The costs and benefits of leaving the EU institutions.

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The government of the United Kingdom is implementing the biggest democratic mandate in the history of our nation and implementing our exit from the European Union. Both official campaigns were clear this would mean leaving the Single Market, The Customs Union, and the European Court of Justice. I repeat BOTH campaigns laid this out to the people and the people chose to leave on that basis.

One would expect the UK media to play a role in explaining the consequences. Instead they obsess with false narratives like Hard Brexit and Soft Brexit when in fact there is only Brexit. They jump on every statement from the EU as if it is an inevitable and final outcome rather than one side simply stating their preferred position. They discuss the minutiae of fifteen-year forecasts as if they will surely unfold, despite being based on a demonstrably flawed gravity model.

Last Autumn the office for budget responsibility revised down the economic growth forecast. Last week the Bank of England revised it up. They can’t get it right one season to the next, but we are supposed to believe Treasury knows best. They don’t – and they have proved it. George Osborne’s Project Fear forecasts were so inaccurate in every regard you might expect the Treasury to throw their tried, tested, and failed models away. Instead they just keep cranking the handle and churning out more nonsense.

So, if we can’t rely on forecasts how can we make informed decisions? Instead of compounding inherent modelling errors over fifteen years we can simply look at the current situation and understand the immediate impact of change.

The Single Market refers to the EU as one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. The impact of leaving this can range from no impact if we have a full free trade agreement to mutually applied tariffs if we leave on World Trade Organisation rules. To put numbers on the latter is complex but it has been done. The independent think tank Civitas published a detailed analysis in a paper called Potential post-Brexit tariff costs for EU-UK trade. It shows that if the UK leaves the EU without a trade deal UK exporters could face the potential impact of £5.2 billion in tariffs on goods being sold to the EU. However, EU exporters will also face £12.9 billion in tariffs on goods coming to the UK.

This is not a desirable outcome for either the UK or the EU. There are incentives for both parties to agree a mutually beneficial deal, but the UK must not allow the EU to cherry pick. Any new FTA must include both goods and services. UK negotiators must understand and drive home that failing to agree such a deal will hurt EU exporters more. It has been argued that is not the case as this is spread across 27 countries so the impact to each is marginal. This is a fallacious argument. The reality is the pain will be felt disproportionally across Europe. German exporters alone would be hit by £3.3 billion of tariffs.

It is also worth noting the profile of goods and services imported and exported varies as do the associated tariffs. The outcome of this is the average our exporters will face is just 4.5% whilst the average tariff EU countries will pay is 5.8%. Think about that for a moment, all of the hyperbole about a cliff edge Brexit over just 4.5%. We have had bigger currency fluctuations than that in every year of our EU membership.

In summary we have nothing to fear from leaving the Single Market and the UK treasury stands to gain to the tune of £12.9 billion. Under WTO rules we cannot simply use that to compensate our exporters and keep the £7.7 balance, but it cannot be beyond the wit of Treasury to ensure our businesses see some of the benefit. There is of course a potential impact on the UK consumer, the EU exporters will try to pass on the tariffs in costs to the buyer driving up prices. They are however operating in highly competitive markets. If the EU doesn’t want free trade with the UK many other countries do so a 10% hike in the cost of a BMW could be offset in the market by a 10% reduction in the cost of a US or Japanese alternative.

Turning to the Customs Union, this ensures the same customs duties, import quotas, preferences or other non-tariff barriers to trade apply to all goods entering the EU, regardless of which country within the area they are entering. That is unless they have a Free Trade Agreement with the EU. As an EU member state, the UK currently applies £9 billion a year of tariffs on countries outside of the EU. HMRC says the UK keeps 20% or just £1.8 billion. The other £7.2 billion is paid to the EU. Prices to UK consumers are pushed up by £9 billion a year but we give 80% of it away.

The day we leave the Customs Union treasury will be £7.2 billion better off as we will keep all of what we charge in tariffs. This figure will reduce over time as we agree free trade with other countries but that is simply moving the money from the government to the consumer, no bad thing. It remains a very real £7.2 billion-pound benefit that is hardly ever discussed.

Finally leaving the European Court of Justice. Every FTA we negotiate will require an arbiter and the one with the EU should be no different. Both sides should be represented and as we will no longer sit on the ECJ this disqualifies it from this role.

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