Analysis The UK could lose out on a 4 per cent boost to gross domestic product (GDP) if it was no longer a member of the EU single market, with particular repercussions for the financial services industry, according to an influential think tank.
The 4 per cent figure is based on the UK defaulting to membership of the World Trade Organisation (WTO) only, rather than agreeing any bespoke trade deals during the impending Brexit negotiations, according to a new report by the Institute for Fiscal Studies (IFS). In its report, the IFS said that the consequences of losing single market membership could "depress tax receipts by a larger amount" than the costs to the UK of membership of the European Free Trade Association (EFTA), along the same lines as Norway. Making up this amount through new trade deals with the likes of China and India would require "quite dramatic - and probably implausible - increases in trade" with these countries, according to the report.
Ian Mitchell, the report's author and an IFS research associate, said that negotiating the UK's "access to" the single market post-Brexit was a "virtually meaningless" concept. Any country with WTO membership may trade with the EU, but these countries do not benefit from reduced import taxes, licencing arrangements and other benefits of single market membership, he said.
"There is all the difference in the world between 'access to' and 'membership of' the single market," he said.
"Membership is likely to offer significant economic benefits, particularly for trade in services. But outside the EU, single market membership also comes at the cost of accepting future regulations designed in the EU without UK input ... Choices in these domains will most likely be far more important than any deal on budget contributions," he said.
According to the report, UK membership of the single market will be even more important for exports of services to the EU than it will be for exports of goods. No existing trade deal, customs union or free trade area breaks down 'non-tariff' barriers to trade, such as licencing and regulatory constraints, as effectively as the EU's single market, the IFS said.
Although it was possible that the UK could negotiate membership of the single market as part of an eventual trade deal following the Brexit negotiations, "such a deal would be unprecedented", the IFS said.
UK service exports have become increasingly important in recent years, accounting for 44% of all exports in 2015 against 31% of all exports in 1999, according to the report. The EU currently accounts for 44% of UK exports as a whole, and 39% of UK services exports. In contrast, China and India together account for just 4.6% of UK exports as a whole and only 2.6% of service exports, according to the report.
Although membership of the single market through EFTA would come at a cost to the UK, in both budget contributions and the requirement to submit to future EU regulations on which it would have no say, the trade benefits would be more than likely to outweigh the costs, according to the report. In particular, the report pointed out that membership of the single market would require "free movement of people alongside a financial contribution".
The UK "may have to make some very difficult choices" between the benefits to the financial services sector, in particular of maintaining "passporting" rights and the costs of regulatory compliance, the IFS said. However, without single market membership, there was a considerable risk that these firms would have to transfer substantial amounts of business to EU subsidiaries.
The IFS pointed out that none of the EU's existing trade agreements covered financial services. Although belonging to the European Economic Area (EEA) provides countries such as Norway with passporting rights "in principle", "almost all of the EU's post-crisis financial regulatory measures, including passporting rights, are currently excluded" from the EEA agreement.
"The EU is an important market for financial services and, without passporting rights that come with single market membership, a substantial portion of that EU-related activity - either from UK firms or from non-EU firms with subsidiaries in the UK - will consider moving activity elsewhere," the IFS said.
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