UK Leaving the Single Market (Micro and Macro Impact and Evaluation)

Here is a revision exam technique video looking synoptically at some of the likely micro and macro consequences of the UK leaving the EU single market.

Micro Point 1

The EU is a customs union and leaving it may lead to higher import tariffs on EU exports.

Higher import prices increase costs for UK firms who then experience lower profits. Consumer welfare would suffer

Evaluation:

The assumes that the UK is unable to negotiate a wide-ranging free trade deal with the EU before Brexit is finalised and a transition period comes to an end.

Micro Point 2

Some UK firms and industries might suffer from a decline in net inward migration from EU. In sectors such as hospitality, technology and construction, EU workers have helped overcome skills shortages

Evaluation:

A fall in UK payments to the EU could fund increased investment in better technical training for UK workers

Micro Point 3

Leaving the EU might cause delays at borders as UK firms comply with EU rules. Many products cross borders several times. Just in time delivery requires minimal border delays, costs will rise

Evaluation:

Most UK exporters already comply with EU regulations. Post Brexit, businesses will have less red tape to deal with

Macro Point 1

Leaving the EU will allow the UK to make many free trade agreements with other nations

Free trade deals with fast-growing emerging economies might see a surge in UK exports which will add to GDP growth

Evaluation:

However complex trade agreements take time. The recent EU-Canada free trade deal took seven years to agree.

Macro Point 2

Leaving the single market will allow the UK economy to limit net inward migration from EU. This will provide opportunities for UK people to find work and also lead to a slower growth of house prices and rents

Evaluation:

But the UK suffers from long run skills shortages. Parts of the economy and the NHS are hugely reliant on migration

Macro Point 3:

Leaving the single market will diminish UK trade with the EU and cut inward investment.

44% of Britain’s exports go to the EU - £220bn out of £510bn. Higher tariffs would make UK exports more expensive.

Evaluation:

This depends on the trade deal we make with the EU. Inward FDI depends on many factors including tax & regulations

Concluding reasoned comments

Most economists believe that the UK would be better off inside the single market – free trade brings mutual gains in welfare

Europe is our biggest trade partner – getting the best possible trade deal with the EU is hugely important

The economy has been doing quite well since the Brexit vote (unemployment is at a 40 year low of just 4.6% of the labour force)

But inflation is now higher in part because of the fall in the external value of sterling.

Most of the pessimistic forecasts focus on the medium to long-term effects of being outside of the single market

Many businesses will have to adjust their supply-chains and some will re-locate investment to mainland Europe. Others will successfully pivot and sell more goods and services to fast-growing emerging countries including China, India and sub Saharan Africa

Overall – the consequences of Brexit for the UK remain highly uncertain

Essential contextual background:

The EU, taken as a whole is the UK’s largest trading partner. In 2017, UK exports to the EU were £274 billion (44% of all UK exports). UK imports from the EU were £341 billion (53% of all UK imports).

The UK had an overall trade deficit of -£67 billion with the EU in 2017. A surplus of £28 billion on trade in services was outweighed by a deficit of -£95 billion on trade in goods.

Source: UK Parliament Research Briefings (December 2018)