The economic impact on services from the UK losing Single Market access

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May 22, 2017

This report examines the economic implications of a post-Brexit Free Trade Agreement (FTA) between the UK and the EU compared to Britain’s current market access.

•When considering the single market, many of the nuances relating to services are often lost as part of the ongoing focus on Brexit. This report specifically addresses the implications of leaving the single market in services and why maintaining deep access is important. The single market in services is important to the UK. This is especially so given the UK’s leading position as an exporter of services. This report also discusses the indirect and non-tariff impacts on goods of leaving the single market and customs union.

 

• Our economic modelling work on the impact of service access restrictions to the EU produces different scenarios. The upside scenario entails a 1.4% loss in GDP versus a 2% loss as part of a downside scenario. This results in an approx. £25-36bn range of GDP losses within the two scenarios. We’ve not considered the costs of the UK missing out on single market deepening, or 3rd round economic impacts. We’ve also made some robust assumptions on the resilience of certain export segments.

 

• A withdrawal from the single market with little/no preferential access in services would result in significant negative impacts on financial services, telecoms/IT1 and transport – all of which will register export losses of 15% or more based on the official figures. Unless these losses are offset through new trade relationships, we could see a 9.5-14% decline in total UK service exports, representing approx. £21-30.5bn in UK export revenue. The service sector where the single market has the biggest impact in absolute terms is financial services. About a third of the losses from single market withdrawal result from lost business in financial services.

 

• The biggest proportional reduction in trade using our methodology would be in the estimated figures for trade in IT and telecoms. However, we think that much of the IT and telecoms trade with the EU is under-recorded. We doubt if this trade would be directly reduced much if we left the single market and so suspect that the high apparent proportionate reduction needs to be understood in this context. Given the understated and unregulated level of exports, the absolute decline recorded may however still be relevant given that in actual terms it represents a significantly smaller relative decline.

 

• The total losses could however be a less than 1.4% of GDP if we assume robust new free trade relationships with service access pillars to the EU and 3rd countries. Losses could therefore be mitigated if we move away from the simple goods-only FTA assumption with the EU and include some more substantial access for services in a CETA+ or Swiss scenario.

 

• Access to the single market for services is therefore important to the UK as it is to the remaining members of the EU. Even outside the formal EEA single market the UK should still be able to avoid many of these costs by negotiating a deal that maximises access. Service access is not just about avoiding World Trade Organisation terms – there is a variety of options that can be looked at that would allow an agreement that covers more than just goods. Reaching such an agreement may however require certain compromises to be made on “red-line” issues.