The Trade-Related Impact of a UK Exit from the EU Single Market

This note develops estimates of the trade-related costs of an exit by the United Kingdom from the European Union and compares these to the potential benefits of the alternative trade policies to which a fully independent UK would have access. An exit scenario that re-sets the UK's relationship with the rest of the EU to a WTO-rules most favoured nation basis (“Brexit”) would involve significant costs. A negotiated change in the UK's status that largely preserves UK integration with the rest of the EU at a level similar to that of the European Free Trade Association (“Brefta”) is much less costly relative to the status quo. The trade policy options available to the UK post-exit would not cover Brexit-level costs, but, in our estimation, provide sufficient liberalization potential to cover the Brefta-level costs. While unilateral liberalization alone would fall short, if it is coupled with an ambitious post-exit trade policy focussed on securing free trade agreements with major trading partners, it would leave the UK essentially neutral and possibly modestly ahead on trade policy grounds. This depends on exactly how low the costs of the post-Brefta UK-REU trade border would be and on the level of ambition that the alternative trade policies would actually achieve. In a long-term perspective, if the world moves to a similar free trade equilibrium, the EU included, the first mover advantages to the UK of full liberalization against the rest of the world would eventually be eroded. In this case, the present value of the benefits of continued participation in the borderless single market would likely dominate, since the additional trade costs imposed by a Brefta border would continue to be incurred indefinitely