, G. (2005), “Rethinking the gains from immigration: Theory and evidence from the U.S.”
The Impact of “Brexit” on Markets and the Economy
June 23, 2016, is considered to be a historic day. Citizens of the United Kingdom voted to leave the European Union, which has led to a series of analysis with respect to what will happen in the trade bloc and in the United Kingdom. This article examines the effect on trade, migration, regulation and tax contributions, which has an impact on the markets (products, labor relations and capital) and on the economy (production and productivity, jobs and public finances).
Introduction
Exports from the United Kingdom to the European Union accounted for approximately 55% of its total exports in 1999, but this percentage decreased to 45% in 2014. The United Kingdom receives approximately one tenth of the exports from the European Union. In addition, the United Kingdom is the fifth largest economy in the world and continues to benefit from a significant foreign direct investment which, as it is long-term, is unlikely to fall immediately.
The free movement of labor in the European Union led to a greater net migration to the United Kingdom than to other states of the EU in the last decade. In 40 years, the UK has experienced a significant increase in its population, about 15%, distributed in 40% by population growth, 40% by migration from outside Europe and 20% by migration from the European Union. Thus, according to the laws of free movement of the European Union, migration has represented an increase in the UK population of approximately 3% since 1973.
Being a member of the European Union has had very different effects on the structure and the magnitude of the regulations in the United Kingdom by means of legislative instruments.
From 2010 to 2015, the average gross contribution of the United Kingdom to the European Union was 16.8 billion pounds; however, the UK also received tax transfers from the UE in the form of public receipts worth approximately 4.4 billion pounds per year, which are mainly paid to the private sector, but are redirected by means of government departments of the United Kingdom. The country received a rebate based on the difference between its contributions and what it received. This means that the net UK contribution to the budget of the European Union during those years was approximately 8.8 billion pounds per year, or 0.5% of GDP (the net contribution of the United Kingdom in 2015 was estimated at approximately 8.5 billion pounds).
Between 2010 and 2015, the net contributions remained stable at an average of 0.5%. However, in 2009 the net budgetary contribution from the United Kingdom was much lower, at 0.3%. The increase in the following years was mainly due to the reduction of the rebates in the differential. The public sector budget of the European Union was approximately 4.7 billion pounds between 2009 and 2015.
Possible Effects of Leaving the European Union
Trade and Investment
There are a number of mechanisms by which the exit of the United Kingdom from the European Union may affect its trade: increase of trade barriers, increased non-tariff barriers, opportunity costs of subsequent reductions of non-tariff barriers within the European Union and the impact on future trade agreements with countries outside the European Union.
The exit of the United Kingdom from the European Union would cause it to run the risk of paying additional taxes or fees applied in other countries so that they can access other major European markets.
In some sectors, local regulations act as non-monetary barriers to cross-border trade. These non-tariff barriers are in addition to the costs of trade in goods and services. Non-tariff rates are the costs of crossing borders, such as the time devoted to revisions in customs and the management of imports and exports. These costs will rise when the United Kingdom leaves the European Union. According to Ciuriak (2015), cross-border costs will represent 1.2% of GDP in the United Kingdom if it fails to negotiate a favorable trade agreement after its departure. However, one should bear in mind that the characteristics of the non-tariff rates on goods and services differ significantly.
One of the main benefits of being part of the European Union market is that it has helped reduce non-tariff rates within the UE. For example, it standardized the regulations of the 28 member states to comply with a single set of rules. Therefore, non-tariff rates applied to the exchange of goods and services between the United Kingdom and the rest of the European Union can increase with the departure of the UK, due to the gradual regulatory divergence.
There is academic research that supports the fact that the costs of the non-tariff rates in trade are greater than the cost of the tariffs. Looi Kee, Nicita and Olarrega (2009) argue that, on average, non-tariff rates contribute an additional 87% to the trade restriction level imposed by tariffs. In a similar manner to the increases in tariffs, the increase in these rates would also elevate the costs of exports from the United Kingdom to the European Union.
Ottaviano and Peri (2014) estimate that the increase in non-tariff rates of the European Union and the United Kingdom will result in a reduction of GDP of the UK of between 0.4% and 0.9%, depending on whether it is able to negotiate a favorable trade agreement with the EU.
Foreign trade
One of the potential benefits of the United Kingdom leaving the European Union is that it would establish its own trade policy, independent of the interests of other member states of the EU. For example, it could make trade agreements with other major emerging economies or rapidly growing markets without having to negotiate as a trade bloc. Ciuriak (2015) emphasizes that a free trade agreement with the major economies of East Asia, including China, Japan, India and the Association of Southeast Asian Nations, would generate about 0.6% of GDP for the UK.
On the other hand, leaving the European Union means giving up the trade agreements that the EU has established with other countries. It currently has preferential trade agreements with 53 countries and is negotiating with another 72. Therefore, in practice, the UK would have to renegotiate 125 trade agreements.
Migration
Migrants from the European Union contribute to the UK economy by propping up the workforce, so that they have an important role in the economy and account for about 6% of the total active working population.
Migrants from the EU also tend to be younger than the native population. The average age of a migrant from the EU is 32.5 years, according to the statistics of 2011, compared with the average age of 40.8 years of British workers. In addition, migrants from the EU have lower levels of economic inactivity than the British.
Several studies have sought to understand the effect of migration on the economies and, in particular, on the labor markets. When migration increases the workforce of an economy, the possibility of increased economic output opens up. In the context of the EU economy, the free movement of labor within the European Union allowed companies to take advantage of a larger pool of workers. If the UK fails to retain the principle of free movement of labor, the immediate impact will be the reduction of the workforce.
There are still no solid estimates of the impact of migration on GDP of the United Kingdom after the departure, but a study by Di Giovanni et al. (2014) estimates that the recent reduction of international migration brought a loss of general social well being of the United Kingdom, which remained at less than 1.5%.
In general, economic theory does not predict any negative long-term effect. However, there could be several short-term results, depending on the economic context and the combination of skills of the workforce in sectors where migrants compete with native workers, i.e., where they are direct replacements in the market.
It is likely that there will be restrictions on migration both in the European Union and the United Kingdom. However, there may be conditions for migrants of the EU to continue working in the UK, with or without the status of permanent residence. In practice, this means that European migrants who are already in the United Kingdom could stay, while restrictions on future flows would be imposed.
Regulation
In the beginning, upon its departure from the European Union, the United Kingdom can revise or remove some or all of the regulations to which it has been subject. However, in some cases, the United Kingdom has introduced regulations that go beyond the minimal standards required by the EU, and it is possible that British lawmakers may not be willing to reverse these regulations.
An analysis of the politically viable regulatory changes in the United Kingdom due to its exit from the European Union points to a potential savings of 12.8 billion pounds per year. This is just a little more than the potential savings it would have in an extreme case without political constraints, in which the calculation of the annual savings would be 24.4 billion pounds.
A review of the regulations of the financial services notes that it is unlikely there will be major changes in many policy areas because the United Kingdom must adhere to international regulatory commitments in any event. Most EU regulations would continue to be applied in the UK, which would also make it possible to apply parliamentary or statuary proceedings so that they would be included or would remain within British law. Meanwhile, the guidelines that the application of national legislation requires will remain in force until they are amended or deleted.
Tax contribution
Upon leaving the European Union, the United Kingdom will no longer contribute to its budget, although that depends on the conditions of its departure. If the UK joins the European economic area like Norway, it would still have to make a contribution to be able to participate in this single market, albeit in a smaller proportion. On the other hand, if the United Kingdom negotiates a free trade agreement or does not pact a trade access agreement, it would not have to contribute to the European budget.
Conclusions
The decision has already been made: the United Kingdom will leave the European Union. From the date of the referendum, two years must pass before the exit from the bloc will materialize. There will be changes in trade, migration, regulations and tax contributions, and in some areas they could be drastic and change the position of the United Kingdom in the global economic context as well as establish precedents in labor relations and capital, production and productivity, employment and public finances, which would have an impact on the social sphere. It is a fact that not everything that was negotiated and established to be part of the European Union will be eliminated. However, it will have to be reconsidered, and this will change the relations not only of the United Kingdom with the European Union, but of each one inside and outside its borders.
Bibliography
Bank of England (2015b), “The impact of immigration on occupational wages: Evidence from Britain,” Staff Working Paper No. 574, December 2015.
Barrell, R. and Pain, N. (1998) “Real exchange rates, agglomerations and irreversibilities: Macroeconomic policy and FDI in EMU,” Oxford Review of Economic Policy, Vol. 14, pp. 152-167.
Department for Business, Innovation and Skills (BIS) and Home Office (2014), “Impacts of migration on UK native employment: An analytical review of the evidence,” March 2014.
Bloomberg (2016b), “The impact of ‘brexit’ on sovereign ratings for the U.K.,” February 2016.
Ciuriak Consulting (2015), “The trade-related impact of a UK exit from the EU single market,” April 25, 2015.
Deutsche Bank (2016), “The UK & EU: Exit Emergency,” February 2016.
Di Giovanni, J., Levchenko, A. and Ortega, F. (2014), “A global view of cross-border migration.”
McIntosh, S. (2013), “Hollowing out and the future of the labour market”, BIS Research Paper Number 134, Department for Business, Innovation and Skills, October 2013.
Office for National Statistics (2008), “Analysis of international trade and productivity, using the EUKLEMS database,” November 2008.
Open Europe (2015), “What if…? The consequences, challenges and opportunities facing Britain outside the EU,” March 2015.
Ottaviano, G. and Peri, G. (2005), “Rethinking the gains from immigration: Theory and evidence from the U.S.”