BACKGROUND | EUROPEAN POLICY | BREXIT
Trade in Goods: What is at Stake? The Costs of Brexit
27 February 2018
Basic Facts On 23 June 2016, the United Kingdom (UK) voted to exit the European Union (EU). On 29 March 2017, the UK officially notified the EU of its intention to leave by triggering Article 50 of the Treaty on European Union (TEU). The EU and the UK have until 29 March 2019 to agree on the conditions of the withdrawal and the nature of their future partnership.
Whichever arrangement ultimately governs the future economic relations between the EU27 and the UK, it will inevitably be less deep and extensive than the current full membership in the European Union.
For the UK, trade with the EU27 countries is of great importance. In 2016, seven of the top ten export destinations of the UK were EU27 countries, and as were six out of the top ten import origins. From 2002 to 2016, the volume of merchandise trade between the UK and the other EU Member States increased by 15.8 per cent.
The high degree of integration between the UK and the EU27 is underlined by trade in intermediate products. In 2014, the EU27 Members States shipped intermediate products worth around $230 billion to the UK. The United Kingdom exported intermediate products worth $202 billion to the EU27 the same year.
The UK seems to have lost some of its appeal as a business location for global investors in recent years. In 1990, 9.2 per cent of global FDI stocks were invested in the UK. This figure was down to 4.5 per cent in 2016. Investors from EU27 countries have nonetheless created 1.4 million jobs in the UK.
Studies show that Brexit will have negative economic effects for both sides, with the UK in danger of losing much more. For the UK, the cumulative effects until 2030 could amount to a loss of approximately 1.3 per cent of GDP under an optimistic scenario and 2.7 per cent under a pessimistic scenario according to a study by the LSE (LSE: 2017, static model, trade in goods only). For the EU27, the losses in GDP are estimated to range between 0.14 per cent under an optimistic scenario and 0.35 of GDP under a pessimistic scenario (LSE: 2017).
Stormy-Annika Mildner, Steven Heckler, Klara Schwobe, Christoph Sprich, Katherine Tepper, Eckart von Unger, | External Economic Policy | www.bdi.eu
Trade in Goods: What is at Stake?
BDI Task Force Brexit The BDI is committed to supporting the Brexit negotiation teams with in-depth expertise in a number of areas of economic policy. In summer 2017, the BDI set up a Task Force Brexit together with its member organisations, company representatives and partners including the Association of German Banks (BdB), the German Insurance Association (GDV), the Federation of German Wholesale, Foreign Trade and Services (BGA), the Confederation of German Employers' Associations (BDA) and the Association of German Chambers of Commerce and Industry (DIHK). The BDI Task Force Brexit has established ten project teams to address specific policy areas: (1) Trade in Goods, (2) Transportation and Logistics, (3) Data and ICT, (4) Taxation, (5) Legal consequences of Brexit in core areas of business law, (6) Energy and Climate Policy, (7) Market Access, (8) Workforce Mobility, (9) Banking, Finance and Insurance, (10) Negotiation Process (including Northern Ireland, Research and Development, Defence, Financial Commitments). The objective of the project teams is to identify the potential risks posed by the exit of the UK from the EU and to propose constructive approaches to counter these risks. The project teams are looking at the regulatory issues in the individual policy areas on the European and the national level. The BDI is also a member of a similar task force at Business Europe, the umbrella organisation for European business. The work of the BDI Task Force Brexit will progress in line with the official negotiations. This position paper is based on the background information developed by the BDI Brexit Task Force. The views expressed in this position paper are those of the BDI and do not necessarily reflect those of the other members of the Task Force.
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Trade in Goods: What is at Stake?
Contents EU27-UK Trade Relations ................................................................................................................... 5 Intra-EU Trade ....................................................................................................................................... 5 Extra-EU Trade.................................................................................................................................... 12 UK-German Trade ............................................................................................................................... 16 Investment Relationships of the UK ................................................................................................ 18 Openness in Trade ............................................................................................................................ 20 Costs of Brexit ................................................................................................................................... 27 Annex I: Figure 25: Economic Impact of Brexit on UK and EU GDP in the Long Run (until 2030) ............................................................................................................................................................. 30 Annex II: List of Abbreviations ........................................................................................................ 32 Imprint ................................................................................................................................................ 33
4
Trade in Goods: What is at Stake?
EU27-UK Trade Relations The EU and the UK have enjoyed very close trading relations, dating back well before Britain joined the European Economic Community in 1973. Having developed into the second-largest economy within the EU (after Germany), the UK is a key player in intra- and extra-EU trade. It accounts for 16 per cent of EU GDP. The British share of global GDP amounts to 3.5 per cent, while the share of the EU27 is 18.3 per cent (see Figure 1). Figure 1: EU and UK GDP in the World (per cent, 2016)
% Share of World GDP
UK 3.5% EU28 21.8%
Rest of the world 78.2%
Rest of the world
EU28
UK
EU27 18.3%
EU27
Source: UNCTAD Database, <stats.unctad.org>, (accessed February 12, 2018).
In 2016, the EU ranked second worldwide regarding both merchandize exports and imports (excluding intra-EU trade) and first regarding trade in services (both exports and imports, again excluding intraEU trade). With 80.6 per cent, manufactured goods accounted for the largest share of EU exports. Its top export products were passenger cars, followed by pharmaceutical products.1 The UK ranked tenth on the list of merchandise exporters worldwide (excluding inter-EU trade, 2016) and fourth regarding imports. The UK is much stronger in trade in services, ranking second in services exports and fifth in imports (excluding intra-EU trade). Just as the EU, Britain’s main export products were passenger cars, followed by pharmaceutical products. Its trade-to-GDP ratio was 28.6 per cent in 2016.2 Intra-EU Trade Intra-EU trade, or trade within the EU, is highly important to EU Member States (see Figure 2 and Figure 3). Goods exported from EU Member States to other EU Member States were valued at €3,115.8 billion in 2016. This is 79 per cent higher than the level recorded for exports from the EU28 to third countries (€1,744.1 billion).3 Goods imported by EU Member States from other EU Member
1
WTO, Trade Profiles, European Union (28), <http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language= E&Country=E28,GB> (accessed January 1, 2018). 2 WTO, Trade Profiles, UK, <http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx? Language=E&Country=E28%2cGB> (accessed January 1, 2018). 3 Eurostat Statistics Explained International Trade in Goods, <http://ec.europa.eu/eurostat/statisticsexplained/index.php/International_trade_in_goods#Analysis_of_main_trading_partners_for_goods>, (accessed December 28, 2017).
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Trade in Goods: What is at Stake?
States amounted to â&#x201A;Ź3,040.5 billion in 2016, 78 per cent higher than the imports of the EU28 from third countries (â&#x201A;Ź1,712.7 billion). Figure 2: Extra-EU vs. Intra-EU Exports (Goods, Billion Euro, 2016)
3500 Intra-EU28 3000
Extra-EU28
2500 2000 1500 1000 500 0 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat Database, <http://ec.europa.eu/eurostat/>, (accessed December 19, 2017).
Figure 3: Relation of Intra-EU Exports to Extra-EU Exports, Per Cent (Goods, 2016)
230% 220% 210% 200% 190% 180% 170% 160% 150% 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat Database, <http://ec.europa.eu/eurostat/>, (accessed December 19, 2017).
In the course of globalisation, value chains have become longer, more international, and more complex. As a consequence, overseas markets have become more important for EU Member States. In 2003, intra-EU exports were 224 per cent higher than extra-EU exports in the same year; in 2016,
6
Trade in Goods: What is at Stake?
intra-EU exports were only 179 per cent higher (see Figure 3). However, with a growth rate of ten per cent, intra-EU trade again increased in relative importance in the period from 2013 to 2016. This reflects the deepening of the single market as well as the development of complex regional supply chains in many sectors, such as automotive, pharmaceuticals, machinery, and energy. From 2002 to 2016, the volume of merchandise trade (exports plus imports) between the UK and the EU27 increased by 15.8 per cent. The biggest increase took place from 2003 to 2006 (38.6 per cent). Over the last ten years, EU27 imports from the UK have fallen (-22.0 per cent). The EU27 has had a trade surplus vis-à-vis the UK over the last decade, amounting to €115 billion in 2016 (see Figure 4). Over the course of that year, the UK exported €176 billion worth of goods to the EU27, or 48 per cent of total UK exports. The UK imported €291 billion worth of goods from the EU27, equivalent to 51 per cent of total UK imports. The evolution of exports and imports between the UK and the EU27, from 2002 to 2016, can be seen in Figure 4. Figure 4: EU27 Trade with the UK Exports and imports of goods (billion Euros)
350 Imports from UK Exports to UK
300
250
200
150
100 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat Database, <http://ec.europa.eu/eurostat/>, (accessed December 19, 2017).
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Trade in Goods: What is at Stake?
Figure 5: Intra EU28 Trade in Goods Balance by Member State (billion Euros, 2016) 200 150
100 50 0
-50 -100
-150
Source: Eurostat Database, <http://ec.europa.eu/eurostat/>, (accessed December 19, 2017).
The importance of trade with the EU for the UK becomes again apparent when focusing on the country’s main trading partners. In 2016, seven of the UK’s top ten export destinations were EU27 countries, as were six out of the top ten import origins (see Figure 6). Figure 6: The United Kingdom’s Trading Partners Exports (goods)
Imports (goods)
Country
Billion Euros
Per Cent
Country
Billion Euros
Per Cent
1.
United States
49.8
14.4
1.
Germany
84.8
14.5
2.
Germany
35.5
10.3
2.
China
50.2
8.6
3.
Netherlands
23.6
6.8
3.
United States
49.9
8.5
4.
France
19.4
5.6
4.
Netherlands
49.7
8.5
5.
Switzerland
17.2
5.0
5.
Belgium
31.9
5.5
6.
China
16.8
4.9
6.
France
31.0
5.3
7.
Ireland
16.5
4.8
7.
Switzerland
29.4
5.0
8.
Belgium
16.0
4.6
8.
Italy
22.4
3.8
9.
Spain
11.2
3.2
9.
Spain
19.1
3.3
10.
Italy
11.0
3.2
10.
Norway
16.7
2.9
Source: UNCTAD Database, <http://unctadstat.unctad.org> (accessed December 19, 2017).
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Trade in Goods: What is at Stake?
The UK tends to import industrial goods and to export services. The main goods shipped from the UK to the EU27 are mechanical engineering products and vehicles, chemicals, minerals, and other processed goods. The picture for imports is similar, with the UK relying heavily on imports of mechanical products and vehicles, processed goods, and chemicals. Figure 7 and Figure 8 provide an overview of trade in goods between the EU27 and the UK. Figure 7: EU27 Imports from the UK (Goods) Imports (2016, per cent, goods/SITC, total: 176 billion Euros) Other 1%
Food, drinks and tobacco 8% Raw materials 2%
Mechanical engineering products and vehicles 36%
Mineral fuels, lubricants and related products 9% Chemical products 20%
Other processed goods 24% Source: Eurostat Database, <http://ec.europa.eu/eurostat/>, (accessed December 19, 2017).
Figure 8: EU27 Exports to the UK (Goods) Exports (2016, per cent, goods/SITC, total: 291 billion Euros) Other 1%
Mechanical engineering products and vehicles 41%
Food, drinks and tobacco 12% Raw materials 3% Mineral fuels, lubricants and related products 3% Chemical products 17%
Other processed goods 23% Source: Eurostat Database, <http://ec.europa.eu/eurostat/>, (accessed December 19, 2017).
The high degree of integration between the UK and the EU27 is underlined by trade in intermediate products. In 2014, the EU27 members shipped intermediate products worth around $230 billion to the
9
Trade in Goods: What is at Stake?
UK. The UK exported intermediate products worth $202 billion to the EU27. The largest supplier of inputs to the UK was Germany, followed by France, the Netherlands, Italy, and Ireland.4 The share of intermediate goods in total UK exports to the EU27 stood at 62.3 per cent in May 2011. Since then, the share of intermediate goods has fallen, accounting for 51.8 per cent in total UK exports to the EU27 in October 2017. Figure 9: Trade in Intermediate Goods between the EU27 and the UK Share of intermediate goods in total exports (per cent) 65% 60% 55% 50% 45% 40% 35%
2002M01 2002M05 2002M09 2003M01 2003M05 2003M09 2004M01 2004M05 2004M09 2005M01 2005M05 2005M09 2006M01 2006M05 2006M09 2007M01 2007M05 2007M09 2008M01 2008M05 2008M09 2009M01 2009M05 2009M09 2010M01 2010M05 2010M09 2011M01 2011M05 2011M09 2012M01 2012M05 2012M09 2013M01 2013M05 2013M09 2014M01 2014M05 2014M09 2015M01 2015M05 2015M09 2016M01 2016M05 2016M09 2017M01 2017M05 2017M09
30%
EU27 to UK
UK to EU27
Source: Eurostat, Trade by BEC Product Groups, <http://ec.europa.eu/eurostat/>, (accessed January 8, 2018).
Figure 10 highlights the most important sectors in trade in intermediate products between the UK and the EU27: manufacture of chemicals, mining and quarrying, and the manufacture of basic metals. A closer look at the figures of the automotive sector reflects the importance of trade in intermediate goods. According to the British Parliament, the UK imported intermediate products for the production of automobiles to a value of ÂŁ10.8 billion in 2016. Eighty per cent of these originated in the EU27 (IW 2017).5
4 Berthold Busch, Produktions- und Lieferverflechtungen zwischen britischen Branchen, der EU und Deutschland, IW-Trends, 2017, <https://www.iwkoeln.de/fileadmin/publikationen/2017/342202/IW-Trends_2017_2_Produktionsverflechtungen.pdf>, (accessed 29 December 2017). 5 Berthold Busch (2017).
10
Trade in Goods: What is at Stake?
Figure 10: Trade in Intermediate Products between the UK and the EU27 Sectors
Current prices (million US$, 2014) UK to EU
Balance UK
Other economic services (administrative and support service activities)
22,442
2,154
Wholesale trade, excluding motor vehicles and motorcycles
21,066
8,866
Activities auxiliary to financial services and insurance activities
14,352
14,059
Manufacture of chemicals and chemical products
11,659
-7,219
Other professional, scientific and technical activities; veterinary activities
11,236
8,146
Mining and quarrying
9,639
6,290
Manufacture of basic metals
7,974
828
Legal and accounting activities; activities of head offices; management consultancy activities
7,803
2,666
Financial service activities, excluding insurance and pension funding
5,728
-12
Mechanical engineering (manufacture of machinery and equipment)
5,663
-4,757
EU to UK
Balance EU
Other economic services (administrative and support service activities)
20,288
-2,154
Manufacture of chemicals and chemical products
18,878
7,219
Manufacture of motor vehicles, trailers and semi-trailers
16,305
11,506
13,963
10,338
Wholesale trade, excluding motor vehicles and motorcycles
12,200
-8,866
Production of data processing equipment (computer, electronic and optical products)
11,843
7,091
Manufacture of machinery and equipment
10,419
4,757
Manufacture of coke and refined petroleum products
9,848
4,469
Manufacture of rubber and plastic products
7,706
3,291
Production of electrical equipment
7,238
3,766
Manufacture preparations
of
basic
pharmaceutical
products
and
pharmaceutical
Note: Figures marked light grey refer to services, which are not a topic covered in this paper. Source: Berthold Busch (2017).
11
Trade in Goods: What is at Stake?
Extra-EU Trade In 2016, the main destinations for EU28 merchandise exports were the United States (20.8 per cent of total EU28 merchandise exports), China (9.7 per cent), and Switzerland (8.1 per cent). The main suppliers for EU28 merchandise imports were China (20.1 per cent of total EU28 merchandise imports), the United States (14.6 per cent), and Switzerland (7.1 per cent). The EU28 has the largest trade surplus with the United States (€112.9 billion) and the largest trade deficit with China (€175.2 billion).6 The main destinations for UK merchandise exports were Germany (14.5 per cent of total UK merchandise exports), China (8.6 per cent), and the United States (8.5 per cent). The main suppliers of UK merchandise imports were the United States (14.4 per cent of total UK merchandise imports), Germany (10.3 per cent), and the Netherlands (6.8 per cent). The UK has the largest trade surplus with Switzerland (€12.2 billion) and the largest trade deficit with Germany (€49.3 billion).7 Imports and exports to the EU27 and the rest of the world can be seen in Figure 11 and Figure 12. Figure 11: UK Exports UK Exports to the EU27 and to the Rest of the World (billion Euros, goods)
600 Exports to EU27 500
Exports to the rest of the world
400
300
200
100
0 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat Database, <http://ec.europa.eu/eurostat/>, (accessed December 19, 2017).
6 7
Eurostat, < http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_122530.pdf>, (accessed January 9, 2017). UNCTAD Database, <http://unctadstat.unctad.org> (accessed December 19, 2017).
12
Trade in Goods: What is at Stake?
Figure 12: UK Imports UK Imports from the EU27 and from the Rest of the World (billion Euros, goods)
600
Imports from EU27
500
Imports from the rest of the world
400 300 200 100 0 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat Database,ext_lt_intratrd, <http://ec.europa.eu/eurostat/>, (accessed December 19, 2017).
Figure 13 provides an overview of goods traded between the UK and members of EU FTA partners and countries currently negotiating free trade agreements with the EU.
13
Figure 13 UK Exports to and Imports from Selected Countries (goods): Total and Selected Sectors 2016 (in million euro) country
exports
% of total UK exports
imports
% of total UK imports
Organic and Inorganic chemical and pharmaceuticals
Vehicles other than railway or tramway rollingstock, and parts and accessories thereof
Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles
exports
% of total exports in this sector
imports
% of total imports in this sector
exports
% of total exports in this sector
imports
% of total imports in this sector
exports
% of total exports in this sector
imports
% of total imports in this sector
EU-FTA partners Canada
5,616.0
1.51
13,330.8
2.31
527.5
1.29
222.6
0.56
785.5
1.69
95.8
0.14
284.1
1.16
373.9
0.71
Chile
550.0
0.15
791.9
0.14
47.1
0.11
7.4
0.02
80.4
0.17
1.1
0.00
32.3
0.13
4.1
0.01
Mexico
1,544.3
0.42
1,330.9
0.23
202.3
0.49
36.3
0.09
140.2
0.30
240.0
0.36
61.7
0.25
188.5
0.36
Norway
3,740.5
1.01
16,557.4
2.88
110.5
0.27
273.7
0.68
441.0
0.95
10.5
0.02
251.8
1.03
121.5
0.23
South Korea
5,379.8
1.45
5,699.3
0.99
331.1
0.81
126.0
0.31
806.9
1.73
1,561.0
2.32
242.2
0.99
448.3
0.86
South Africa
2,407.2
0.65
8,898.5
1.54
237.1
0.58
22.1
0.06
282.4
0.61
433.4
0.06
305.8
1.25
44.1
0.08
Switzerland
17,845.5
4.80
27,537.5
4.79
1,160.6
2.83
4.719.0
11.77
535.8
1.15
68.8
0.10
289.7
1.18
279.2
0.53
Turkey
5,573.0
1.46
11,422.2
1.99
397.3
0.97
58.6
0.15
834.3
1.79
1,903.8
2.83
279.3
1.14
1,013.5
1.94
Ukraine
456.1
0.12
363.4
0.06
80.6
0.20
0.5
0.00
78.0
0.17
3.5
0.00
21.6
0.09
17.1
0.03
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Trade in Goods: What is at Stake?
country
exports
% of total UK exports
imports
% of total UK imports
Organic and Inorganic chemical and pharmaceuticals
Vehicles other than railway or tramway rollingstock, and parts and accessories thereof
Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles
exports
% of total exports in this sector
imports
% of total imports in this sector
exports
% of total exports in this sector
imports
% of total imports in this sector
exports
% of total exports in this sector
imports
% of total imports in this sector
in negotiation Australia
4,787.1
1.29
6,818.8
1.19
574.7
1.40
128.2
0.32
1,097.6
2.36
26.8
0.04
312.6
1.27
118.8
0.23
Indonesia
647.3
0.17
1,496.6
0.26
67.1
0.16
14.2
0.04
17.6
0.04
30.9
0.05
55.5
0.23
155,7
0.30
Japan
5,781.3
1.56
12,018.9
2.09
855.0
2.08
305.9
0.76
1,043.2
2.24
2,550.6
3.80
325.1
1.33
1,140.5
2.18
Malaysia
1,586.1
0.43
2,194.0
0.38
73.4
0.18
17.9
0.04
200.2
0.43
44.8
0.07
252.1
1.03
640.2
1.22
Philippines
488.0
0.13
583.8
0.10
48.5
0.12
0.5
0.00
19.3
0.04
28.9
0.04
121.1
0.49
143.4
0.27
Singapore
5,579.9
1.50
3,053.1
0.53
218.1
0.53
158.7
0.40
234.5
0.50
19.9
0.03
460.8
1.88
388.9
0.74
Vietnam
588.8
0.16
4,612.5
0.80
76.3
0.19
2.0
0.00
23.4
0.05
79.2
0.12
55.3
0.23
1,877.0
3.59
- Argentina
366.4
0.10
793.8
0.14
106.8
0.26
4.7
0.01
20.7
0.04
0.8
0.00
16.3
0.07
0.5
0.00
- Brazil
2,302.6
0.62
3,098.0
0.54
471.7
1.15
78.7
0.20
161.8
0.35
6.5
0.01
110.7
0.45
36.3
0.07
- Paraguay
35.8
0.01
37.9
0.01
4.2
0.01
-
0.00
2.4
0.00
0.0
0.00
1.8
0.00
0.4
0.00
- Uruguay
146.7
0.04
80.0
0.01
23.2
0.06
0.0
0.00
3.9
0.00
0.0
0.00
4.0
0.00
0.4
0.00
Mercosur
Source: HM Revenues and Customs, <https://www.uktradeinfo.com/Statistics/BuildYourOwnTables/Pages/Table.aspx>, (accessed January 29, 2018 and February 21, 2018).
15
UK-German Trade Since 1990, German exports to the UK have more than tripled (€28.3 billion to €85.9 billion in 2016). In the same period, German imports from the UK nearly doubled (€19.1 billion to €35.7 billion in 2016). The relatively weak growth of German imports from the UK is mainly due to the decline since 2011 (see Figure 14). The highest demand for German goods in the UK has been for vehicles and trucks (31.4 per cent of total German merchandise exports to the UK in 2016). Demand in the UK is also high for German medical and pharmaceutical products (7.3 per cent), machines (5.0 per cent), and for electrical products (5.0 per cent) (see Figure 15). Vehicles and trucks also account for the largest share of German imports from the UK (15.2 per cent of all imports from the UK to Germany in 2016) followed by petroleum products (7.7 per cent), other means of transport (6.5 per cent), and medical and pharmaceutical products (5.8 per cent) (see Figure 16). Figure 14: German-British Trade Relations Trade 1990 – 2016 (billion Euros, goods) 100 90
German Exports to UK
80
German Imports from UK
70 60 50 40 30 20 10 0
Source: DeStatis Database, <https://www-genesis.destatis.de/genesis/online>, (accessed on January 8, 2018).
16
Trade in Goods: What is at Stake?
Figure 15: German Exports to the UK Exports to the UK by product groups, per cent (goods/SITC, 2016, total: €85.9 billion)
Other goods (€31.1 bn.) 36%
Road vehicles (€27.0 bn.) 31%
Medical and pharmaceutical products (€6.2 bn.) 7% Metalware (€2.2 bn.) 3% Non-ferrous metals (€2.3 bn.) 3%
Machines, apparatus and devices for various purposes (€4.3 bn.) 5%
Various processed goods (€2.7 bn.) 3% Power machines and engine equipment (€2.9 bn.) 3% Other means of transport (€ 2.9 bn.) 3%
Electrical machines and apparatus (€4.3 bn.) 5%
Source: DeStatis Database,https://www-genesis.destatis.de/genesis/online,(accessed January 9, 2018).
17
Trade in Goods: What is at Stake?
Figure 16: German Imports from the UK Imports from the UK by product groups, per cent (goods/SITC, 2016, total: €35.7 billion)
Road vehicles (€5.4 bn.) 15% Petroleum, petroleum products and related goods (€2.7 bn.) 8%
Other goods (€15.0 bn.) 42%
Other means of transport (€2.3 bn.) 6% Medical and pharmaceutical products (€2.1 bn.) 6% Electrical machines and apparatus (€2.1 bn.) 6% Organic chemicals (€1.3 bn.) 4%
Non-ferrous metals (€2.0 bn.) 6% Machines, apparatus and devices for various purposes (€1.4 bn.) 4%
Power machines and engine equipment (€1.4 bn.) 4%
Source: DeStatis Database, <https://www-genesis.destatis.de/genesis/online> (accessed January 8, 2018).
Investment Relationships of the UK The UK is an important global investor. In 2016, with a share of only 3.5 per cent of global GDP, UK investors accounted for 5.5 per cent of global investment stocks. However, the role of UK investors in the world is decreasing. In 2002, UK investors accounted for 13.8 per cent of global investment stocks down from 14.4 per cent in 1980. The UK is also an attractive destination for investments from all over the world. Nonetheless, the appeal of the UK as a business location for global investors also seems to have decreased. While in 1990, almost 9.3 per cent of global FDI stocks were invested in the UK, this figure was down to 6.5 per cent in 2014 and dropped to 4.5 per cent in 2016 (see Figure 17).8 In 2017, the (generally volatile) FDI inflows to the UK decreased sharply in comparison to 2016 (-90 per cent).9 Foreign investments have nonetheless an important and positive impact on the UK economy. In 2016, foreign investment stocks stood at €1,463.7 billion (stocks in tangible goods) in the United Kingdom.10 Foreign investors controlled 22,200 companies in the UK which produced goods and services with a
8 UNCTAD Database, FDI Stocks Inward/Outward, Per Cent of Global FDI, <http://unctadstat.unctad.org/> (accessed January 25, 2018). 9 UNCTAD World Investment Trends Monitor No. 28, <http://unctad.org/en/PublicationsLibrary/diaeia2018d1_en.pdf>, p. 4 (accessed January 25, 2018). 10 Foreign Direct Investment Involving UK companies: Inward Tables. <https://www.ons.gov.uk/businessindustryandtrade/business/businessinnovation/datasets/foreigndirectinvestmentinvolvingukc ompanies2013inwardtables>, (accessed February 21, 2018).
18
Trade in Goods: What is at Stake?
total production value of €908.9 billion in production value (2014). Foreign investors were responsible for 3.6 million employees in the UK. Investors from the EU held 40.5 percent of the FDI stocks in the UK (€660.8 billion) in 2016. German investors alone accounted for more than 73 billion of the UK’s FDI stocks.11 41.8 percent of the companies in foreign ownership (9,200) were controlled by EU investors and generated 38.1 percent of the production value of all foreign investors (€346.8 billion). These EU investors employed 40.0 percent of all employees in the UK working for enterprises owned by foreign investors (1.4 million) in 2014.12 Figure 17: Role of the UK as Investor and as Destination for Investment UK’s Share of Global FDI Stocks (Inward / Outward) 16 14 12 10 8 6
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
4
FDI Outward Stock (per cent)
FDI Inward Stock (per cent)
Source: UNCTAD Database, FDI stocks inward/outward, per cent of global FDI, http://unctadstat.unctad.org/ (accessed January 25, 2018).
11
Foreign direct investment involving UK companies: Inward tables. <https://www.ons.gov.uk/businessindustryandtrade/business/businessinnovation/datasets/foreigndirectinvestmentinvolvingukc ompanies2013inwardtables>, (accessed February 21, 2018). 12 UK Foreign Direct Investment: Trends and Analysis: Summer 2017, <https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/ukforeigndirectinvestmenttrendsandanalysis/s ummer2017>, (accessed February 21, 2018).
19
Trade in Goods: What is at Stake?
Openness in Trade The EU is both a single market and a customs union. EU businesses have access to over 500 million consumers for their products, easier access to a wide range of suppliers and consumers, lower unit costs, and greater commercial opportunities. EU citizens benefit from lower prices, greater product variety, more innovation and faster technological development, as well as higher standards of safety and environmental protection. A comparison of prices of selected consumer products with and without tariffs, shows the considerable impact tariffs on EU27-UK trade would have on prices (Figure 18). Our example is based on the scenario that there is no preferential trade relationship between the EU27 and the UK, i.e. that the EU’s external tariffs would apply. An average tariff of just two per cent would add as much as €4.6 billion in revenues to the EU budget, after subtracting collection fees of the Member States (20 per cent) and assuming that UK exports to the EU do not fall .13 These additional revenues would make up to some extent for the ‘net loss’ of the UK’s contributions to the EU budget. However, EU citizens would have to shoulder the costs of these new tariffs as prices of products would rise. Once the EU’s single market is replaced by other forms of market integration, formal customs procedures (and in some cases, origin calculations) will be required in supply chains. Tariffs are, therefore, not the only costs that would arise. Lower volumes in shipments and costly internal company compliance measures would also increase costs. Figure 18 is therefore a somewhat optimistic view. Figure 18: Companies’ and Consumers’ Benefits in Trade between EU-UK: Examples Type of consumer good
Duties paid within the single market:
Duties paid without the single market (Third Country Duty)
Customs duty
Customs Value
Customs Duty
Customs Value
Passenger cars
0%
€30,000
10%
€33,000
Household appliances, e.g. vacuum cleaners
0%
€200
2.2%
€204.4
Textiles; e.g. T-Shirts
0%
€50
12%
€56
Source: European Commission Market Access Database 2017, <http://madb.europa.eu/madb/datasetPreviewFormATpubli.htm?datacat_id=AT&from=publi>, (accessed December 19, 2017).
13
Jorge Núñez Ferrer and David Rinaldi (2016), The Impact of Brexit on the EU Budget: A Non-Catastrophic event. <https://www.ceps.eu/publications/impact-brexit-eu-budget-non-catastrophic-event>, (accessed 29 December 2017). Note: The study bases this number on the value of goods exported from the UK to the EU in 2015; a value of €255 billion.
20
Trade in Goods: What is at Stake?
The average EU common external tariffs for the main product groups are listed in Figure 19. Figure 19: Average EU Common External Tariff by Product Groups Product Groups
Final bound (AVG)
Share in %
Duty-free in %
Minerals & metals
1.9
2.0
15.2
67.6
Petroleum
3.1
2.5
14.6
98.3
Chemicals
4.5
4.5
11.5
51.8
Textiles
6.6
6.5
2.5
16.1
Clothing
11.5
11.5
5.0
0
Leather, footwear
4.2
4.1
2.8
12.9
Non-electrical machinery
1.7
1.9
11.6
50.9
Electrical machinery
2.4
2.8
12.9
60.1
Transport equipment
4.1
4.3
5.6
9.6
Manufactures, n.e.s.
2.4
2.6
7.0
50.8
duties
MFN applied duties (AVG)
Imports
Source: WTO World Tariff Profiles, European Union (28), http://stat.wto.org/TariffProfile/WSDBTariffPFView.aspx?Language=E&Country=E28, (accessed December 19, 2017).
The EU’s maximum customs duties are bound in the schedules of commitments of the World Trade Organisation (WTO), and are stipulated at the same or lower levels in the European External Tariff (EET). The annually updated customs duties are published in the combined nomenclature. The EET’s legal basis is Council Regulation (EEC) No. 2658/87. Average industry customs duties are around three to four per cent of the product’s customs value. However, the duties of some products are much higher, such as in the automotive sector, where duties for cars of 10 per cent and duties for certain trucks of 22 per cent apply.14 According to a study by Open Europe 15 , 35 per cent of UK exports are goods which would face particularly high tariffs when entering the EU after Brexit: cars, chemicals, clothing, food, beverages, and tobacco. The German chemical industry expects annual customs duties of €200 million, if the UK levied customs duties at the level of current EU external tariffs.16 The following two info boxes illustrate how strongly German and British industries are interwoven in two key sectors – the automotive and the chemical industry.
14
TARIC Consultation, <http://ec.europa.eu/taxation_customs/dds2/taric/taric_consultation.jsp?Lang=en&Taric=car&Expand=true&SimDate=2018021 3#car0000000>. 15 Booth, Stephen, Howarth, Christopher and Mats Persson, What if…? The Consequences, Challenges and Opportunities Facing Britain outside EU, Open Europe Report 3, 2015. http://europas-krisen.zdf.de/media/downloads/Brexit/150507-OpenEurope-What-If-Report-Final-Digital-Copy.pdf (accessed February 21, 2018) 16 Berthold Busch (2017).
21
Trade in Goods: What is at Stake?
Business Example I: Trade Risks for the Automotive Industry Trade risks for the automotive industry are particularly high for two main reasons. Firstly, the industrial division of labour between British and continental companies is particularly deep in this sector. Secondly, the UK is the leading export destination for the German automotive industry, even ahead of the United States. Almost every fifth car exported by Germany (total car exports: 4.4 million) goes to the UK. In 2015, German manufacturers exported 810,000 cars produced in Germany to the UK – more than to any other country. Of all the (passenger) car exports from Germany to the UK, 43 per cent (348,500 units) were attributable to the premium segment (including VW Phaeton, Touareg, and Beetle). With 1.3 million units, German manufacturers also account for half of all British car sales, 40 per cent of which are premium vehicles. On the other hand, the UK is also an important production location for German manufacturers: German manufacturers produce about 260,000 vehicles a year in the UK. Three-quarters of the cars produced in the UK (total: 2.6 million units) are exported, 57 per cent of which to the EU27.17 This production structure might now be put at risk. The overwhelming majority of businesses from the automotive industry – from the UK as well as the EU27 – believe that a return to the WTO fall-back position would have a serious negative impact on their business. WTO rules would see the application of a 10 per cent tariff on vehicles and an average 4.5 per cent tariff on vehicle components. Consequently, these tariffs would increase the cost of production, undermine competitiveness, and possibly increase the cost of cars for consumers. Another risk for the automotive industry are labour issues. A significant proportion (around ten percent) of the workforce of UK automotive companies of all types and sizes are non-UK EU nationals. In some companies, over 50 percent of employees at all levels are from the EU27. For more details on labour issues, see the position paper of the BDI/BDA Working Group 8 on labour mobility.
17 Klaus Deutsch and Stefan Mair, „Wirtschaftliche Schäden des Brexit – Gefahren für Produktion und Jobs“, in: ifo Schnelldienst 11/2017, pp. 33-37 <https://www.cesifo-group.de/DocDL/sd-2017-11-2017-06-08.pdf>, (accessed January 10, 2018).
22
Trade in Goods: What is at Stake?
Business Example II: Brexit and the German chemical and pharmaceutical industry The UK is a key trading partner of the German chemical and pharmaceutical industry. Last year, the sector sold goods worth €12 billion to the UK, which amounts to 6.7 per cent of total German chemical exports (Figure 20). The bulk of these exports comprised specialty chemicals and pharmaceuticals. At the same time, German chemical companies imported goods – particularly pharmaceuticals, speciality chemicals and petrochemicals – worth €6.4 billion from the UK (Figure 20). This equates to 5.2 per cent of total German chemical imports. Figure 20: Exports and Imports of Germany's Chemical and Pharmaceutical Industry By country, in billion Euros (2016) 35 30 25
12.6
17.2
20 15.2
15 10
9.6 11.8
6.4
6.7
19.3
15.8
5
4.3 9.7
12.8
8.9
12.0
10.0
7.4
2.7
3.0
7.1
6.1
7.1 1.5
0
exports
imports
Source: DeStatis, VCI (Chemdata).
The UK is the sixth largest trading partner of Germany’s chemical and pharmaceutical industry, with a total trading volume (imports and exports combined) of €18.4 billion. Figure 21: Direct Investments by & into Germany's Chemical and Pharmaceutical Industry Stock of direct investments by German chemical industry in the UK and stock of UK direct investments in German chemical industry, in billion Euros 2500 2000 1500 2474
500
1369
1103
2577
2288
1000
1965 1562 1013
0 2012
2013
2014
2015
direct investments by German chemical/pharmaceutical industry in the UK direct investments into German chemical/pharmaceutical industry from the UK Source: Deutsche Bundesbank, VCI (Chemdata).
23
Trade in Goods: What is at Stake?
Moreover, the UK plays a significant role as a location for the production and sale of Germany’s chemical companies. The stock of direct investments by German chemical companies in the UK in 2015 amounted to roughly one billion Euros (Figure 21). Furthermore, in 2015, German companies had 40 subsidiaries in the UK’s chemical sector, which employed 8,000 people and generated €3.9 billion in revenues. The involvement of British investors in German chemicals was even higher – with a total investment volume of almost €2.6 billion in 2015 (Figure 21). Breaking these more general economic trends and developments down to the company level, the following picture arises for the chemical and pharmaceutical industry in a post-Brexit scenario: Let’s take a German chemical company as an example: The company generates three to four per cent of global its sales in the UK, where it employs 1,400 members of staff at ten manufacturing sites. Sixty per cent of the company’s UK exports go to the EU, while 90 per cent of the company’s UK imports originate from the EU. Without a deal, WTO terms for the UK would carry a substantial burden for the company: additional trade costs could sum up to €50-55 million (based on average tariff rates of 4-6 per cent), with compliance costs alone (submitting additional documents, IT system, etc.) amounting to €2.1 million. Furthermore, deviating customs processes will lead to increased complexity, longer customs clearance, and less flexibility. Longer dispatch times and larger stock inventories may become necessary. In addition, the UK stands to lose duty-free access to more than 50 countries through the free trade agreements of the EU. Significant disruptions to supply chains can be expected as customers move and deals change. In view of the gravity of these consequences, a duty-free frictionless trade between the UK and the EU after Brexit would be substantially valuable.18
18
VCI.
24
Trade in Goods: What is at Stake?
EU membership also reduces the cost of trade around the globe, from which both EU and British companies benefit. Both consumers and companies take advantage of preferential customs duties in trade between the EU and third countries. Figure 22 illustrates the different MFN duties of current and future EU FTA partners. UK exporters will face these duties once they are no longer part of the EU FTAs with those countries and no FTA deal with the UK is in place. Losing preferential market access again means higher costs, both for companies and consumers. Figure 22: Custom Duties of Selected EU Trade Partners Country
Simple AV MFN Applied Tariff, Total, 2016
Simple AV MFN Applied Tariff, Agricultural products, 2016
Simple AV MFN Applied Tariff, Non-Agricultural Products, 2016
EU
5.2
11.1
4.2
Preferential Trade Agreements in Place Canada
4.1
15.6
2.2
Chile
6.0
6.0
6.0
Columbia
6.6
13.7
5.5
Mexico
7.0
14.6
5.7
Norway
6.1
39.9
0.5
South Africa
7.7
8.5
7.5
South Korea
13.9
56.9
6.8
Switzerland
6.3
34.2
1.7
Turkey
10.9
43.2
5.5
Ukraine
4.5
9.2
3.7
Preferential Trade Agreements under Negotiation Australia
2.5
1.2
2.7
Indonesia
7.9
8.4
7.8
Japan
4.0
13.1
2.5
Malaysia
5.8
8.4
5.4
Mercosur: -
Argentina
13.7
10.3
14.3
-
Brazil
13.5
10.0
14.1
-
Paraguay
9.8
9.9
9.8
-
Uruguay
10.4
9.9
10.5
Philippines
6.3
9.8
5.7
Singapore
0.0
0.1
0.0
Vietnam
9.6
16.3
8.5
Source: WTO, ITC, UNCTAD, World Tariff Profiles 2017 https://www.wto.org/english/res_e/booksp_e/tariff_profiles17_e.pdf, (accessed January 29, 2018).
Figure 23 shows the MFN import duties of EU FTA partners and potential FTA partners for the five main export products of the UK. As long as the UK does not have similar FTAs in place as the EU, the UK automotive industry would be confronted with very high customs tariffs in most emerging markets (20 per cent or more) and relatively high tariffs in developed countries (e.g. 5.9 per cent in Canada). Pharmaceutical exports (medicaments in measured doses) to Latin America would face customs tariffs of almost ten per cent. Other key UK exports would be affected to a lesser extent.
25
Figure 23: MFN Applied Tariffs for the UK's Main Exports, 2017
Exports to
Motor cars for transport of persons
AV
Duty free
Max
Preferential Trade Agreements in Place Canada 5.9 3.6 Chile* 6 0 Columbia 33.6 0 Mexico 31.3 0 Norway 0 100 South Africa 18.2 22.5 South Korea 8 0 Switzerland 0 Turkey** 9.7 0 Ukraine 9.5 3.7
Medicaments in measured doses
Duty free
AV
6.1 6 35 50 0 25 8 10 12
Preferential Trade Agreements under Negotiation Australia* 5 0 5 Indonesia* 35 0 50 Japan* 0 100 0 Malaysia* 21.8 9.4 35 Mercosur: - Argentina 33.3 0 35 - Brazil* 35 0 35 - Paraguay* 6.5 57.4 20 - Uruguay*** 23 0 23 Philippines 29 2.1 30 Singapore 0 100 0 Vietnam* 57.1 0 70
Max
Turbo-jets, turbo-propellers and others
Gold
Duty free
AV
Max
Duty free
AV
Max
Balloons, dirigibles, gliders, hang gliders, other nonpowered aircraft, helicopters and airplanes, spacecraft (including satellites) and spacecraft launch vehicles Duty free
AV
Max
0 6 8.6 5.7 0 0 8 0 0 0
100 0 8.3 43.1 100 100 0 100 100 100
0 6 10 15 0 0 8 0 0 0
0 6 0 1.9 0 0 2.3 0 0 2.3
100 0 100 87.5 100 100 25 75 100 0
0 6 0 15 0 0 3 0 0 5
0 6 0 0 0 0 5.5 0.9 0
100 0 100 100 100 100 0 0 66.7 100
0 6 0 0 0 0 8 2.7 0
0 6 0 1.3 0 0 0 0 1.4 2
100 0 100 75 100 100 100 37.5 42.5 80
0 6 0 5 0 0 0 0 2.7 10
0 4.3 0 0
100 13.8 100 100
0 5 0 0
0 4.4 0 0
100 37.5 100 100
0 10 0 0
0 0 0 0
100 100 100 100
0 0 0 0
0 0 0 0
100 100 100 100
0 0 0 0
9.8 9.8 9.3 9.9 2.9 0 1.4
16.8 16.8 16.7 16.5 1.7 100 73.4
14 14 14 14 5 0 8
3 3 3 3 3 0 0
75 75 75 75 0 100 100
12 12 12 12 3 0 0
0 0 0 0 3 0 0
100 100 100 100 0 100 100
0 0 0 0 3 0 0
0 0 0 0 3 0 0
100 100 100 100 0 100 100
0 0 0 0 3 0 0
Source: WTO, World Tariff Download Facility 2017, http://tariffdata.wto.org/ReportersAndProducts.aspx, (accessed January 29, 2018); WTO, Trade profiles, http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=GB, (accessed January 30, 2018). * Data from 2016 **Data from 2015 ***Data from 2014
26
Costs of Brexit How high will the costs of Brexit be for the UK and the EU27? The future relationship between the EU27 and the UK has not yet been defined. We therefore have to make assumptions on how trade costs will change in order to forecast the consequences of Brexit. A number of different scenarios are conceivable from a trade policy perspective, ranging from a UK exit with continued strong trade integration with EU Member States (similar to the status of Norway or Switzerland) to a trade policy ‘ice age’ between the EU and the UK. Depending on the scenario, costs differ accordingly. A multitude of studies have estimated the consequences of Brexit for UK and EU27 trade and living standards. While the studies differ in their results regarding the exact costs, all studies concur that the costs will likely be considerable. A major disruption of trade will entail economic costs for both sides, with the UK threatened to lose much more than the EU27. The disproportionally small share of the total cost for the EU27 is not simply due to economies of scale (considering that its economy is about five times larger than that of the UK), but also the result of fundamental drivers, such as the greater market power of its enterprises.19 Both, public institutions (UK Treasury, OECD) and independent research institutes (LSE, ifo Institute) have projected various scenarios ranging from optimistic to pessimistic. The ‘optimistic scenario’ refers to a small increase in trade barriers between the two parties and assumes that the UK will enjoy relations similar to that of an EEA member, such as Norway. The ‘pessimistic’ scenario, on the other hand, means a much larger increase in trade barriers and assumes that the trading relationship between the EU and the UK is reduced to the terms of their WTO membership. Overall, the studies have produced relatively consistent results: all future scenarios project a drop in the UK’s economic openness and interconnectedness and lower trade and investment flows, thereby reducing productivity and GDP per person. The costs outweigh any potential benefits of leaving the EU. All of the aforementioned studies are forward-looking and model-based, and can be classified as both reliable (more so than some mainstream methods) and meaningful. However, even they are unable to cover all relevant channels by which economic integration raises welfare or economic disintegration results in costs. The impact of dynamic trade effects on welfare and growth, as well as the additional non-trade effects of economic integration, are rarely covered.20 Both the LSE and the ifo Institute worked with a static as well as a dynamic model. While the static models only observe trade impacts on welfare, the dynamic models go further and also include nontrade impacts, such as investment, migration, and regulation. As the dynamic effects were only estimated for the UK, when comparing the costs for the EU27 and for the UK, we have to refer to the static models. UK and EU: comparing estimated welfare losses -
According to studies by the LSE and ifo Institute, the impact of Brexit on trade are estimated to result in welfare losses for the UK of between -0.64 and -1.34 per cent of GDP for the optimistic and -1.62 and -2.98 per cent for the pessimistic scenarios (static models) (see Annex: Economic Impact of Brexit on UK and EU GDP in the Long Run).
19
A. Belke and D. Gros (2017). Busch/ Matthes, Brexit – The Economic Impact, 2016, <https://www.cesifo-group.de/DocDL/forum-2016-2-busch-matthesbrexit-june.pdf, (accessed 11 January 2018).
20
27
Trade in Goods: What is at Stake?
-
For the EU27, the welfare losses are estimated to be between -0.1 and -0.14 per cent of GDP in the optimistic scenarios and between -0.23 and -0.36 per cent in the pessimistic scenarios. These amounts are modelled as totals cumulating up to 2030.21 Within the EU, countries that trade intensively with the UK will be affected the most. As one of the countries with the closest trade relations with the UK, Irelandâ&#x20AC;&#x2122;s GDP rate is expected to decrease by 2.4 per cent, in the pessimistic (WTO) scenario.22 The reviewed studies do not estimate the impact on FDI in the EU.
UK: dynamic effects -
The losses for the UK estimated in the dynamic models, in which dynamic effects are also taken into account, are significantly higher. These reflect the negative impacts on FDI, some of which may well be redirected away from the UK into the EU27. The figures here vary considerably. In the optimistic scenarios, losses in welfare range from a drop of -2 to -6.3 per cent of GDP. For the pessimistic scenarios losses range from -7.5 to as much as -20 per cent over the course of ten years, which is significant from a macroeconomic perspective.
The studies do not take account of one major consequence of Brexit on the UK, which is that the UK will lose preferential access to the markets of the 37 free trade agreements (FTAs) and customs unions of the EU. Over the long run, the UK will be able to counter these costs by negotiating its own FTAs. However, this generally takes a few years, and the UK will not have as much negotiating power as the EU. Costs are thus likely to be higher than those illustrated above. The variance in the results of the referenced studies can be explained by the fact that the studies used different methods and assumptions (new and conventional methodologies), and covered different effects. Hence, the figures of the various models should not be compared too closely. While the precise extent of the economic impact of Brexit on the UK and the EU27 predicted by the studies might differ to some extent, all forecasts concur that losses will be greater for the UK than for the EU27. Change in UK Trade Flows after Brexit Additionally to calculating welfare losses, Dhingra et al. (2017) estimated the effect of Brexit on trade flows between the UK and the EU27. They looked at total UK exports and imports to/from the EU27 for both the short (one year after Brexit) and the long run (ten years after Brexit) for an optimistic and a pessimistic scenario. The study underlines that tangible negative effects on UK export and import volumes can be expected already one year after Brexit, even if trade barriers only increase marginally (optimistic scenario). It is not surprising that the expected effects will be most pronounced (-16 per cent in total UK exports as well as imports and -43 and -38 per cent for exports/imports to and from the EU) with higher trade barriers and in the long run (pessimistic scenario) (see Figure 24).
21 Ansgar Belke and Daniel Gros, The Economic Impact of Brexit: Evidence from Modelling Free Trade Agreements, RWI Leibniz-Institut fĂźr Wirtschaftsforschung, <http://www.rwi-essen.de/media/content/pages/publikationen/ruhr-economicpapers/rep_17_700.pdf>, (accessed January 8, 2018). 22 Dhingra, G., et al., The Costs and Benefits of Leaving the EU: Trade Effects, CEP Discussion Papers, CEPDP1478, London School of Economics, London 2017. <http://eprints.lse.ac.uk/83612/>, (accessed January 9, 2018).
28
Trade in Goods: What is at Stake?
Figure 24: Change in UK Trade Flows after Brexit (LSE) Optimistic Scenario (Norwegian Model)
Pessimistic Scenario (No Deal/ WTO Scenario)
Short Run (in %)
Long Run (in %)
Short Run (in %)
Long Run (in %)
Total UK exports
-5
-9
-14
-16
Total UK imports
-6
-8
-14
-16
Exports to EU
-14
-25
-36
-43
Imports from EU
-13
-22
-34
-38
Note: The short-run horizon is one year after Brexit and long-run horizon is ten years after Brexit Source: Swati Dhingra, et al., The Costs and Benefits of Leaving the EU: Trade Effects, CEP Discussion Paper No 1478, 2017, http://cep.lse.ac.uk/pubs/download/dp1478.pdf, (accessed January 4, 2018).
29
Annex I: Figure 25: Economic Impact of Brexit on UK and EU GDP in the Long Run (until 2030) Figure 25: Economic Impact of Brexit on UK and EU GDP in the Long Run (until 2030) Difference in real GDP relative to the UK staying in the EU over time Change in Welfare (in per cent) Static Model EU
Dynamic Model UK
UK
LSE: Dhingra et al. (2016) Optimistic: UK similar to EEA/Switzerland Pessimistic: UK as WTO third country
-0.12 (-£12 billion)* -0.29 (-£28 billion)*
-1.34 (-£26 billion)* -2.61 (-£55 billion)*
*Loss in total numbers relative to GDP Focus on trade and fiscal transfers; Non-trade impacts on welfare as investment, migration and regulation have been left out in this model. Optimistic scenario: Increase in EU/UK non-tariff barriers (+2 per cent) + exclusion from future fall in NTB within EU (-5.7 per cent), saving of 17 per cent of 0.53 per cent lower fiscal transfer.
-6.3 -9.5 Including long term/ dynamic effects of trade on productivity, e.g. positive effects through increasing competition, (which reduces excess profits and promotes efficiency), access to superior intermediate goods and a larger export market can also stimulate innovation.
Pessimistic scenario: MFN Tariff + increase in EU/UK non-tariff barriers (+6 per cent) + exclusion from future fall in NTB within EU (-12.8 per cent), saving of 0.31 per cent net fiscal transfer. LSE: Dhingra et al. (2017) Optimistic: UK similar to EEA/Switzerland Central Scenario 1: UK joins EFTA Central Scenario 2: EU-UK FTA Pessimistic: UK as WTO third country
-0.14 (-£17.6 billion)*
-1.34 (-£25.0 billion)*
-0.35 (-£34.0 billion)*
-2.66 (-£50.0 billion)*
Note: Update of Dhingra et al. 2016
*Loss in total numbers relative to GDP
Calculations are based on data from World Input-Output Database (WIOD) of 2011
Focus on trade and fiscal transfers
-3.3 to -4.9 (UK-EU trade reduced by 13.1%) -6.3 to -9.4 (UK-EU trade reduced by 25.2%) -10.2 to -15.3 (UK-EU trade reduced by 40.1%) -13.3 to -20.0 (UK-EU trade reduced by 53.3%) Takes account of dynamic effects of Brexit on productivity such as falls in foreign direct investment.
IFO Institute: Aichele&Felbermayr (2015) Optimistic: UK similar to EEA/Switzerland Pessimistic: UK as WTO third country
-0.1** between -0.23 and -0.36**
-0.64** between -1.62 and -2.98**
Static model of general equilibrium, utilizing new quantitative trade theory
** Includes the effects of tariffs as well as non-tariff measures. Limitations: Excludes dynamic effects of trade – such as the innovation capabilities of companies.
-2.0 -14.0 Takes account of dynamic effects that illustrate the impact of economic integration on investment and innovation behaviour. Limitation: Does not take account of immigration effects. 30
Trade in Goods: What is at Stake?
Sectoral Effects for EU and UK
EU: At a sectoral level, the mechanical engineering, automotive and chemicals industries in countries like Germany France and Luxembourg would benefit from Brexit. One the continent, losses would be highest for the automotive, food and paper industries. UK: At a sectoral level, the study concludes that Brexit would most heavily impact the UK’s mechanical engineering, automotive and chemicals industries as the EU’s MFN import tariffs are relatively high in these areas. However, the financial industry could be the biggest loser. If fiscal and labour market benefits from the immigration of EU immigrants are taken into account and half of the EU immigrants returned to the EU27, per capita income could fall by between two and five per cent in the long term.
OECD: Kierzenkowski et al. (2016) Optimistic: small declines Central: medium declines Pessimistic: large declines
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-2.7 -5.1 -7.7 Takes into account the dynamic effects of Brexit on productivity such as falls in foreign direct investment. Limitation: Does not account for the immigration effects. Long-term GDP growth would be further reduced through a smaller pool of skills, stemming from lower immigration and reduced FDI, reducing managerial quality.
HM Treasury (2016) Optimistic: UK similar to EEA Central: FTA Pessimistic: UK as WTO third country
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Note: HM Treasury looked at a time horizon of 15 years, not 10 (as done in the other studies).
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-3.8 -6.2 -7.5 Taking dynamic effects of Brexit on productivity such as falls in foreign direct investment into account.
Note: The welfare loss of the EU27 countries is the weighted average of losses of the individual countries. Within the EU, countries that trade intensively with the UK will be most affected. For example, in the pessimistic scenario, Ireland’s welfare decreases by 2.4 per cent. *Totals in order to compare the percentage to volume of GDP. Sources: R. Aichele and G. Felbermayr, Costs and Benefits of a United Kingdom Exit from the European Union, ifo Institut 2015, < https://ged-project.de/wpcontent/uploads/2015/04/Costs-and-benefits-of-a-United-Kingdom-exit-from-the-European-Union.pdf>, (accessed January 5, 2018); S. Dhingra, G. Ottaviano, T.A. Sampson and J. Van Reenen (2016). The Consequences of Brexit for UK Trade and Living Standards’, CEP Brexit Analysis No. 2, <http://cep.lse.ac.uk/BREXIT/abstract.asp?index=4991>, (accessed 4 January 2018); Dhingra, G., et al. (2017), The Costs and Benefits of Leaving the EU: Trade Effects, CEP Discussion Papers, CEPDP1478, London School of Economics, London. <http://eprints.lse.ac.uk/83612/>, (accessed 9 January 2018); HM Treasury, HM Treasury Analysis: The Long-term Economic Impact of EU Membership and the Alternatives, 4/2016, <https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/517415/treasury_analysis_economic_impact_of_eu_membership_web.pdf>, (accessed January 4, 2018); Rafal Kierzenkowski, Nigel Pain, Elena Rusticelli, and Sanne Zwart, The Economic Consequences of Brexit: a Taxing Decision, OECD Economic Policy Papers, April 2016, <http://www.oecd-ilibrary.org/docserver/download/ 5jm0lsvdkf6ken.pdf?expires=1515159557&id=id&accname=guest&checksum=AEDAC9C63DFCD463468E56104D8BA576>, (accessed January 5, 2018).
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Annex II: List of Abbreviations AV
Average
EEA
European Economic Area
EET
European External Tariff
EU
European Union
FDI
Foreign Direct Investment
FTA
Free Trade Agreement
GDP
Gross Domestic Product
ICT
Information Communication Technologies
MFN
Most Favoured Nation
TEU
Treaty on European Union
UK
United Kingdom
USA
United States of America
USD
US Dollar
WTO
World Trade Organization
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Imprint BDI – Federation of German Industries Breite Straße 29, 10178 Berlin Germany www.bdi.eu T: +49 30 2028-0 Editors Dr. Stormy-Annika Mildner T: +49 30 2028-1562 s.mildner@bdi.eu Steven Heckler T: +49 30 2028-1523 s.heckler@bdi.eu Klara Schwobe T: +49 30 2028-1723 k.schwobe@bdi.eu Dr. Christoph Sprich T: +49 30 2028-1525 c.sprich@bdi.eu Katherine Tepper k.tepper@ifg.bdi.eu Eckart von Unger T: +32 2 792-1011 e.vonunger@bdi.eu
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