When the United Kingdom leaves the European Union (EU), the imposition of stricter barriers to trade, capital flows and the circulation of labor will affect the product and employment not only of the United Kingdom, but also of the 27 Member States. remaining members of the EU.
Given that Brexit means that both parties will break a friction-free economic relationship, the costs will fall on both sides, as our new study suggests.
The links between the EU and the United Kingdom are deep: the United Kingdom is one of the largest trading partners of the 27 economies that make up the EU and generates around 13% of trade in goods and services. In addition to the bilateral trade ties, there are substantial trade links through the supply chain between the EU-27 and the United Kingdom in which several countries participate.
Financial connections are also strong: gross bilateral capital flows totaled approximately 52% of EU GDP in 2016. Migration flows have also been reinforced over time and are very large with some countries, such as Ireland. Reversal of integration will hurt the EU's long-term employment and product.The reversal of such integration after Brexit will damage income and employment in the EU.
If the United Kingdom and the EU conclude an ordinary free trade agreement (FTA) that produces low tariffs for trade in goods, but higher non-tariff barriers, we estimate that, compared to the current situation, the actual product of the EU -27 will decrease 0.8%, and employment, 0.3%, in the long term and taking into account all transmission channels.
If the WTO rules begin to be applied automatically, the contraction of the real product will be even more pronounced -1.5% in the long term- and employment will drop 0.7%.
However, if a relatively favorable solution similar to that of Norway, which belongs to the European Economic Area (EEA), in which the United Kingdom retains access to the single market but withdraws from the customs union, the reduction of the product, is agreed upon and employment would seem to be insignificant in the EU-27.
The more a country trades with the United Kingdom, the greater the impact of brexit on the national product. To demonstrate this, we apply to each country a framework that analyzes the direct and indirect trade effects of the increase in tariffs and non-tariff barriers applied to trade in goods and services. The simulated effects are relatively smaller than the estimates indicated above because the framework of the model takes into account only commercial ties.
According to our determinations, the real product of the EU-27 would decrease 0.2% in the long term with a free trade agreement; the economy most affected would be Ireland (around 2.5%), followed by the Netherlands, Denmark, Belgium and the Czech Republic.
This effect would be deepened if the WTO rules were applied: the loss of EU-27 product would amount to 0.5%, and that of Ireland, to 4%, given the substantial increase in tariff barriers and non-tariff.
Our study does not analyze the effect of uncertainty on the future relationship between the EU-27 and the United Kingdom or the transition to the new relationship. It focuses exclusively on the long-term impact, when all parties have fully adapted to the new relationship. The final consequences will take years to materialize and will depend on the agreement that the EU-27 and the United Kingdom ultimately reach.