According to Open Europe's comprehensive Brexit report, UK GDP could be 2.2% lower in 2030 if Britain leaves the EU and fails to strike a deal with the EU or reverts into protectionism. A far more realistic range is between a 0.8% permanent loss to GDP in 2030 and a 0.6% permanent gain in GDP in 2030, in scenarios where Britain mixes policy approaches.
Now that the UK decided to leave the EU the impact would depend on the new relationship between the UK and the EU. The UK is facing the prospect of setting up new trade deals with the 27 member states as well as other countries across the world, after voting to leave the European Union. There are five models used by other countries outside the EU that Britain could try to replicate.
The Norwegian model was a phrase bandied around a lot during the referendum campaign. The country is a member of the European Economic Area (EEA) and the European Free Trade Association (EFTA). Norway contributes to the EU budget in order to have full access to the European Single Market. It is the model outside of the EU which is most integrated with the Single Market. However, without a seat at the table, Norway must accept most of the rules without having a vote or veto over how those rules are made. Norway also must accept the free movement of people and is part of the Schengen Area. The country has a higher share of EU migrants per capita than the UK.
Switzerland is not a member of the EEA, but it is a member of the European Free Trade Association. This flexible agreement means it has a large degree of access to the EU market - though less than Norway - and it negotiates on sector-by-sector deals with the EEA signatories. Switzerland is obliged to contribute to the EU budget, but the amount is less than this Norway spends. Switzerland accepts more migrants from the European Union per capita than the UK and is part of the Schengen Area.
A trade deal between Canada and the EU has been seven years in the making and is still yet to be ratified. The agreement means Canada does not include the free movement of people or make significant contributions to EU spending, but it is given limited preferential access to the Single Market. Like Norway and Switzerland, Canada has also to adopt regulations and rules without having any say at the law-making process.
Turkey, a candidate for EU membership since 1999, has partial access to the Single Market, covering industrial goods and processed agricultural goods. In these areas it is required to implement laws and regulations compatible to those of the EU. It does not contribute to the EU budget but as a candidate for membership is a recipient of funding, mainly supporting reforms in the country's civil society. When the EU signs an agreement with a third country, such as South Korea, Turkey must give that country access to its own market on the same terms. However, i.e. South Korea would then have no obligation to open its markets to Turkey on the same terms, and a separate deal must be negotiated.
World Trade Organisation model
This option would offer the most complete break-up with the EU. If no deals are reached before Britain leaves, then trade would be covered by the WTO rules. It means no free movement, no contributions to the EU budget or implementation of EU regulations but it also means tariffs on all goods and services exported from the UK and imported in the Union. These tariffs include a 9.9% duty on cars and an average 12.2% on agricultural goods.
A lack of clarity over what would replace EU membership is just one reason why the path to Brexit – and beyond - would be long and uncertain, taking ten years or more.
Official trade statistics show that the European Union is the destination for about half of all British goods exports. The trading links are bigger if we include the countries that the United Kingdom trades freely with because of a Free Trade Agreement with the European Union. If we take into account these agreements it means that 63% of Britain’s goods exports are linked with the European Union membership. It is highly expected that a favourable trade agreement would be reached after Brexit as there are advantages for both sides in continuing close commercial relations. But the worst-case scenario, in which Britain faces tariffs under ‘most-favoured nation’ rules of the WTO, is certainly no disaster. Exporters would face some additional costs, such as complying with the European Union’s rules of origin, if they are outside the single market. However, these factors would be an inconvenience rather than a major barrier to trade.
Leaving the EU would also affect foreign direct investment, immigration and economic regulations in the UK. These effects are harder to quantify than the changes in current free trade status but are likely to lead to further declines in income.
Being outside the EU means that the UK would not automatically benefit from future EU trade deals with other countries. This would mean missing out on the current US and Japanese deals, which are forecast to improve real incomes by 0.6%.
The economic consequences of leaving the EU will depend on what policies the UK adopts following Brexit. But lower trade due to reduced integration with EU countries is likely to cost the UK economy far more than is gained from lower contributions to the EU budget.