Academy hears advice on how the UK can prosper outside the EU

15 May 2017

How can the UK prosper outside the EU?

Prospering outside the European Union will be neither simple nor straightforward for the UK, was the message to a conference held on 10th May 2017 by the Academy of Social Sciences in association with the Scottish Economic Society and the Society of Business Economists. In order to ensure that the UK can prosper as well as possible, the speakers agreed that it must negotiate exit terms that most closely resemble the existing tariff free trading arrangements with our EU partners as everything else will diminish prosperity because of the additional tariff barrier, which may be non-monetary (eg standards) as well as monetary.

More detailed accounts of key presentations are available in our Professional Briefings 11 and 12, available at the bottom of this page.

Having already established its credentials as a leading figure in the Brexit debates – through publications and events – the Academy brought together leading figures to discuss the UK’s future as a trading nation once it leaves the EU. A detailed examination of what is entailed, both in the Brexit process and in establishing trade partnerships and agreements, resulted in a picture that was not particularly encouraging. Supply chains are key elements but will take an enormous amount of unpicking and thinking through if the potential and highly significant impacts of leaving the customs union are to be mitigated.

Paul Johnson, Director of the Institute for Fiscal Studies, chaired a discussion of the macro-economic aspects, looking at both the UK as a whole and also at the unique and ‘interesting’ situation in which Scotland currently finds itself, having voted overwhelmingly to Remain in the EU.  Professor Vicky Pryce FAcSS, former joint head of the Government Economic Service, joined Professor Ronald MacDonald OBE (Research Professor of Macroeconomics and International Finance at the University of Glasgow) in thinking through the issues and the options available.

Professor Pryce examined the current economic outlook and saw clouds gathering – from a reduction in consumer sentiment, higher inflation, and a reduction in the quality of many jobs. No, she concluded, it was not possible for the UK to really prosper outside the EU.

Some of the key problems are seen in the supply chain, which is highly complex and international. In an environment of increasing inflation, SMEs are likely to be particularly affected with their resources increasing in price as a result of exchange rate changes alongside the impact of less favourable trade agreements resulting from leaving the Customs Union, alongside difficulty in raising their own prices. Manufacturing is a small part of the UK economy which will limit the effects of any growth that does occur. Financial services are a significant part of the UK economy but the volume of transactions will reduce, with implications for tax receipts, even if most firms retain their headquarters in London.

The Governor of the Bank of England produced strategies to help the UK weather Brexit, including quantitative easing to support the Pound and removal of the need for banks to raise £150bn, but this results in more debt. Added to the £60bn ‘Brexit bill’, the purported £8bn savings from Brexit seem paltry.

Professor MacDonald looked closely at the Scottish perspective, where he noted a worse fiscal deficit coupled with negative growth verging on recession; much of this due to the oil shock. Brexit and IndyRef2 simply add to uncertainties. Scotland’s main trade partner is the rest of the UK, followed by non-EU rest of world. He noted that Scottish trade figures are rudimentary, mostly combined within UK figures, which don’t show the supply chain effect – and most of Scotland’s trade is in intermediate products rather than final goods. Examining Scottish government pronouncements, he showed that Scotland was having to pursue a third-best solution, as others were unfeasible or had been rejected by the UK government – namely, remaining in the single market even if the UK leaves it. As a result the Scottish government had commissioned some modelling of options from the Fraser of Allender Institute thinktank, and he foresaw the opportunity of greater devolution for Scotland (more akin to Home Rule) arising. He called for greater spending on national statistics to enable the details of the issues to be disentangled and properly evaluated.

A slightly more positive note was struck during the second session looked at How can the City and personal finances prosper outside the EU? Professor David Blake of the Cass Business School at City, University of London, and Professor John Kay CBE FAcSS of St John’s College Oxford and a Financial Times columnist, looked at the future for the City.

Brexit could be a golden opportunity to escape the clutches of EU financial regulations and take a leading position in financial affairs, said Professor Blake, who carried out a SWOT analysis on the implications for the UK as the main financial services centre. He considered it unlikely that the major financial firms would leave London, but agreed that the loss of passporting (the ability of the City to trade easily with the EU) was likely and would lead to a reduction in transactions, with a consequent loss of tax income to the UK government. Nevertheless the removal of outside interference in pension law and the removal of the negative impact, for example, on UK pensions of efforts to shore up the Euro should be welcomed.

Professor John Kay CBE FAcSS noted the parallel between the present time and the Phoney War period at the start of WWII. He agreed that financial services could find themselves better off outside EU regulation but that the effect on the City may not be great in any case. The consequences of creating the Euro has been seen in the effect on interest rates across the EU, and the European Central Bank has become essentially a zombie bank having absorbed much of the debts of the northern banks (e.g. BNP Paribas and Deutsche Bank). For the UK financial services are not actually the major export business that is often talked about, as the bulk of revenue arises from PAYE and National Insurance payments on the high earnings within the industry.

Lively discussions from those present showed the keen interest and anxiety around these topics.

In the afternoon Professor Alan Winters CB, Director of the UK Trade Policy Observatory (UKTPO) at the University of Sussex, and Chatham House chaired a teach-in on the details of trade policy. Colleagues from the UKTPO looked at trade policy from a variety of angles.

Professor Jim Rollo CMG FAcSS asked What is trade policy for and what might drive future UK policy? He set out the basic issues, noting that this unique situation could permit the UK to begin from scratch and produce a brand new trade policy. Trade policy is a governance method for commercial relations with the rest of the world, at whatever level, and is a way of using our ability to import to influence other countries. The tools of trade policy include its main currency of market access, which can be shallow (tariffs/quotas) or deep (regulation level). The World Trade Organisation (WTO) operates as non-discriminatory or preferential.

The question is how we will pay for increased market access, if we leave the Single Market. Shocks will arise that will need to be absorbed, possibly in the displacement of workers and differential effects on regions.

Lawyer Dr Emily Lydgate looked at anchoring UK trade policy in the World Trade Organisation (WTO) and asked why the WTO is important to the UK in finding the ‘new normal’. She looked at the question of separating the UK from the EU in the WTO and noted that it appears at the moment to be possible for the UK to adopt EU tariffs where possible.  She highlighted that, although in the case of a No Deal outcome to Brexit negotiations, it would be possible for the EU to apply the WTO’s ‘most favoured nation’ tariff rate to the UK and vice versa, this was not a good outcome as ‘most favoured nation’ is the rate applied by the EU to all WTO states where it has no other agreement.

She drew attention to potential major problems with talks, noting that WTO provisions are often not fit for purpose and the processes would be liable to become clogged up in dispute resolution. UK diplomacy needs to talk to the WTO and find pragmatic solutions. In turn we need to be generous, offering open markets when in doubt.

Dr Michael Gasiorek looked at UK bilateral trade relations with the EU and other developed countries, and considered that it will be difficult for the UK to prosper outside the EU because of the practical problems arising from the complexities of trade. It is not the cost of the tariffs that will be the issue, but the costs arising from other, non-tariff, measures. He highlighted the impact on market access arising from distance and border costs, alongside tariffs and regulations, government procurement and rules of origin.  The most important sectors for UK exports to the EU are machinery, vehicles, pharma, electrical machinery and aerospace. Although EU tariffs are likely to be kept for simplicity, as his colleague had previously explained, he noted the time and financial impact of additional borders and customs checks when moving goods or components between countries, as well as the difficulties of calculating how much of an individual product the UK might be responsible for. Further, leaving the single market means there is no mutual recognition of standards so that issues of conformity and compliance arise. He noted that, although estimates of the costs of these ‘non-tariff measures’ vary, they are often quite high, especially because of the close integration of UK and EU supply chains. He called for transitional arrangements or the ability to continue using existing arrangements, and to minimise borders and customs barriers.

Dr Maximiliano Mendez Parra of the Overseas Development Institute looked at the options for future UK trade relations with developing countries. He noted that the UK is an important destination for many developing countries and that Brexit could be an opportunity to streamline the supply chain through removal of unnecessary standards. However, he noted there was little opportunity for reciprocity with developing nations.

Discussion focused on the likely practical impacts on trade, including costly delays at borders, especially where manufacture has come to rely on frequent transportation of goods across borders. It was also noted that the UK had little negotiating capacity and that prioritisation would be required.

The task ahead is very large and complex; opportunities exist for increasing prosperity but significant hurdles must be carefully cleared.

Download Professional Briefing 11 – How can the UK and Scotland Prosper outside the EU?

Download Professional Briefing 12 — How can British Trade Policy Prosper outside the EU?