Hard Brexit: impact on the UK sectors and regions
December 2017
Introduction
The UK Government has claimed to be willing to opt for a hard Brexit. What would be the economic consequences on the various UK sectors and regions?
The paper from Dr. Andrew Black, ‘Hard Brexit and the Regions’, with contributions from Etienne Piciocchi, is available at:
http://fedtrust.co.uk/wp-content/uploads/2017/11/Hard-Brexit-and-the-regions.pdf
Here are some excerpts from the study.
Purpose
“This paper spells out possible outcomes in terms of Hard Brexit impacts on sectors and regions within the UK. And this is done in a framework that integrates both macro assumptions and sector and regional outcomes in a consistent manner.
This report assesses the economic consequences of:
The adoption of WTO tariffs between the UK and the EU on the various UK industry sectors,
The imposition of Non-Tariff Barriers on the UK service sectors.”
Approach
“The approach used in the report involves the linking together of four different databases. These are :
The WIOD Input Output tables, using 2014 as the base year.
WTO tariff information, linked with …
… the HS trade nomenclature of the United Nations. This allowed us to calculate the expected Hard Brexit trading costs.
The ONS regional Gross Value Added statistics, also for 2014.
The analysis was conducted using a synthetic 33x33 matrix that made it possible to map information from the various sources across to the Input-Output tables in order to obtain consistent results.
The results were obtained from running four different scenarios using different input assumptions about macroeconomic policy.
Scenario A: Impact of the Tariff Burden
Scenario 1: “Short Sharp Knock”
Scenario 2: Longer, slower losses over a 5-year period.
Scenario 3: Slow Growth in sectors with High IIT index
Additional assumptions about Brexit related trading costs for the service sectors were made.
This paper includes the estimated costs of Non Tariff Barriers (NTBs) on service industries. Omitted from an earlier analysis, the inclusion of NTBs here helps to compare outcomes across the whole of the economy.
The costs are estimated at between 5 and 10% of the volume of EU/UK service trade flows, making this a relatively benign assessment. The estimates are informed by a survey of other authors’ contributions, and by the writer’s views.
The difficulty being that services play such a large role in the UK economy that assumptions about NTBs will by their nature dominate the analysis of possible Brexit impacts.
Another issue with service sector trade is that NTBs involve issues of market access. Either access is given on more or less equal terms, often using the principle of a “passport”. This gives permission to accredited services and related products to be sold across the whole of the Common Market. Without such a passport access to the Common market is denied. In the event of such a denial, it is unlikely that substitute markets of the same volume and proximity could be found in the short run. The effects of a service sector passport denial have not been factored into this analysis.
As with other work of this kind, the analysis considers several “what if” situations. Under the specified assumptions, the model provides estimates of what might happen. IO analysis is one of the few ways in which an integrated approach to macro level decisions and sector level (meso) outcomes can be measured.”
Results
“The results here are sobering.
In absolute terms the impacts of higher, Brexit related, trading costs in the service sectors are large, and concentrated in London and the South East.
However, relative to the size of the sector, as well as relative to the size of the standard UK regions’ economies, it is the losses in manufacturing being both more regionally concentrated, and experiencing higher potential tariff costs, that drag down the fortunes of the North and Midlands.
The sectors most strongly negatively affected by a Hard Brexit are Transport Equipment, Textiles, Rubber/Plastics, food processing, electrical equipment and agriculture – all when measured against the size of these sectors’ overall output.”
Implications
“The results suggest that:
Those regions that voted most strongly to leave the EU, notably the West and East Midlands, the North West, North East and Yorkshire, will endure greater economic losses proportionate to their regional economies than will the South East and London.
There is much clearer congruence between political voting behaviour and economic interest in the Remain areas, and notably for London and Northern Ireland. The congruence between politics and economics is weaker in the case of Scotland, although on a narrow tariff only view (Scenario A) Scotland is the most strongly negatively affected region.
The impact of the various scenarios is likely to support the longer term trend towards further de-industrialization of the UK economy, which may have further unwanted side effects.
Although the service sectors are not the most exposed to a Hard Brexit, this evaluation could change were access to the EU market to be completely blocked. Under these circumstances the ordering of the worst affected regions would change dramatically.
This underlines just how important reaching an agreement with the EU will be, and how preferable membership of the EU is. Becoming a member of the EEA, with continuing tariff free access to the EU market, would be preferable to a WTO solution.”