Brexit is expected to substantially hurt GDP growth in the UK, are there possible solutions and even an upside?

By Avi Gupta

Introduction

December 31st 2020 is the end. The end of the 11 month transition period following the official withdrawal agreement passed by the UK parliament which notified the EU of their leaving. Brexit has been a long and arduous road clouded with domestic political uncertainty, market instability and most importantly an uncertain economic outlook. As the deadline concluding the transition period nears, the real possibility of a no-deal Brexit must be considered alongside the benefits and negatives of possible economic trade agreements that can be instituted ex-post. 

Before evaluation of possible economic agreements following December 31st is possible, it is important to first evaluate the economic loss that withdrawal from the EU will cause. Scholars differ on an exact figure of the GDP loss to the British Economy and the economic impact of Covid-19 makes any prior number even further from accurate, but the consensus is a 5-10% total decline in GDP over the next 10-15 years compared to if the UK stayed inside the EU. This number excludes the possibility of any deal with the EU or any possible trade agreements that the UK makes with other WTO members, which would reduce the negative economic impact. 

Now, to diminish this GDP loss, presuming a no-deal Brexit, the UK has many different possible options to pursue. This article will focus on four that are analyzed by the RAND Corporation and they are as follows:

Worst Case – Return to WTO Rules

In this scenario, the UK withdraws from the EU with no deal and would make no agreement with any other country to offset the difference. Although regarded as the worst case scenario that dictates the GDP decline stated earlier, this scenario has already proven to be a moot point as the UK has already maintained 20 out of 40 trade deals that foreign powers had with the EU which will be shared to the UK following Brexit. Furthermore, the UK has signed a new trade deal with Japan. These steps suggest the worst case is well in the past, but only about 10% of UK trade is assured through these trade deals meaning their impact is noticeable but not extensive.

Winners Status Quo – UK – EU Free Trade Agreement

Through this scenario,. The UK and EU will maintain zero tariffs between themselves but face a diverging origin and regulatory requirements especially as the UK creates new criteria for its imports and exports. Although such an agreement will boost UK GDP by over 4% after its withdrawal, there is potential political difficulty of attaining this agreement. Furthermore, as the deadline quickly approaches, one solution to prevent economic disaster in the short run is to institute a temporary Free Trade Agreement and allow for more time to negotiate and settle the differences between the UK and EU.

A Closer Partnership – US – UK Free Trade Agreement

One scenario would see a further expansion of the economic relationship between the US and the UK with a free trade agreement which is currently being negotiated. Such an agreement would lead to an increase of about 2.4% in GDP for the UK, but with a minimal increase in GDP for the United States the agreement may require more incentives for the United States. That being said, this scenario can go hand in hand with a UK-EU Free Trade Agreement to possibly not only prevent a GDP shock to the UK but increase GDP.

Reaching for the Stars – UK – US – EU Free Trade Agreement

This scenario is the least likely and most difficult to institute, but also can create an economic boom for all three economies and create a stronger connection between the continents. The UK would benefit with over a 7% boost to GDP. That being said, following the shift of trade policy by President Trump and the accompanying tariffs on the EU, the EU commission has declared that the Transatlantic Trade and Investment Partnership (TTIP) will not be considered which for the moment closes that door firmly.

Conclusion

It is difficult to see what scenario will come to fruition. That being said, with the time necessary to create a sophisticated and beneficial trade agreement, these proposed trade agreements are long-term possibilities. As the deadline approaches, the UK is attempting to use its newfound freedom to establish trade agreements with other WTO members and maintain its trade levels. No matter though, if no extension or temporary free trade zone is instituted, the British Economy will face a serious economic shock that will be compounded by the devastation of Covid-19. □

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Work Cited

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