The long-term economic impact of leaving the EU.
Ebell, Monique ; Warren, James
The aim of this paper is to analyse the long-term implications of
leaving the EU for the UK economy. To do this, we consider three main
channels by which the UK economy could be affected in the long run:
1) Reductions in trade with EU countries and a modest increase in
tariff barriers.
2) A reduction in foreign direct investment (FDI), particularly
affecting services FDI.
3) A reduction in the UK's net fiscal contribution to the EU.
We input these effects of leaving the EU into NiGEM, the National
Institute Global Econometric Model, a multi-country economic forecasting
model. NiGEM has been developed at NIESR over the past three decades and
is funded by subscriptions from international institutions, central
banks and finance ministries from around the world, as well as some
private sector institutions. Both the OECD and HM Treasury have also
chosen to use NiGEM to conduct their analysis of the economic impact of
leaving the EU. This is not surprising, as NiGEM's explicit trade
linkages make it particularly well-suited to modelling the impact on the
UK economy of shifts in trade policy.
This article presents our estimates of the long-run impact of
leaving the EU over the next fifteen years, not only on GDP, but on
consumption, real wages, unemployment, and a range of other
(endogenously determined) variables. We find that by 2030, GDP is
projected to be between 1.5 per cent and 3.7 per cent lower than in the
baseline forecast in which the UK remains in the EU. Real wages fall
somewhat more, by between 2.2 per cent and 6.3 per cent. Consumption is
also hit somewhat harder than GDP, falling by between 2.4 and 5.4 per
cent. Real wages and consumption decline more than GDP in the long term
due to a long-term deterioration in the terms of trade, coupled with a
shift towards savings.
Table 14 compares our estimated long-run reductions in GDP to those
of three other prominent studies published by the OECD, the Centre for
Economic Performance (CEP) at the LSE and HM Treasury. While the studies
assume broadly similar reductions in trade and FDI, as well as similar
reductions in the UK's net contributions to the EU, the range of
estimated impacts on GDP relative to the 2030 baseline is considerably
larger. We summarise these results by reporting the estimated reduction
in GDP for each percentage point reduction in total trade. In the CEP
analysis, GDP is reduced by 0.5 per cent to 0.75 per cent for each 1 per
cent reduction in total trade, while in the OECD and HM Treasury
studies, the reduction is about 0.3 per cent to 0.4 per cent of GDP for
each 1 per cent decrease in total trade. In our analysis, GDP is reduced
by 0.1 per cent for each 1 per cent reduction in trade, so that our
estimates can be seen as more conservative.
Our modelling strategy is to focus on a small number of the
clearest and most well-understood potential impacts on the EU economy of
leaving the EU in our core scenarios. As a result, it is not surprising
that our estimated reductions in GDP are smaller than those of studies
allowing for a wider range of impacts. One key distinguishing feature of
our analysis is that our core scenarios abstract from any direct impact
of openness on productivity. This differentiates our analysis from the
two other published studies which also use NiGEM: HM Treasury (2016) and
OECD (2016). (1)
While HMT (2016) and OECD (2016) cite a large body of empirical
evidence suggesting that openness might be associated with higher levels
of productivity, there is also considerable uncertainty about the
factors driving the UK's recent productivity performance. (2) For
this reason, we think it prudent and valuable to focus only on the most
well understood impacts of trade and FDI of leaving the EU in our core
scenarios. Any reductions to productivity stemming from reductions in
openness should be layered on top of these estimates, as should any
increases to productivity from reductions in EU regulation.
However, it is important to note that there is a very real risk
that leaving the EU might have a negative impact on productivity.
Abstracting from any direct impact on productivity may account for much
of the difference between our lower and the OECD and HM Treasury's
higher estimates of the long-run GDP impact of leaving the EU. We find
that adding a productivity shock of similar magnitude to the
Treasury's to one of our scenarios brings our results roughly into
line with the Treasury's, and we now find a GDP decline of 7.8 per
cent relative to the 2030 baseline for this scenario, compared to a
decline of 2.7 per cent without the productivity shock, a difference of
5.1 per cent of GDPT This illustrates that the estimates from our core
scenarios are conservative, and that there is a risk that the negative
economic impact of leaving the EU could be substantially larger. We
discuss this and other unmodelled risks in more detail when presenting
the results in full.
As a model with general equilibrium properties, NiGEM allows the
economy to adapt to its new situation outside the EU. EU demand for our
exports falls, but so do export prices and the effective exchange rate,
which helps to stem the decline in exports. However, we estimate that
the decline in the effective exchange rate leads exports to drop only by
at most 2.4 per cent less than they would have done in the absence of
currency depreciation. The net effect of leaving the EU on trade remains
strongly negative. The UK model's flexible labour markets also
adjust over the long run, so that our analysis does not lead to any
appreciable increase in long-run unemployment. That is, NiGEM allows the
UK economy to adjust to its new situation in a variety of ways, and some
of these adjustments tend to temper the negative impacts of Brexit in
the long run.
Of course, a key question concerns the counterfactual: what would
the relationship between the UK and the rest of the EU, and the rest of
the world, look like after a UK exit from the EU? There are many
possibilities. We focus on three main scenarios:
* 'Norway', membership in EEA, free trade in goods and
services with the EU, including access to EEA financial services markets
via passporting.
* 'Switzerland', bilateral agreements with the EU on free
trade in goods, but no free trade in services and no access to EEA
financial services markets via passporting.
* 'WTO', no membership in free trade agreements for goods
or services with EU, no passporting.
In all three cases, the UK would no longer belong to the EU's
customs union. This implies that rules of origin would need to be
applied to UK exports to the EU, and there is no access to the EU's
free trade agreements with third parties. (4) In all three scenarios, we
consider optimistic and pessimistic estimates of the declines in the
UK's total trade.
We base our scenarios on estimates of the magnitudes of the
reductions in trade and FDI, and the likely increase in tariffs, on a
synthesis of the existing academic literature. In the next section, we
present a brief overview of the existing evidence on the impact of
trading block membership on trade in goods and services and FDI in
manufacturing and services. We also use HM Treasury and European
Commission data on the UK's contributions to the EU to estimate the
fiscal savings from exit. Then, we go on to use the National Institute
Global Econometric Model (NiGEM) to present the impact of these three
main effects on the UK economy.
All of the scenarios involving UK exit from the EU lead to
substantial exchange rate depreciations and current account
deterioration in the wake of the Referendum. As a consequence, in a
companion article (Baker et al. in this issue), we also model explicitly
the impact of post-Brexit uncertainty on the UK economy in the period
immediately after a vote to leave the EU. We undertake this modelling
exercise by increasing a variety of risk premia in the model. We then
run our trade, FDI and fiscal shocks on the new path where there is a
greater degree of short-run uncertainty faced by the UK economy. That
is, our modelling approach takes into account that in order to arrive at
the new long-run state of the UK economy on exit from the EU, the
economy is expected to transit through a period of considerable
uncertainty in the short run. The uncertainty in the immediate
post-Brexit period has little appreciable impact on the long-run
outcomes, however.
Scenarios
Decrease in trade volumes
Table 1 summarises the declines in trading volumes with the EU used
to calibrate the shock to the UK's export market shares to the EU
for each of our three scenarios: Norway, Switzerland and WTO. These
estimates are based on a synthesis of the available evidence. These
declines in EU export market shares lead to declines in total trade
reported in the final two columns of table 1. (5)
The European Union covers trade in both goods and in many important
categories of services, while most other preferential trade agreements
(PTAs) cover trade in goods only. This makes it difficult to draw
conclusions from the econometric studies covering a large number of
goods-only PTAs for trade in services, especially since the UK is one of
the world's leading exporters of services. We address this issue by
looking separately at the impact of PTAs on goods and on services. We
base our estimates on four key papers: Baier et al. (2008), van der
Marel and Shepherd (2013), Ceglowski (2006), and Egger et al. (2011).
Goods trade
The standard framework for estimating the impact of trading block
membership on trade volumes is the theoretically based gravity model
(Anderson and van Wincoop, 2003). Gravity models estimate bilateral
trading volumes as depending on measures of trading costs such as
distance, common border, common language, as well as on membership in
the same trading block. Gravity models are the standard framework used
by economists for estimating the impact of trade barriers, borders and
free trade agreements on the volume of trade.
First we consider the impact on goods trade with the EU associated
with the Norway or Switzerland scenarios. Baier et al. (2008) use a
theoretically-based gravity model to estimate the reduction in trade
from being a member of EFTA (i.e. being in the EEA but not the EU) on
trade as 38 per cent over ten years or 25 per cent over five years
(table 2). (6) Although Baier et al. (2008) use data on both goods and
services in these estimates, we consider them to be mainly relevant for
goods trade, and much less so for services trade. (7) This is because
Baier et al. (2008) use panel data at 5-year intervals from 1960 until
2000, and most of the variation in EU versus EFTA/EEA membership occurs
before 1990. Before 1990, trade was much more heavily weighted towards
goods than it is today, especially for the UK (table 4). After 1995, the
period of most substantial trade in services, the only EFTA/EEA members
remaining were Norway and Switzerland--and Switzerland does not
participate in the single market for services. So it seems likely that
the estimates are largely capturing the impact of EU vs EFTA/EEA
membership on goods trade.
The estimated reduction in goods trade for Switzerland and Norway
may be due to the fact that neither of these countries belongs to the
EU's customs union. Despite being inside the single market, being
outside the EU's customs union imposes additional non-tariff
barriers on Norway and Switzerland. A customs union is like Schengen for
goods: once a good is inside the customs union, it can move around
freely with no further questions asked. Norway and Switzerland, however,
are subject to the EU's rules of origin in goods trade. For
example, a car produced in Germany, and containing an engine imported
from Japan, can be sold anywhere in the EU without further ado. If the
same car had been produced in Norway, it would have to obtain a sort of
'visa' which details the origin of its components, and
potentially pay a tariff for the Japanese engine. This complicates Swiss
and Norwegian goods trade with the EU, especially for products with
complex supply chains. Augier et al. (2005) study the impact of rules of
origin on trade between EU countries and their free-trade agreement
(FTA) partners, and find that they can reduce trade by up to 70 per
cent, with central estimates lying around 40 per cent.
Next, we consider the impact on goods trade of leaving the EEA
entirely, and not joining any other trading block. Baier et al.
(2008)'s point estimates, reproduced in table 2, indicate that the
reduction in goods trade lies between 50 per cent and 56 per cent over
ten years, depending on whether the regression is run in levels or in
first differences, and we take the average of 53 per cent. (8)
Services trade
Next, we consider the evidence on the impact of trading block
membership on bilateral services trade. There is reason to believe that
estimating services trade separately from goods trade might be
advisable. Prima facie it would seem that some of the key determinants
of goods trade--distance as a proxy for transport costs, for
example--would matter less for trade in some kinds of services,
especially for the high value-added financial and business services in
which the UK specialises. Rather, services face a host of non-tariff
barriers to trade, regulatory and legal impediments to selling services
across borders. Being a member of a trading block might be important in
reducing these types of trade barriers. For example, non-EU banks can
only do business in the EU by establishing a subsidiary in an EU
country. Once a bank has acquired an EU 'passport', however,
it is free to do business across the EU.
We present the evidence from two articles which have attempted to
estimate the impact of trading block membership on services trade. Both
are based on gravity models, but differ somewhat in their focus and in
the data used.
Ceglowski (2006) estimates theoretical gravity models for bilateral
trade in services, and examines the relationship to trade in goods. The
Norway scenario involves continued free trade in services, including
access to EU financial markets via 'passporting'. However, one
hypothesis about services trade is that it is in part a byproduct of
goods trade, in particular for services such as transport,
communications or cross-border finance (Fieleke, 1995). Ceglowski (2006)
tests this hypothesis by running a 2SLS regression, using the log of
lagged goods trade as an instrument. She finds that a 1 per cent
increase in goods trade should lead to a 0.74 per cent increase in
services trade. Combined with the 25 per cent (38 per cent) reduction in
goods trade from leaving the EU for EFTA/EEA, we get a decrease in
services trade of 19 per cent (28 per cent) by the 'goods
channel' for Norway and also for Switzerland. In the Island Nation
scenario, the 53 per cent reduction in goods trade leads to a decrease
in services trade of 39 per cent by the 'goods channel'.
Once the log of lagged goods trade is included as an instrument in
Ceglowski (2006)'s gravity regressions, none of the other standard
gravity variables such as the product of GDPs, distance, common border
or common language is significant in explaining bilateral service trade
flows. The only exception is the variable for membership in a trading
block, which would decrease the UK's trade in services with other
EU members by 26 per cent over and above the impact on goods trade. (9)
We call this the 'EU channel'.
We obtain the impact of trading EU membership for
Switzerland's bilateral agreements, which do not cover services, as
the sum of the 19 per cent (28 per cent) reduction in services trade by
the 'goods channel' and the 26 per cent reduction by the
'EU channel'. Similarly, we obtain the estimated reduction in
services trade with the EU by combining the 39 per cent reduction by the
'goods channel' with the 26 per cent reduction by the 'EU
channel'.
Goods and services trade
Egger et al. (2011) provide the most methodologically up-to-date
estimates of the impact of Preferential Trade Area membership on trade,
but their estimates do not differentiate specifically between EU
membership and EEA membership, nor do they differentiate between goods
and services. (10) Using 2005 data from the UN World Trade Database,
Egger et al. (2011) both accounts for endogeneity of preferential trade
agreements by a two-stage instrumental variables procedure, and for the
large numbers of 'zeros' in the UN trade data by using a
nonlinear Poisson Pseudo-Maximum Likelihood estimator, as suggested by
Santos Silva and Tenreyro (2006). Their coefficient estimate of 1.2701
(standard error of 0.3961) corresponds to a decline in total trade of 72
per cent from leaving a PTA completely. (11) We take this to be our most
pessimistic estimate for the WTO scenario.
Over the past decades, there have been very few examples of trading
blocks or free-trade agreements breaking down. Hence, most of the
variation in the data underlying the gravity estimates reported above
refers to countries which join free trade agreements (FTAs). This raises
questions about asymmetries: are the estimated trade increases from
joining a FTA larger or smaller than the estimated trade decreases from
leaving a FTA? While there are not enough such break-ups of FTAs to make
a reliable comparison, there is some evidence on the presence of
asymmetries in the trade effects from the formation or break-up of
currency unions. Glick and Rose (2002) found evidence in favour of large
trade effects from currency union breakups, but subsequent analyses
focusing on currency union formation found much smaller or no trade
creation. (12) Campbell (2013) finds that controlling for country-pair
trends might be important to avoid bias. Thus, it is prudent to remain
aware that there might be some risks to assuming symmetry of the trade
effects of joining a free trade area and leaving one.
Tariffs
In all three cases, the UK would no longer belong to the EU's
customs union, and the UK would lose access to the EU's free trade
agreements with third parties. The UK would be facing
most-favoured-nation (MFN) tariffs with all its non-EU trading partners,
until it was able to negotiate new trading deals. The average WTO
most-favoured-nation import tariff is 9 per cent. (13) We assume that UK
goods would face an average 5 per cent increase in tariffs. This allows
some scope for the negotiation of preferential trading agreements.
FDI
Membership in the European Union might matter for inward foreign
direct investment (FDI) for two reasons:
1) Free movement of capital might make it easier for firms from
other EU-28 countries to invest in the UK.
2) Free trade in goods and services, including passporting, and
labour mobility across the EU, might make the UK a more attractive
destination for FDI from outside of the EU.
All other things equal, membership in the European Union should
increase inward FDI to the UK, both from the rest of the EU and from the
rest of the world. (14)
There is relatively little direct evidence on the quantitative
impact of belonging to the European Union--or to any other free trade
area--on FDI. There are three main methods for estimating the impact of
EU membership on FDI: gravity models, synthetic cohorts, and regressions
of FDI on trade openness.
Table 5 summarises the evidence from gravity models. Gravity models
and the synthetic cohort approach both generate estimates of the decline
in FDI from leaving the EU completely, corresponding to our Island
Nation scenario. The range of estimates for the decrease in FDI to
leaving the EU lies between 12 per cent and 28 per cent for gravity
models (table 5), and between 25 per cent and 30 per cent for the
synthetic controls approach of Campos and Coricelli (2015). (15)
While these gravity and synthetic control estimates are
instructive, they are also difficult to project onto the Norwegian or
Swiss scenarios. The HMT (2016) study cited in table 5 also attempts to
estimate an FDI impact of EEA membership, but concludes that the
insignificant coefficient estimates are due to the limitations of the
data, in particular the very small number of countries in the EEA in the
2000s.
Greater openness to trade might also make a host country more
attractive for inward FDI, if the goods and services produced there can
easily also be exported to other nearby markets. There are two key
advantages of using estimates of the impact of openness on inward FDI to
the UK. First, this measure captures total inward FDI flows, rather than
only the FDI from intra-EU trade. Second, it allows us to map the
differential impact on trade in the Norwegian, Swiss and WTO scenarios
directly into impacts on FDI.
Evidence on the impact of openness to trade on FDI in both services
and manufacturing is provided by Ramasamy and Yeung (2010). They use
data from the OECD countries covering 1980 to 2003 to estimate a fixed
effects panel model. They find that openness is a much more important
determinant of inward FDI flows for services than for manufacturing. A 1
percentage point increase in the services trade to GDP ratio results in
an increase of $1.98 billion in inward services FDI flows, but an
increase of only $1.66 million in inward manufacturing FDI flows. (16)
As a result, we focus the rest of our discussion on this services
channel. (17)
Table 6 presents estimates of the reductions in inward FDI to the
UK in each of the three scenarios from the Ramasamy and Yeung (2010)
estimates of the impact of openness, measured as the change in the
services trade to GDP ratio, on inward services FDI flows. Column (a)
translates the declines in services trade in table 1 into reductions in
the services trade to GDP ratio, while column (b) multiplies these by
Ramasamy and Yeung's estimate of $1.98 billion. Column (c) reports
average FDI inflows to the UK (OECD, 2015) in $billions in 2009-13,
while the neighbouring column gives the range of estimated percentage
declines in inward FDI post-Brexit. We use the midpoints of each of
these ranges to calibrate the decline in FDI inflows.
Our estimates for the decline in FDI inflows to the UK are quite
similar to those reported in HMT (2016): 9.7 per cent for Norway
(against 10.0 per cent in the Treasury analysis), 17.1 per cent for our
Swiss scenario (compared to 15-20 per cent for the Treasury's FTA
scenario and 23.7 per cent for the WTO scenario (compared to 1826 per
cent in the Treasury's WTO case), although our estimates were
obtained using a different methodology. Finally, table 7 converts the
reductions in FDI inflows to declines in UK private sector investment
(PSI). We calibrate a shock such that UK PSI decreases by the midpoints
of these estimates for each scenario into NiGEM, coupled with a
corresponding negative shock to the balance of payments. The final two
columns of table 7 show that these are rather modest negative shocks to
PSI of between 1.5 per cent and 3.5 per cent, never exceeding 0.5 per
cent of GDP.
Fiscal costs and benefits
Each year, the UK government contributes to the European Union
budget. At the same time, the EU allocates some of its spending to the
UK. Some of this EU spending is funnelled through the UK government: for
example, the UK government uses some EU funding to finance a public
investment project or to support farmers. Some EU funding goes directly
to private-sector bodies in the UK: for example, some UK universities
receive research grants directly from the European Union.
The UK is a net contributor to the EU budget: we contribute a
larger amount to the UK budget than we receive back in EU spending. The
amounts involved are fairly small, however. In 2014, the UK contributed
0.8 per cent of its GDP to the EU, and received EU spending equivalent
to 0.3 per cent of GDP, for a net contribution to the EU budget of 0.5
per cent of GDP (table 8). This corresponds to a gross contribution of
17.8bn [euro] or 14.4bn [pounds sterling], and a net contribution of
8.6bn [pounds sterling] (table 9). (18) In the case of the UK leaving
the EU, there would be scope for increasing domestic spending or
reducing taxes by the projected level of the UK's net contribution
to the EU. We examine the size of the direct fiscal adjustments, that
is, how much the UK government would save if the UK were to leave the
EU.
Tables 8 and 9 give the OBR's projections for the evolution of
the UK's contributions to the EU, as well as for the UK's
public sector receipts from the EU. We add a projection of a constant
0.08 per cent of GDP in private sector receipts from the EU, largely
research funding, based on the average over the period 2009-15.
The UK's total net contribution, defined as its contributions
to the EU budget net of both public and private sector receipts from the
EU, is set to peak in 2016 at 9.5 billion [pounds sterling], or 0.49 per
cent of GDP. After this, the total net contribution is projected to fall
to between 0.31 per cent and 0.36 per cent between 2017 and 2020.
There are three possibilities for the direct fiscal impact of
leaving the EU. By direct fiscal impact, we mean only the impact from no
longer contributing to the EU budget. In all cases, we assume that the
government would replace the spending that the EU currently undertakes
in the UK, both to private and to public sector bodies. This means that
the government would be left with a choice on what to do with the net
contributions it would have made to the EU: spend it, use it to reduce
the deficit or to reduce taxes. We assume that the government would use
the repatriated contributions to increase spending. We also make an
appropriate adjustment to the balance of payments.
The UK is projected to contribute 0.63 per cent of GDP to the EU
budget, but also to receive 0.30 per cent of GDP in EU spending.
Assuming that the UK government would replace all projected EU spending
in the UK, then the saved net contributions to the EU would be 0.33 per
cent of GDP.
In the WTO scenario the UK would cut all ties to the EU and EEA. In
this case, we assume that the UK government would gain 0.3 per cent of
GDP to use either for debt reduction, tax reduction or additional
spending. Norway and Switzerland, however, still contribute to the EU
budget, although their contributions are somewhat smaller than the
UK's. It is difficult to estimate what the UK's contributions
to the EU would be in these scenarios, as this would be subject to
negotiation. The House of Commons (2013) reports that Norway's per
capita net fiscal contribution to the EU is 83 per cent of the
UK's, and there are EU countries whose net contributions are close
to or lower than Norway's. We assume, therefore, that the UK's
contribution to the EU would not change in the Norway scenario, while in
the Swiss and WTO cases we assume savings of 0.3 per cent of GDP.
Long-term impact on the UK economy of leaving the EU
We now present the results of our NiGEM modelling of the projected
long-term impact on the UK economy of leaving the EU relative to the
baseline. Tables 10-12 summarise the main results for key macroeconomic
aggregates for each of the three scenarios. In this text, we focus on
the long-run implications for the UK economy and compare outcomes for
each of the Brexit scenarios to the baseline of remaining in the EU in
2030.
Norway
The most favourable outcome would occur if the UK were successful
at retaining the same kind of market access to the EU as EEA member
Norway. In this case, GDP is projected to decline by between 1.5 per
cent and
2.1 per cent relative to the 2030 baseline. Households are expected
to be hit somewhat harder: real wages for households are projected to
decline by 2.2 per cent to
3.2 per cent, and consumption is projected to decline by 2.4 per
cent to 3.3 per cent, while total private sector investment drops by 0.6
per cent to 0.7 per cent compared to the baseline. The greater impact on
real wages and consumption can be traced back to the permanent
deterioration in the terms of trade. Import prices rise permanently,
while export prices fall, so that the consumption basket becomes more
expensive relative to domestically produced output. The fall in
investment is much smaller, also reflecting the shift in the relative
price of consumption.
Norway currently obtains its market access in exchange for taking
on virtually all EU regulation, accepting free movement of people, and
making contributions to the EU budget which are not much smaller on a
per capita basis than those of the UK today. As a result, it is
difficult to see what benefits in terms of reduced regulation or control
of migration (although it is far from clear that taking over control of
migration would bring economic benefits) might be set against the
projected GDP losses. Indeed, the Norway scenario does not seem to be
favoured by proponents of leaving the EU. (19)
Switzerland
The Switzerland scenario assumes somewhat looser links with the EU,
but would still involve a free trade agreement in goods with the EU.
There would be no free trade agreement in services, and UK-domiciled
banks would no longer have automatic access to EEA markets via
passporting. As a result, this scenario involves somewhat larger losses
in market share with the EU, leading to larger declines in trade of
between 13.3 per cent and 17.4 per cent. Now, GDP declines by between
1.9 per cent in the optimistic and 2.3 per cent in the pessimistic
version, both relative to the 2030 baseline. Again, households are hit
somewhat harder: real wages fall by 3.1 per cent to 3.8 per cent, and
consumption is projected to drop by 2.8 per cent to 3.5 per cent
compared to the non-Brexit baseline.
Again, Switzerland's bilateral agreements involve accepting
large areas of EU regulation and free movement of people, as well as a
somewhat more modest contribution to the EU budget than the UK. (20)
Similarly to the Norwegian model, it is difficult to see how this
arrangement would bring substantial regulatory control to the UK, and it
is far from clear whether control of migration would be feasible.
Indeed, the Switzerland scenario also does not seem to find favour with
proponents of Brexit. (21)
WTO
The WTO scenario assumes the loosest links with the EU: there would
be no free trade with the EU in either goods or services. The larger
loss in EU market share would also result in larger long-term declines
in total trade of between 20.7 per cent and 29.2 per cent. The resulting
declines in GDP relative to the 2030 baseline are projected to lie
between 2.7 per cent and 3.7 per cent. Once again, the impact on
households is projected to be stronger: real wages are projected to fall
by 4.6 per cent to 6.3 per cent, while consumption is projected to drop
by 4.0 per cent to 5.4 per cent, all relative to the 2030 baseline.
While the WTO scenario implies the greatest negative economic
impact on the UK economy, it is also the scenario which seems most
likely to generate some benefit in terms of reductions in regulation.
However, the UK economy has been judged by the OECD, the World Bank and
the World Economic Forum to be one of the most lightly regulated among
the advanced economies. It is not clear that there is much scope for
efficiency gains from even lighter touch regulation.
Mechanism
To understand how leaving the EU might damage the UK's
long-term economic performance, it is useful to begin with the declines
in trade. The overwhelming weight of evidence is that belonging to a
free trade agreement increases trade with other members of the trading
block, so that leaving a trading block would result in lower trading
volumes with one's ex-FTA partners. (22) We implement this in NiGEM
by reducing the UK's export market shares in EU countries, in line
with the estimated reductions in bilateral trade of table 3.
The reductions in export market shares manifest themselves as a
decline in demand for UK exports. This has two main impacts on prices: a
reduction in export prices and a depreciation of the pound. Both of
these changes would then tend to increase demand for UK exports from
outside the EU. In addition, depreciation raises import prices. The
currency depreciation manifests itself in a short-lived improvement in
the trade balance and current account. However, these are reversed in
the longer run, as the reductions in EU market share are progressively
phased in.
We illustrate the ability of exchange rate depreciation to temper
the fall in exports associated with the UK leaving the EU in figure 1,
which shows the percentage increase in exports from a 1 per cent decline
in the real exchange rate. (23) By 2030, exports increase by only about
0.1 per cent for every 1 per cent decline in effective exchange rate.
This translates into an exchange-rate bounce-back for exports (i.e. the
amount by which exports increase due to currency depreciation) of
between 1.1 per cent and 2.4 per cent compared to the baseline (table
13). This exchange rate bounce-back for exports is rather small compared
to the total declines in exports by 2030 of between 11.2 per cent and
24.0 per cent. As a result, despite the fact that the currency
depreciation seems to be able to temper the impact of the loss of market
access, its impact is small compared to the loss in exports in all
scenarios.
The rise in import prices and reduction in export prices comprise a
long-run deterioration in the terms of trade by between 1.7 per cent and
6.1 per cent relative to the 2030 baseline (tables 10b, lib, 12b). This
implies that a consumption basket including imported goods will become
more expensive relative to domestically produced goods, and hence
consumption and real wages fall more sharply than GDP. In the long run,
households may react to higher consumption prices by increasing savings,
reflected in the relatively small declines in investment of between 0.6
and 2.7 per cent.
In addition, a currency depreciation tends to be inflationary, as a
weaker currency raises the sterling price of imports. This can be seen
by the rise in inflation in the wake of Brexit taking effect. This might
place the Bank of England in a difficult position in the post-Referendum
period, as it might face a surge in inflation together with a negative
demand shock weighing down on GDP. The companion piece on the short-term
implications of leaving the EU discusses the short-term monetary policy
implications in more detail. Here, we assume that the Bank of England
would initially 'look through' the one-off surge in inflation
brought about by currency depreciation, holding interest rates constant
until the third quarter of 2018. In the longer run, however, inflation
returns to very close to its baseline.
[FIGURE 1 OMITTED]
NiGEM also allows for the UK's flexible labour markets to
respond to the decline in employment demand. Despite a short-run
increase in unemployment in the adjustment period, the degree of
long-run wage flexibility in the UK model ensures that the long-run
increase in unemployment does not exceed 0.2 per cent in any of the
scenarios. However, this same long-run wage flexibility means that the
long-run losses from Brexit do manifest themselves in terms of rather
substantial real wage declines relative to the 2030 baseline of between
2.2 per cent and 6.3 per cent. This is broadly in line with the
behaviour of UK unemployment and wages in the wake of the financial
crisis, when the increases in unemployment were short-lived and fairly
muted, with real wages remaining more persistently weak.
As a result of the projected declines in real wages, UK consumers
who depend upon labour income would be worse off, and their consumption
is projected to decline between 2.4 per cent and 5.4 per cent. UK
households might also face marginally higher rates of direct taxes. The
decline in economic activity would also lead to a decline in tax
revenues. In order for the government to stick to its long-run fiscal
consolidation plans, the average direct tax rate would need to rise by
between 0.5p and 0.8p.
Comparison to other studies
Table 14 compares our key assumptions and results to those of other
studies. All of the comparator studies use similar estimates of the
reductions in trade from leaving the EU, often based on the same gravity
estimates. The OECD and HM Treasury analyses also use the same model,
NiGEM. Still, the estimated impacts on GDP vary. In the most pessimistic
scenarios, our analysis suggests a GDP decline of 3.7 per cent, compared
to 7.7 per cent for the OECD, and 9.5 per cent for HM Treasury and the
LSE.
What accounts for these differences? In our assessment, one
important factor is the treatment of productivity. Both the OECD and the
HM Treasury analyses appeal to evidence on the impact of openness on
productivity as a basis for inputting direct reductions in productivity
into NiGEM. The OECD also assumes that productivity might rise if
regulation were to decline. In contrast, our core scenarios do not
include any impact of either a reduction in openness or a reduction in
regulation on productivity. (24)
To understand how important the downside risks from productivity
losses might be, we add a decline in productivity to our optimistic WTO
scenario. We calibrate the decline to approximate the productivity
losses from declines in trade assumed by HM Treasury in its long-run
Brexit analysis. (25) Assuming that productivity (modelled as
labour-augmenting technology) declines by 5 per cent causes long-run GDP
to decline by a further 5.1 per cent relative to its 2030 baseline. That
is, GDP declines by 7.8 per cent rather than 2.7 per cent compared to
its longrun baseline. This brings our estimate of the GDP impact of the
WTO scenario into line with the Treasury's impact of 7.5 per cent
for a similar scenario.
We have chosen to step back from attempting to quantify the
potential impact of Brexit on productivity in our core scenarios, not
because we think that productivity is unimportant, but rather because of
the difficulties in applying econometric evidence to the current UK
case. Econometric evidence on the relationship between openness and
productivity essentially uses information on this relationship over a
large number of countries and/ or time periods, in order to extract an
average impact of openness on productivity, while controlling for as
many coincident factors as possible. Thus, such econometric
relationships can be thought of as holding in 'normal times'.
While the weight of the evidence does seem to suggest that reducing the
openness of an economy would tend to decrease productivity and
decreasing regulation would tend to increase productivity in
'normal times', it is far from clear that these are in fact
'normal times' with respect to UK productivity. UK
productivity has been unusually weak since the crisis, and it is not
well understood why this is the case, i.e. the factors which are
currently driving the weak UK productivity performance remain unknown.
As a result, it is also impossible to know whether and how these
factors might interact with a reduction in openness or a reduction in
regulation. It might be that a reduction in openness would have a
greater impact than in 'normal times', or the opposite might
be true. The same goes for any improvements in productivity from
reductions in regulation. In addition, the UK's product and labour
markets are already ranked as among the most lightly regulated among
major economies by the OECD, the World Bank and the World Economic
Forum. This makes it difficult to see that there is much space to
deregulate further, making it equally difficult to see how the
productivity gains from deregulation could be large. So while our core
scenarios focus on a small number of the clearest and most
well-understood potential impacts on the UK economy of leaving the EU,
we are aware that there are a number of additional unmodelled risks. We
have demonstrated that the impact of productivity losses might be
substantial. We discuss more of these additional unmodelled risks in the
next section.
Unmodelled risks to leaving the EU
As emphasised above, our modelling strategy is to focus on a small
number of the clearest and most well-understood potential impacts on the
EU economy of leaving the EU. There is a range of further risks to
leaving the EU, including impacts on productivity, the impact of future
migration policy, and a potential for constitutional changes within the
UK. It goes beyond the scope of this article to discuss these factors in
depth. Rather, we give a brief assessment of each.
Scotland and Northern Ireland
In the Commentary to this issue, Armstrong and Portes argue that
there is a risk of break-up of the UK in the event of a vote to leave
the EU. If there were a second independence referendum, and the Scottish
electorate were to judge that its interests were better served as an EU
member outside the UK, then some additional disruption to the UK economy
could be expected. One of the issues which would again come up is the
division of the UK's national debt, with accompanying risks for the
rest of the UK's fiscal position. Similar risks may exist with
respect to Northern Ireland's constitutional position. In addition,
any break-up of the UK would also be likely to be accompanied by a
period of further uncertainty. All of this points to issues around
Scotland's and Northern Ireland's constitutional status posing
a risk of larger declines in GDP and other macro aggregates from leaving
the EU.
Migration
Our analysis abstracts from migration. For one thing, in the
Norwegian and Swiss cases, there is no reason to assume that free
movement of people with the EU would end. Changes in migration policy
would only seem to be relevant in the WTO scenario. For another,
representative agent models like NiGEM are not ideally suited to
quantifying the impact of changing migration policy. In the long run,
increasing or decreasing migration would mainly scale the economy up or
down and have little impact either way on GDP. If restricting migration
were to lead to productivity losses--perhaps because loss of access to
the EU talent pool were to worsen skills shortages or skill
mismatch--then we may be underestimating the economic costs to leaving
the EU. Moreover, there is evidence that EU migration has net fiscal
benefits for the UK, and these might counterbalance any positive fiscal
impact from repatriating the UK's net contributions to the EU. (26)
At the same time, it is at least conceivable that if the freedom to set
migration policy were used optimally, then this might have some positive
impact on productivity.
Current account
Finally, there is some risk that we have underestimated the impact
of leaving the EU on the current account. Currently, the UK has a
current account deficit of about 5.2 per cent of GDP in 2015, reaching 7
per cent in the final quarter of 2015. (27) That is, in 2015, the UK
relied on inflows of foreign capital equivalent to 5.2 per cent of GDP
to finance the domestic economy. If a vote to leave the EU were to
worsen the sentiment of foreign investors regarding the prospects for
the UK economy more than expected, it could become difficult to attract
such large capital inflows at current interest rates.
Conclusion
We present estimates of the reductions in GDP and other key
macroeconomic aggregates for three scenarios for the post-Brexit UK. We
project that by 2030, UK GDP would be 1.5 per cent to 2.1 per cent lower
in a Norwegian scenario, 1.9 per cent to 2.3 per cent lower in a Swiss
scenario, and 2.7 per cent to 3.7 per cent in the WTO scenario. The
long-run deterioration in the terms of trade leads the declines in wages
to be somewhat larger, ranging between 2.2 per cent and 6.3 per cent,
but there would be little perceptible long-run impact on unemployment.
Our core scenarios focus on a small number of the most
well-understood potential impacts of leaving the EU: the impact of
reduced demand for UK exports from the loss in EU market access, and the
reduction in UK investment associated with reductions in FDI,
counterbalanced by the projected savings from repatriating the UK's
net contributions to the EU.
There are both upside and downside risks to these estimates. As for
upside risks, there might be a modest amount of scope for increases to
productivity from reducing regulation, and it cannot be excluded that
migration policy could be formulated so as to increase productivity. If
they were to materialise, these upside risks might decrease the size of
the long-run GDP losses from leaving the EU. One substantial downside
risk is that reducing openness might lead to a decline in productivity.
Adding a productivity decline that is similar to that assumed by HM
Treasury in its long-run analysis leads to a further 5.1% decline in GDP
relative to the 2030 baseline. Further downside risks include a breakup
of the UK, losses in productivity from restrictive migration policies
and current account instability.
NOTES
(1) Pain and Young (2004) base their estimates of the GDP impact of
leaving the EU on NiDEM, a predecessor of the current NiGEM model which
included greater detail on the UK domestic economy, but which is no
longer supported. Pain and Young's work pre-dates the rise of
gravity models of trade, so they model the trade impacts of leaving the
EU through an increase in tariff barriers, rather than as a reduction in
EU export market shares. They report an estimated reduction in GDP from
leaving the EU of 2.25 per cent
(2) See recent NIESR research by Riley et al. (2015) and Bryson and
Forth (2015).
(3) We explain how we calibrated our productivity shock to be
similar in magnitude to HM Treasury when we present this scenario in
detail.
(4) See the following section for a discussion of how rules of
origin might act as a barrier to trade.
(5) To be clear: the declines in EU market shares are fed into
NiGEM, the total trade reductions are long-run outcomes from NiGEM.
(6) Baier et al. (2008) run panel gravity regressions with
country-pair and time effects, both in levels and first differences.
Results are reproduced and converted to reductions in bilateral trade
with the EU in table 2.
(7) Ottaviano et al. (2013) use Baier et al. (2008) to approximate
the reduction in trade in both goods and services from moving from the
EU to EEA/EFTA, using their estimate over five years.
(8) Baier et al. (2008), Table 5 column 3 provides the results of
regressions in levels, while Table 6 column 2 reports results from
regressions in first differences.
(9) Table I, column 11 in Ceglowski (2006), which reports the
results of the IV regressions with time and country fixed effects.
(10) This is potentially a difficulty, because most PTAs have
little if any coverage of services, while the impact of PTAs is measured
on trade in goods and services.
(11) The percentage decline in total trade is calculated as
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] =72.
(12) Cf.Berger and Nitsch (2008), Santos Silva and Tenreyro (2010),
Ritschl and Wolf (2011).
(13) World Trade Organization (2015).
(14) Membership in the EU might also have an ambiguous effect on
outward FDI, increasing it to the rest of the EU, but possibly at the
expense of displacing some FDI that might otherwise have been destined
for countries outside the EU.
(15) The synthetic controls approach constructs a counterfactual
scenario for the UK by combining data from the non-EU countries who
jointly form the best proxy for the UK in a statistical sense. Campos
and Coricelli (2015) construct the counterfactual for the UK as a
combination of Canada (44 per cent), New Zealand (36 per cent) and the
US (20 per cent). See Abadie and Gardeazabal (2003) for more details on
the methodology.
(16) We have converted Ramasamy and Yeung's (2010) estimate
for the impact of openness on FDI of $ 1.31 billion to 2013 $ using the
US GDP deflator.
(17) Earlier evidence provided by Kolstad and Villanger (2008) had
not found evidence that openness increased FDI flows in services. This
might be due to differences in the sample studied: Kolstad and Villanger
use data from 57 countries, both developed and emerging between 1989 and
2000, while Ramasamy and Yeung restrict their analysis to OECD countries
but cover the longer period of 1980 to 2003.
(18) HMT (2016) gives the UK's net contribution as 9.8 bn
[pounds sterling] or 0.54 per cent of UK GDP, which does not seem to
count private sector receipts from the EU.
(19) Economists for Brexit (2016), The Economy after Brexit'.
(20) The referendum of February 2014 requires the Swiss government
to renegotiate its bilateral agreement with the EU on the free movement
of people within three years. As of yet, no agreement has been reached,
and it is not yet clear how and whether restricting migration will be
compatible with Switzerland's current level of EU market access.
(21) Economists for Brexit (2016), 'The Economy after
Brexit'.
(22) See Head and Mayer (2014) for an overview of the literature on
gravity models of trade.
(23) We obtain these estimates by shocking the exchange rate
premium, inducing a depreciation in the effective exchange rate of I per
cent, and comparing to the resulting increase in exports.
(24) It is important to distinguish between total factor
productivity and productivity measured as output per hour worked. Total
factor productivity is the part of output which is explained by
technology and unknown factors, that part that goes beyond just the
combination of labour and capital. Productivity measured as output per
hour worked, in contrast, depends on the capital to labour ratio, the
amount of capital (machines, patents, software) that each worker has to
work with. While TFP is unassumed to be unchanged in our analysis,
productivity measured as output per worker does decline, in line with
the decline in investment and hence the decline in the capital to labour
ratio.
(25) Specifically, HM Treasury reports on page 182 that it uses
elasticities of productivity to trade of between 0.2 and 0.3 in its
analysis. We apply an elasticity of 0.25 to the 20 per cent decline in
trade for our optimistic WTO scenario to arrive at a decrease in
labour-augmenting productivity of 5 per cent.
(26) Dustman and Frattini, 2014.
(27) Office for National Statistics (2016). See Lane (2016) for a
discussion of the challenges in interpreting the UK's recent
current account figures.
REFERENCES
Abadie, A. and Gardeazabal, J. (2003), 'The economic costs of
conflict: a case study of the Basque country', American Economic
Review, 93(1), pp. I 13-32.
Anderson, J. and van Wincoop, E. (2003), 'Gravity and
gravitas: a solution to the border puzzle', American Economic
Review, 93(1), pp. 170-92.
Augier, P., Gasiorek, M. and Tong, C.L. (2005), 'The impact of
rules of origin on trade flows', Economic Policy, 20, pp. 567-624.
Baier, S. and Bergstrand, J. (2007), 'Do free trade agreements
actually increase members' international trade?', Journal of
International Economics, 71(1), pp. 72-95.
Baier, S., Bergstrand, J., Egger, P. and McLaughlin, P. (2008),
'Do economic integration agreements actually work? Issues in
understanding the causes and consequences of the growth in
regionalism'. The World Economy, 31 (4), pp. 461 -97.
Berger, H. and Nitsch, V. (2008), 'Zooming out: gthe tade
effect of the euro in historical perspective', Journal of
International Money and Finance, 27, 8, pp. 1244-60.
Bruno, R" Campos, N. and Estrin, S. (2016), 'Gravitating
towards Europe: an econometric analysis of the FDI effects of EU
membership', mimeo, London School of Economics.
Bryson, A., and Forth, J. (2015) 'The UK Productivity
Puzzle', NIESR Discussion Paper No. 448.
Campbell, D. (2013), 'Estimating the impact of currency unions
on trade: solving the Glick and Rose Puzzle', The World Economy,
pp. 1278-92,
Campos, N. and Coricelli, F. (2015), 'Some unpleasant Brexit
econometrics', VoxEU.org
(http://www.voxeu.org/article/someunpleasant-brexit-econometrics).
Ceglowski, J. (2006), 'Does gravity matter in a service
economy?', Review of World Economics, 142(2), pp. 307-29.
Dhingra, S., Ottaviano, G., Sampson, T. and Van Reenen, J. (2016),
'The consequences of Brexit for UK trade and living
standards', CEP Brexit Analysis No. 2
(http://cep.lse.ac.uk/pubs/download/ brexit02.pdf).
Dustman, C. and Frattini, T. (2014), 'The fiscal effects of
immigration to the UK', Economic Journal, 124, pp. 593-643.
Egger, P., Larch, M" Staub, K. and Winkelmann, R. (201 I),
'The trade effects of endogenous preferential trade
agreements', American Economic Journal: Economic Policy 3, pp. I
13-43.
Glick, R. and Rose, A.K. (2002), 'Does a currency union affect
trade? The time-series evidence', European Economic Review, 46(6),
pp. 1125-51.
--(2016), 'Currency unions and trade: a post-EMU mea
culpa', mimeo (previous version NBER Working Paper No. 21535,
2015).
Head, K. and Mayer, T. (2014), 'Gravity equations: workhorse,
toolkit, and cookbook', chapter 3 in Gopinath, G., Helpman, E. and
Rogoff, K. (eds), Handbook of International Economics, vol. 4, Elsevier,
pp. 131-95.
HM Treasury (2015), European Union Finances 2015: statement on the
2015 EU Budget and measures to counter fraud and financial
mismanagement, Cm9167.
--(2016), HM Treasury analysis: the long-term economic impact of EU
membership and the alternatives, Cm9250.
Kimura, F. and Lee, H-H. (2006), The gravity equation in
international trade in services', Review of World Economics,
142(I), pp. 92-121.
Lane, P. (2016), 'A financial perspective on the UK current
account', National Institute Economic Review, 234, F67-72.
OECD (2015), FDI flows (indicator), doi: 10.1787/80ecalf9-en
(accessed on 18 December 2015).
--(2016), The economic consequences of Brexit: A taxing decision.
Office for Budget Responsibility (2015), July 2015 Economic and Fiscal
Outlook: Economy Supplementary Tables.
Office for National Statistics (2016), Balance of payments Oct to
Dec and annual for 2015.
Ottaviano, T., Pessoa, J., Sampson, T. and van Reenen, J. (2014),
The costs and benefits of leaving the EU', CFS Working Paper Series
No. 472.
Pain, N. and Young, G. (2004), The macroeconomic impact of UK
withdrawal from the EU', Economic Modelling, 21, pp. 387-408.
Ramasamy, B. and Yeung, M. (2010), The determinants of foreign
direct investment in services', The World Economy, pp. 573-596,
doi: 10.1111/j. 1467-9701.2009.01256.x
Riley, R., Rosazza Bondibene, C. and Young, G. (2015), 'The UK
Productivity Puzzle 2008-2013: Evidence from British Businesses',
Bank of England Working Paper No. 531; also as NIESR Discussion Paper
No. 450.
Ritschl, A.O. and Wolf, N. (2011), 'Endogeneity of currency
areas and trade blocs: evidence from a natural experiment', Kyklos,
64, 2, pp. 291-312.
Santos Silva, J.M.C. and Tenreyro, S. (2006), 'The log of
gravity', Review of Economics and Statistics, 88(4), pp. 641-58.
--(2010), 'Currency unions in prospect and retrospect',
Annual Review of Economics, Annual Reviews, 2, I, pp. 51-74.
Straathof, S" Linders, G.-J., Lejour, A. and Mohlmann, J.
(2008), 'The internal market and the Dutch economy: implications
for trade and economic growth', CPG Netherlands Document No. 168.
van der Marel, E. and Shepherd, B. (2013), 'Services trade,
regulation and regional integration: evidence from sectoral data'.
The World Economy, pp. 1393-405.
Webb, D. and Keep, M. (2016), 'In brief: UK-EU economic
relations', House of Commons Library Briefing Paper 06091.
Monique Ebell and James Warren *
* National Institute of Economic and Social Research. E-mail:
m.ebell@niesr.ac.uk; j.warren@niesr.ac.uk. This project was funded by
the Economic and Social Research Council under the UK in a Changing
Europe programme. We thank Angus Armstrong, Oriol Carreras, Jagjit
Chadha, Ian Hurst, Simon Kirby, Jack Meaning, Rebecca Piggott, Jonathan
Portes and Albrecht Ritschl for helpful discussions.
Table 1. Trade: impact of leaving the EU on total trade,
long-run NiGEM outcome
Declines in EU export Declines in total
market shares trade (NiGEM)
Optimistic Pessimistic Optimistic Pessimistic
Norway 23% 39% 10.5% 16.5%
Switzerland 31% 42% 13.3% 17.5%
WTO 50% 72% 20.7% 29.2%
Note: Declines in total trade are calculated as
([x.sub.Brexit]-[x.sub.Baseline])/[x.sub.baseline.]
Table 2. Trade: reduction in bilateral goods trade from
leaving the EU, Baier et al. (2008)
Regression results from Baier et al. (2008)
Levels First differences
Table 5 Table 5 Table 6 Table 6
(1) (3) (1) (2)
EU(t) 0.65 ** 0.45 ** 0.48 ** 0.47 **
[7.86] [4.01] [8.91] [8.63]
EU(t-l) 0.37 ** 0.23 **
[3.13] [4.41]
sum 0.65 0.82 0.48 0.70
EEA(t) 0.19 * 0.05 0.19 ** 0.17 **
[2.11] [0.48] [4.02] [3.49]
EEA(t-l) 0.29 ** 0.06
[2.85] [1.40]
sum 0.19 0.34 0.19 0.23
Percentage change in bilateral trade
EU > EFTA -36.9% -38.1% -25.2% -37.5%
EU > No EIA -47.8% -56.0% -38.1% -50.3%
Notes: Regressions are run in logs, so the percentage change in trade
from moving from the EU to EFTA is obtained as:
exp([x.sub.EFTA])-exp([x.sub.EU])-exp([x.sub.EU]). The percentage
change in trade from leaving the EU but joining no other economic
integration area (EIA) is obtained as: exp(0)-exp([x.sub.EU])-
exp([x.sub.EU]). EU(t) gives the impact of currently being an EU
member on tracle'fi.e. over the last 5-year period), while EU(t-l)
gives the impact on trade of also having a member 5 years previously,
while their sum gives the impact of having been an EU member over the
past 10 years.
Table 3. Trade: impact of leaving the EU on EU export market shares
Goods Services
Baier et al. v d Marel Ceglowski Baier +
Shepherd v d Marel
Shepherd
Norway 25%-38% 40% 19%-28% 29%-39%
Switzerland 25%-38% 40% 45%-54% 29%-39%
WTO 53% 43% 63% 50%
Total
Baier + Egger et al.
Ceglowski
Norway 23%-35% --
Switzerland 31%-42% --
WTO 56% 72%
Note: We calculate the decline in total trade in goods and services
by using that in 2014, 72.4 per cent of trade with the EU was in
goods and 27.6 per cent was in services trade.
Table 4. Trade: long-term trends in UK share of
commercial services in total trade
Exports Imports Total trade
1980 31.1 21.8 26.4
1990 29.1 20.1 24.1
2000 41.5 27.7 33.9
2010 63.4 27.8 42.5
Source: WTO Time Series Database and own calculations.
Table 5. FDI: gravity estimates of the impact of EU membership on
inward FDI
Authors Type of FDI Data Controls for
zeros?
Bruno et All to EU 34 OECD countries, No
al. (2016) 1985-2013
All to EU 34 OECD countries, Yes
1985-2013
All to EU 34 OECD countries, Yes
1985-2013
Straathof et Intra-EU 30 OECD countries, No
al. (2008) 194-2004
Non-EU 30 OECD countries, No
to EU 1994-2004
HM Treasury Intra-EU 40 countries, Not
(2016) 2000-2012 reported
Authors Type of FDI Coefficient Increase in Decrease in
on inward trade from trade from
FDI flows joining EU leaving EU
Bruno et All to EU 0,285 33% 25%
al. (2016) (0.077)
All to EU 0.320 38% 28%
(0.163)
All to EU 0.132 14% 12%
(0.050)
Straathof et Intra-EU 0.25 28% 22%
al. (2008) (0.09)
Non-EU 0.11 12% 11%
to EU (0.05)
HM Treasury Intra-EU 0.298 ** 35% 26%
(2016)
Table 6. FDI: declines in inward FDI flows to the UK
Decline in services Decline in annual
trade to GDP ratio services FDI inflows
(2013 $ bn)
(a) (b)
Norway 2.2%-3.1% $4.4-$6.1bn
Switzerland 3.1%-6.3% $6.1-$12.5bn
Island Nation 5.6%-7.4% $11.1-$14.7bn
Average FDI % decline in FDI % decline in FDI
inflows inflows to the UK inflows to the UK
to UK 2009-13
(c) (b)/(c) Midpoints
Norway $54.4bn 8.0%-11.3% 9.7%
Switzerland $54.4bn 11.3%-22.9% 17.1%
Island Nation $54.4bn 20.4%-26.9% 23.7%
Sources: Own calculations (a), (b) and OECD (c).
Table 7. FDI: declines in UK private sector investment
Decline in annual UK PSI 2013 % decline in
services FDI inflows (2013 $ bn) UK PSI
(a) (b) (a)/(b)
Norway $4.4-$6.1bn $364.9bn 1.2%-1.7%
Switzerland $6.1-$12.5bn $364.9bn 1.7%-3.4%
Island Nation $11.1-$14.7bn $364.9bn 3.0%-4.0%
% decline in Decline in FDI
UK PSI as % of GDP
Midpoints
Norway 1.5% 0.2%
Switzerland 2.6% 0.35%
Island Nation 3.5% 0.5%
Sources: Own calculations (a) and ONS (b).
Table 8. UK and the EU budget, based on HMT and OBR figures and
forecasts, % of UK GDP
Gross Rebate Total Public sector
contribution contribution receipts
(a) (b) (b) (d)
2009 0.95 0.36 0.59 0.30
2010 0.98 0.19 0.78 0.31
2011 0.95 0.19 0.75 0.25
2012 0.94 0.19 0.76 0.25
2013 1.04 0.21 0.84 0.23
2014 1.03 0.24 0.79 0.25
2015 0.95 0.26 0.69 0.23
2016 1.00 0.22 0.78 0.21
2017 0.87 0.27 0.59 0.21
2018 0.87 0.23 0.64 0.21
2019 0.88 0.23 0.66 0.22
2020 0.87 0.24 0.64 0.22
Ave 2009-14 0.98 0.23 0.75 0.27
Ave 2015-20 0.91 0.24 0.67 0.22
Public sector net Imputed private Total net
contribution sector receipts contribution
(c)-(d) (e) (c)-(d)-(e)
2009 0.29 0.08 0.21
2010 0.48 0.06 0.42
2011 0.51 0.10 0.41
2012 0.50 0.09 0.42
2013 0.60 0.09 0.51
2014 0.54 0.07 0.47
2015 0.45 0.08 0.37
2016 0.57 0.08 0.49
2017 0.39 0.08 0.31
2018 0.44 0.08 0.36
2019 0.44 0.08 0.36
2020 0.42 0.08 0.34
Ave 2009-14 0.49 0.08 0.41
Ave 2015-20 0.45 0.08 0.37
Sources: UK GDP: OBR November 2015 Economic and Fiscal Outlook,
Supplementary Economy Tables, Table 1.4. Gross contributions to EU
budget, Rebate, Public sector receipts, 2009-14: HM Treasury. Gross
contributions to EU budget, Rebate, Public sector receipts, 2015-20
forecasts: Webb and Keep, 2016, citing OBR.
Notes: Private sector receipts are imputed to be the difference
between public sector receipts reported by the OBR, and the total
receipts reported by EU (2016). For the forecasts for 2015-20, we
take private sector receipts to be 0.08% of UK GDP, their average
over 2009 to 2014. Remaining data for 2015-20 are based on OBR
projections, as reported in Webb and Keep (2016).
Table 9. UK and the EU budget, based on HMT and OBR figures and
forecasts, [pounds sterling] billions
Gross Rebate Total Public sector
contribution contribution receipts
(a) (b) (c)=(a)-(b) (d)
2009 14.1 5.4 8.7 4.4
2010 15.2 3.0 12.2 4.8
2011 15.4 3.1 12.2 4.1
2012 15.7 3.1 12.6 4.2
2013 18.1 3.7 14.5 4.0
2014 18.8 4.4 14.4 4.6
2015 17.8 4.9 12.9 4.4
2016 19.6 4.3 15.3 4.2
2017 17.8 5.6 12.1 4.3
2018 18.5 4.8 13.7 4.4
2019 19.7 5.1 14.6 4.9
2020 20.3 5.5 14.8 5.1
Public sector net Imputed private Total net UK
contribution sector receipts contribution GDP
(c)-(d) (e) (c)-(d)-(e)
2009 4.3 1.2 3.1 1,486
2010 7.4 0.9 6.5 1,556
2011 8.2 1.5 6.7 1,620
2012 8.4 1.5 6.9 1,665
2013 10.4 1.5 8.9 1,735
2014 9.8 1.2 8.6 1,817
2015 8.5 1.5 7.0 1,882
2016 11.1 1.6 9.5 1,958
2017 7.9 1.6 6.3 2,044
2018 9.3 1.7 7.6 2,133
2019 9.7 1.8 7.9 2,227
2020 9.7 1.9 7.8 2,327
Sources: As table 1.
Notes: Private sector receipts are imputed to be the difference
between public sector receipts reported by the OBR, and the total
receipts reported by EU (2016). For the forecasts for 2015-20, we
take private sector receipts to be 0.08% of UK GDP, their average
over 2009 to 2014. Remaining data for 2015-20 are based on OBR
projections, as reported in Webb and Keep (2016).
Table 10a. Summary: Norway
2016 2017 2018 2019
GDP Optimistic -0.2 -1.2 -2.1 -2.1
% change from base Pessimistic -0.2 -1.0 -2.2 -2.4
Consumption Optimistic -0.1 -0.9 -1.2 -1.4
% change from base Pessimistic -0.1 -1.1 -1.5 -1.8
Investment (PSI) Optimistic -4.8 -14.8 -11.2 -4.2
% change from base Pessimistic -4.8 -14.9 -11.6 -4.6
Real consumer wages Optimistic -0.6 -1.2 -1.1 -1.6
% change from base Pessimistic -0.6 -1.6 -1.7 -2.3
Output per hour worked Optimistic -0.4 -1.7 -1.7 -1.4
% change from base Pessimistic -0.4 -1.3 -1.5 -1.3
Unemployment, % Optimistic -0.2 -0.4 0.5 0.7
Change in levels Pessimistic -0.2 -0.2 0.6 0.9
Inflation Optimistic 0.7 0.6 0.5 0.7
Change in levels Pessimistic 0.7 1.5 0.9 0.9
Bank rate, % Optimistic 0.0 0.0 0.0 0.25
Change in levels Pessimistic 0.0 0.0 0.25 0.25
Long rate, % Optimistic 0.5 1.0 0.2 0.1
Change in levels Pessimistic 0.5 1.0 0.2 0.0
Effective direct Optimistic 0.0 0.0 0.1 0.3
tax rate, % Pessimistic 0.0 0.1 0.2 0.4
Change in levels
2020 2025 2030
GDP Optimistic -1.7 -1.6 -1.5
% change from base Pessimistic -2.1 -2.1 -2.1
Consumption Optimistic -1.4 -2.0 -2.4
% change from base Pessimistic -2.0 -2.7 -3.3
Investment (PSI) Optimistic -1.0 -0.7 -0.7
% change from base Pessimistic -1 -0.7 -0.6
Real consumer wages Optimistic -1.8 -2.1 -2.2
% change from base Pessimistic -2.7 -3.1 -3.2
Output per hour worked Optimistic -1.5 -1.5 -1.6
% change from base Pessimistic -1.6 -1.9 -2.1
Unemployment, % Optimistic 0.3 0.2 0.0
Change in levels Pessimistic 0.5 0.2 0.1
Inflation Optimistic 0.1 0.1 0.0
Change in levels Pessimistic 0.2 0.1 0.0
Bank rate, % Optimistic 0.0 0.25 0.0
Change in levels Pessimistic 0.0 0.0 -0.25
Long rate, % Optimistic 0.0 -0.1 -0.1
Change in levels Pessimistic 0.0 -0.1 -0.2
Effective direct Optimistic 0.3 0.3 0.4
tax rate, % Pessimistic 0.5 0.4 0.5
Change in levels
Table 10b. External sector: Norway
2016 2017 2018 2019
Exports Optimistic 0.5 -4.7 -10.6 -13.3
% change from base Pessimistic 0.5 -5.4 -14.5 -18.9
Imports Optimistic -1.4 -9.2 -11.4 -11.6
% change from base Pessimistic -1.4 -10.5 -15.6 -17.0
Trade Optimistic -0.5 -7.1 -11.0 -12.4
% change from base Pessimistic -0.5 -8.1 -15.1 -17.9
Effective exchange rate Optimistic -7.3 -10.9 -10.1 -10.6
% change from base Pessimistic -7.3 -12.3 -11.6 -12.1
Terms of trade Optimistic 0.7 4.1 3.2 1.5
% change from base Pessimistic 0.7 1.1 0.8 -0.5
Trade balance Optimistic -2.7 -1.0 -2.0 -2.7
% of GDP Pessimistic -2.7 -1.8 -2.6 -3.3
Base -3.4 -3.7 -3.3 -2.7
Income balance Optimistic 1.1 0.6 0.2 -0.2
% of GDP Pessimistic 1.1 1.1 0.5 0.0
Base 0.7 0.4 0.1 0.0
Current account Optimistic -3.1 -1.8 -3.3 -4.5
balance Pessimistic -3.1 -2.1 -3.6 -5.0
% of GDP Base -4.1 -4.7 -4.6 -4.0
2020 2025 2030
Exports Optimistic -13.1 -11.2 -10.3
% change from base Pessimistic -19.1 -17.3 -16.3
Imports Optimistic -11.2 -10.8 -10.7
% change from base Pessimistic -16.8 -16.8 -16.7
Trade Optimistic -12.1 -11.0 -10.5
% change from base Pessimistic -17.9 -17.1 -16.5
Effective exchange rate Optimistic -10.8 -11.0 -11.2
% change from base Pessimistic -12.3 -12.4 -12.5
Terms of trade Optimistic 0.8 -1.3 -1.7
% change from base Pessimistic -1.2 -2.9 -3.2
Trade balance Optimistic -2.7 -2.4 -1.8
% of GDP Pessimistic -3.3 -2.9 -2.2
Base -2.3 -2.0 -1.4
Income balance Optimistic 0.1 0.0 1.6
% of GDP Pessimistic 0.3 0.2 1.8
Base 0.2 0.2 1.5
Current account Optimistic -4.2 -3.9 -1.7
balance Pessimistic -4.7 -4.3 -1.9
% of GDP Base -3.5 -3.1 -1.2
Table 11a. Summary: Switzerland
2016 2017 2018 2019
GDP Optimistic -0.2 -1.1 -2.1 -2.2
% change from base Pessimistic -0.2 -1.0 -2.2 -2.5
Consumption Optimistic -0.1 -1.0 -1.4 -1.6
% change from base Pessimistic -0.1 -1.1 -1.6 -1.9
Investment (PSI) Optimistic -4.8 -14.9 -11.8 -6.2
% change from base Pessimistic -4.8 -14.9 -12.1 -6.6
Real consumer wages Optimistic -0.6 -1.4 -1.4 -1.9
% change from base Pessimistic -0.6 -1.7 -1.8 -2.4
Output per hour worked Optimistic -0.4 -1.5 -1.6 -1.5
% change from base Pessimistic -0.4 -1.3 -1.6 -1.5
Unemployment, % Optimistic -0.2 -0.3 0.5 0.7
Change in levels Pessimistic -0.2 -0.2 0.6 0.9
Inflation Optimistic 0.7 1.0 0.7 0.8
Change in levels Pessimistic 0.7 1.7 1.0 1.0
Bank rate, % Optimistic 0.0 0.0 0.0 0.25
Change in levels Pessimistic 0.0 0.0 0.25 0.25
Long rate, % Optimistic 0.5 1.0 0.2 0.0
Change in levels Pessimistic 0.5 1.0 0.2 0.0
Effective direct Optimistic 0.0 0.0 0.1 0.3
tax rate, % Pessimistic 0.0 0.1 0.2 0.4
Change in levels
2020 2025 2030
GDP Optimistic -1.9 -1.9 -1.9
% change from base Pessimistic -2.2 -2.3 -2.3
Consumption Optimistic -1.6 -2.3 -2.8
% change from base Pessimistic -2.0 -2.8 -3.5
Investment (PSI) Optimistic -3.3 -2.3 -2.1
% change from base Pessimistic -3.3 -2.3 -2.0
Real consumer wages Optimistic -2.3 -2.8 -3.1
% change from base Pessimistic -2.9 -3.5 -3.8
Output per hour worked Optimistic -1.6 -1.8 -1.9
% change from base Pessimistic -1.7 -2.1 -2.3
Unemployment, % Optimistic 0.4 0.2 0.1
Change in levels Pessimistic 0.6 0.2 0.1
Inflation Optimistic 0.2 0.1 0.0
Change in levels Pessimistic 0.3 0.1 0.0
Bank rate, % Optimistic 0.0 0.25 0.0
Change in levels Pessimistic 0.0 0.0 0.0
Long rate, % Optimistic 0.0 0.0 -0.1
Change in levels Pessimistic 0.0 -0.1 -0.1
Effective direct Optimistic 0.4 0.3 0.4
tax rate, % Pessimistic 0.5 0.4 0.6
Change in levels
Table 11b. External sector: Switzerland
2016 2017 2018 2019
Exports Optimistic 0.5 -5.2 -12.6 -16.1
% change from base Pessimistic 0.5 -5.7 -15.4 -20.2
Imports Optimistic -1.4 -9.9 -13.3 -14.2
% change from base Pessimistic -1.4 -10.8 -16.3 -18.0
Trade Optimistic -0.5 -7.6 -13.0 -15.1
% change from base Pessimistic -0.5 -8.4 -15.9 -19.0
Effective exchange Optimistic -7.3 -12.3 -11.6 -12.1
rate Pessimistic -7.3 -16.5 -15.9 -16.5
% change from base
Terms of trade Optimistic 0.7 2.8 2.1 0.6
% change from base Pessimistic 0.7 0.8 0.6 -0.7
Trade balance Optimistic -2.7 -1.3 -2.3 -3.0
% of GDP Pessimistic -2.7 -1.8 -2.7 -3.5
Base -3.4 -3.7 -3.3 -2.7
Income balance Optimistic 1.1 0.9 0.4 -0.1
% of GDP Pessimistic 1.1 1.2 0.6 0.0
Base 0.7 0.4 0.1 0.0
Current account Optimistic -3.1 -1.9 -3.3 -4.4
balance Pessimistic -3.1 -2.1 -3.5 -4.7
% of GDP Base -4.1 -4.7 -4.6 -4.0
2020 2025 2030
Exports Optimistic -16.2 -14.3 -13.3
% change from base Pessimistic -20.4 -18.6 -17.6
Imports Optimistic -14.0 -13.5 -13.3
% change from base Pessimistic -17.9 -17.7 -17.4
Trade Optimistic -15.0 -13.9 -13.3
% change from base Pessimistic -19.1 -18.2 -17.5
Effective exchange Optimistic -12.2 -12.2 -12.3
rate Pessimistic -16.8 -16.6 -16.6
% change from base
Terms of trade Optimistic -0.1 -2.0 -2.3
% change from base Pessimistic -1.3 -3.0 -3.2
Trade balance Optimistic -3.0 -2.8 -2.1
% of GDP Pessimistic -3.4 -3.1 -2.4
Base -2.3 -2.0 -1.4
Income balance Optimistic 0.2 0.1 1.6
% of GDP Pessimistic 0.3 0.2 1.8
Base 0.2 0.2 1.5
Current account Optimistic -4.0 -3.9 -1.7
balance Pessimistic -4.4 -4.1 -1.8
% of GDP Base -3.5 -3.1 -1.2
Table 12a. Summary: WTO
2016 2017 2018 2019
GDP Optimistic -0.2 -1.0 -2.3 -2.8
% change from base Pessimistic -0.2 -0.7 -2.4 -3.5
Consumption Optimistic -0.1 -1.2 -1.7 -2.1
% change from base Pessimistic -0.1 -1.5 -2.1 -2.8
Investment (PSI) Optimistic -4.8 -15.0 -12.8 -8.1
% change from base Pessimistic -4.8 -15.1 -13.8 -9.0
Real consumer wages Optimistic -0.6 -1.9 -2.1 -2.9
% change from base Pessimistic -0.6 -2.6 -3.0 -4.1
Output per hour worked Optimistic -0.4 -1.1 -1.6 -1.6
% change from base Pessimistic -0.4 -0.5 -1.6 -1.8
Unemployment, % Optimistic -0.2 -0.1 0.7 1.2
Change in levels Pessimistic -0.2 0.2 0.8 1.7
Inflation Optimistic 0.7 2.2 1.3 1.3
Change in levels Pessimistic 0.7 3.8 2.1 1.8
Bank rate, % Optimistic 0.0 0.0 0.25 0.50
Change in levels Pessimistic 0.0 0.0 0.25 0.75
Long rate, % Optimistic 0.5 1.0 0.1 -0.1
Change in levels Pessimistic 0.5 1.0 0.1 -0.1
Effective direct Optimistic 0.0 0.1 0.2 0.4
tax rate, % Pessimistic 0.0 0.1 0.3 0.6
Change in levels
2020 2025 2030
GDP Optimistic -2.5 -2.6 -2.7
% change from base Pessimistic -3.3 -3.4 -3.7
Consumption Optimistic -2.4 -3.2 -4.0
% change from base Pessimistic -3.3 -4.2 -5.4
Investment (PSI) Optimistic -4.6 -3.4 -2.7
% change from base Pessimistic -4.6 -3.3 -2.4
Real consumer wages Optimistic -3.5 -4.2 -4.6
% change from base Pessimistic -4.9 -5.8 -6.3
Output per hour worked Optimistic -1.8 -2.4 -2.7
% change from base Pessimistic -2.2 -3.2 -3.6
Unemployment, % Optimistic 0.8 0.3 0.1
Change in levels Pessimistic 1.2 0.3 0.2
Inflation Optimistic 0.4 0.1 0.0
Change in levels Pessimistic 0.6 0.1 0.0
Bank rate, % Optimistic 0.00 0.00 -0.25
Change in levels Pessimistic 0.25 0.00 -0.25
Long rate, % Optimistic -0.1 -0.1 -0.2
Change in levels Pessimistic -0.2 -0.2 -0.3
Effective direct Optimistic 0.6 0.3 0.6
tax rate, % Pessimistic 0.8 0.4 0.8
Change in levels
Table 12b. External sector: WTO
2016 2017 2018 2019
Exports Optimistic 0.5 -6.1 -17.5 -23.1
% change from base Pessimistic 0.5 -7.1 -23.3 -31.5
Imports Optimistic -1.4 -11.6 -18.6 -21.1
% change from base Pessimistic -1.4 -13.7 -24.8 -28.9
Trade Optimistic -0.5 -9.0 -18.1 -22.0
% change from base Pessimistic -0.5 -10.6 -24.1 -30.2
Effective exchange rate Optimistic -7.3 -16.0 -15.5 -16.3
% change from base Pessimistic -7.3 -23.9 -23.6 -24.5
Terms of trade Optimistic 0.7 -0.5 -0.5 -1.8
% change from base Pessimistic 0.7 -4.8 -3.9 -4.7
Trade balance Optimistic -2.7 -2.2 -3.0 -3.8
% of GDP Pessimistic -2.7 -3.4 -3.8 -4.8
Base -3.4 -3.7 -3.3 -2.7
Income balance Optimistic 1.1 1.5 0.7 0.1
% of GDP Pessimistic 1.1 2.3 1.3 0.4
Base 0.7 0.4 0.1 0.0
Current account Optimistic -3.1 -2.2 -3.7 -5.1
balance Pessimistic -3.1 -2.5 -4.0 -6.0
% of GDP Base -4.1 -4.7 -4.6 -4.0
2020 2025 2030
Exports Optimistic -23.3 -21.8 -20.7
% change from base Pessimistic -32.1 -30.6 -29.3
Imports Optimistic -21.2 -20.9 -20.7
% change from base Pessimistic -29.3 -29.4 -29.0
Trade Optimistic -22.2 -21.3 -20.7
% change from base Pessimistic -30.7 -30.0 -29.2
Effective exchange rate Optimistic -16.7 -16.1 -16.1
% change from base Pessimistic -25.1 -24.3 -24.0
Terms of trade Optimistic -2.5 -3.8 -4.0
% change from base Pessimistic -5.4 -6.1 -6.1
Trade balance Optimistic -3.7 -3.3 -2.5
% of GDP Pessimistic -4.7 -4.0 -3.2
Base -2.3 -2.0 -1.4
Income balance Optimistic 0.5 0.3 1.9
% of GDP Pessimistic 0.8 0.6 2.4
Base 0.2 0.2 1.5
Current account Optimistic -4.7 -4.4 -2.1
balance Pessimistic -5.4 -4.9 -2.2
% of GDP Base -3.5 -3.1 -1.2
Table 13. Mechanisms
Norway
Optimisic Pessimistic
Effective exchange rate, % decline -11.2 -12.5
Exports, % decline -10.3 -16.3
Export bounce-back, % increase 1.1 1.3
Switzerland
Optimisic Pessimistic
Effective exchange rate, % decline -12.3 -16.6
Exports, % decline -13.3 -17.6
Export bounce-back, % increase 1.2 1.7
WTO
Optimisic Pessimistic
Effective exchange rate, % decline -16.1 -24.0
Exports, % decline -20.7 -29.3
Export bounce-back, % increase 1.6 2.4
Table 14. Comparison of recent studies on the impact of Brexit
on the United Kingdom
OECD LSE/CEP
WTO/FTA EEA/FTA
Brexit Modelling
Reduction in total trade (%) -10 to-20 -12.6
Reduction in FDI (%) -10 to-45 none
EU budget savings,
% of GDP 0.3 to 0.4 0.0
Method NiGEM Estimated
trade
elasticities
(a)
Results
GDP, % change
Central estimate (%) -5.1 -7.9
Range (%) -2.7 to -7.7 6.3-9.5
Wages, % change
Central estimate (%) n.a. n.a.
Range (%) n.a. n.a.
Ratio of GDP to trade
declines 0.27-0.39 0.5-0.75
Channels
Reduced trade with EU X X
Productivity losses from
reduced trade X X (a)
Reduction in FDI X
Productivity losses from
reduced FDI X
Change in migration X
Productivity gains from
deregulation X
Lower or zero contributions
to the EU budget X
HM Treasury
EEA FTA WTO
Brexit Modelling
Reduction in total trade (%) -9 -14 to -19 -17 to-24
Reduction in FDI (%) -10 -15 to-20 -18 to-26
EU budget savings,
% of GDP 0.4 0.4 0.4
Method NiGEM
Results
GDP, % change
Central estimate (%) -3.8 -6.2 -7.5
Range (%) -3.4 to 4.3 -4.6 to 7.8 -5.4 to 9.5
Wages, % change
Central estimate (%) n.a. n.a. n.a.
Range (%) n.a. n.a. n.a.
Ratio of GDP to trade
declines 0.42 0.33-0.41 0.32-0.40
Channels
Reduced trade with EU X X X
Productivity losses from
reduced trade X X X
Reduction in FDI X X X
Productivity losses from
reduced FDI X X X
Change in migration
Productivity gains from
deregulation
Lower or zero contributions
to the EU budget X X X
NIESR
EEA FTA
Brexit Modelling
Reduction in total trade (%) -11 to -16 -13 to-18
Reduction in FDI (%) -10 -17
EU budget savings,
% of GDP 0.0 0.3
Method NiGEM
Results
GDP, % change
Central estimate (%) -1.8 -2.1
Range (%) -1.5 to-2.1 -1.9 to-2.3
Wages, % change
Central estimate (%) -2.7 -3.4
Range (%) -2.2 to -3.2 -3.1 to-3.8
Ratio of GDP to trade
declines 0.13 0.14
Channels
Reduced trade with EU X X
Productivity losses from
reduced trade
Reduction in FDI X X
Productivity losses from
reduced FDI
Change in migration
Productivity gains from
deregulation
Lower or zero contributions
to the EU budget X
NIESR NIESR
WTO WTO+
Brexit Modelling
Reduction in total trade (%) -21 to-29 -22
Reduction in FDI (%) -24 -24
EU budget savings,
% of GDP 0.3 0.3
Method NiGEM
Results
GDP, % change
Central estimate (%) -3.2 -7.8
Range (%) -2.7 to -3.7 -7.8
Wages, % change
Central estimate (%) -5.5 -7.0
Range (%) -4.6 to -6.3 -7.0
Ratio of GDP to trade
declines 0.13 0.35
Channels
Reduced trade with EU X X
Productivity losses from
reduced trade X
Reduction in FDI X X
Productivity losses from
reduced FDI
Change in migration
Productivity gains from
deregulation
Lower or zero contributions
to the EU budget X X
Notes: (a) The LSE-CEP analysis uses econometric estimates of the
relationship between trade and GDP to estimate the impact of a given
reduction in trade on GDP. These estimates would, in principle,
capture any and all impact of trade on GDP, including productivity
gains from increases to openness. They might also capture any
increase in FDI which is associated with greater trade volumes, as
well as any increases in productivity associated with this additional
FDI. WTO+ is the scenario which includes a 5% shock to labour-
augmenting technological progress.
