By Jo Michell, Senior Lecturer UWE Bristol
With one month to go before the UK votes to leave or remain in the European Union, SouthWestBusiness is running a series of articles on the impact on business. Starting with Jo Michell, senior economist at UWE, on trade...
The EU referendum campaign has been characterised by increasingly implausible claims. Both the potential benefits and dangers of an exit have been inflated.
Analysis produced by economists in favour of Leave side shows that Brexit would lead to prosperity.
This is countered by projections from by those on the Remain side showing enormous economic costs in terms of lost output and income.
What is the public – or the owner or manager of a business – to make of all this? How should they decide which way to vote?
It might be more helpful for the public if economists were to admit it is impossible to predict the outcome of an exit with any certainty.
What we can do is present a range of possible scenarios and comment on the plausibility of each. That is what I will try to do in this article.
United Kingdom membership of the European Union (EU) means businesses within the UK are free to sell their products to customers in any of the 27 other members as well as the four nations of the European Free Trade Area.
It also means that the UK must allow producers outside the EU to sell within the UK on terms collectively agreed by the EU. Finally, UK companies can sell to customers in non-EU countries on the basis of free-trade deals negotiated and signed by the EU.
How would the situation change in the event of Brexit? The answer depends on what kind of arrangement the UK came to with the EU. Two countries are often suggested as examples of possible post-Brexit models: Norway and Switzerland.
The key difference between the two is that Norway is a member of the European Economic Area (EAA), a free-trade agreement linking the nations of the EU and the EFTA.
Although Switzerland is a member of the EFTA, it chose to reject membership of the EAA and instead signed a number of bilateral trade deals with the EU.
Both countries face no barriers to trade with the EU.
Could the UK follow the Swiss model and sign bilateral trade deals with the EU? The answer is that this depends on politics, not economics.
Will the EU be willing to offer preferential terms to the UK in the aftermath of a Brexit? The most plausible answer is ‘probably not’.
It is clear that Germany, the strongest EU member, is willing to incur significant costs in order to defend its vision of the European project. They showed how far they are willing to go in their treatment of Greece.
Germany will want to make clear that disrupting the EU does not come without costs. Even if a deal were on offer, it is unlikely to come without a requirement for the free movement of labour, as in the Swiss case.
This is something that the pro-Leave camp will be unwilling to accept.
What about the Norwegian model of leaving the EU but remaining in the EAA?
The problem with this option is that Norway remains bound by all the requirements of the EU: of free movement of labour, capital, goods and services.
But Norway has no say over in the decision-making process which produces these regulations.
The Leave campaign argues that the UK should leave the EU in order to regain regulatory control. It is hard to see how this is compatible with immediately signing agreement throwing away this control.
Neither the Swiss nor Norwegian models look likely.
The most plausible outcome is therefore that the UK would leave the EU and fall back on World Trade Organisation (WTO) rules.
The EU would then impose tariffs on goods entering from the UK.
The UK would essentially trade with the EU on the same basis as much of the rest of the world. The UK would also lose access to other markets with which the EU has free trade arrangements.
Since between 40 and 50 per cent of UK exports are to EU countries, this could have a significant impact on UK exporters.
The impact will not be felt evenly, however.
The tariffs imposed by the EU on non-EAA countries vary widely.
On a trade-weighted basis, EU tariffs are between one and two per cent – hardly enough to worry most companies.
Looking beneath the aggregate figures, however, it is clear that some exporters would face problems.
The EU protects agricultural markets strongly, for example. Exporters of dairy products or meat might find themselves facing tariffs of 30 per cent or more – enough to make exporting impossible for many companies.
Financial services providers may also face difficulties: UK financial institutions would be likely to lose automatic ‘passporting’ rights into the EU.
The effect of higher tariffs may be offset by a fall in Sterling. This would increase the cost of imported items used as inputs by business, however.
The extent to which prices paid by business would rise would depend on the extent to which the UK choose to impose tariffs on imports.
There is a clear trade-off between independence and access to EU markets. If the UK wishes to retain tariff-free access to the EU, it largely has to accept the associated conditions.
Even in the event that the UK were to leave without signing any new agreement, UK firms exporting to the EU would still be bound by EU regulations.
The effects would not be felt through trade alone. There is likely to be a fall in inward investment, both from EU countries, and from countries which see the UK as a gateway to the EU markets.
There is little incentive for a European firm to set up new production facilities in the UK if they would then face barriers to selling back into Europe.
The effect of Brexit on individual UK businesses is highly uncertain.
It will depend on their industry, the location of their export markets, what arrangement the UK reaches with the EU post-Brexit and on the macro effects of exit.
The gains and losses will not be evenly distributed. In the short run, uncertainty will increase for all.
Dr Jo Michell is a senior lecturer in economics at the University of the West of England