For Release Tuesday

December 12, 2017

A new study from the RAND Corporation projects that the UK economy is likely to suffer under the most probable post-Brexit trade scenarios.

Leaving the EU with no deal and operating under World Trade Organization (WTO) rules would lead to the greatest economic loss for the UK, reducing GDP by nearly 5 per cent, or $140 billion, 10 years after Brexit, compared with EU membership.

Researchers at the nonprofit, nonpartisan RAND and its European affiliate RAND Europe built an economic model to measure the percentage and monetary changes in GDP growth, GDP per capita, trade and foreign direct investment for the UK, EU and US across the eight trade scenarios. A new calculator on the RAND website allows anyone to explore likely post-Brexit impacts under their own assumptions.

The WTO outcome would likely move the UK further from EU standards and over time significantly increase non-tariff barriers, harming the ability of UK businesses to sell goods and services to EU countries. The services sector, which includes financial and banking, is particularly important as it dominates the UK economy, contributing to around 80 per cent of GDP.

The EU would also lose out under the WTO scenario, but the effect is relatively minor—a 0.7 per cent drop in GDP 10 years after Brexit.

Of the scenarios analysed, the most beneficial to the UK economy would be a trilateral UK-EU-US agreement, a TTIP-like agreement under which UK GDP would be 2.2 per cent higher—or 7.1 percentage points better than under the WTO rules scenario. This is even slightly better than continued EU membership. The EU and US are also forecast to make significant economic gains under this trade scenario. However, a TTIP-like arrangement is seen as very unlikely in the current political environment on both sides of the Atlantic.

Other trade scenarios could be better for the UK than WTO rules but still lead to economic losses compared with EU membership. These include 'hard Brexit' scenarios, such as a UK-EU free trade agreement (net UK GDP decline of 1.9 per cent 10 years after Brexit), UK-US free trade agreement (2.5 per cent decline) or UK-EU transitional zero-tariff agreement (2.1 per cent decline), and 'soft Brexit' scenarios, such as the Norway option (1.7 per cent decline), Switzerland option (2.4 per cent decline) or remaining part of the Customs Union (1.8 per cent decline).

“The analysis clearly shows that the UK will be economically worse-off outside of the EU under most trade scenarios. The key question for the UK is how much worse-off,” said Charles Ries, Vice President, International at RAND and lead author of the report. “It is in the best interests of the UK, and to a lesser extent the EU, to achieve some sort of open trading and investment relationship post-Brexit.”

The study used game theory insights to create a better understanding of how a wide variety of factors might affect the outcome of the Brexit negotiations between the UK and EU. Based on these insights, the report recommends that the UK seek to move away from a 'zero-sum game' and towards a 'positive sum game' as negotiations proceed, to ensure the best possible deal for all parties. A UK strategy of trying to pick apart European unity would be unlikely to work since it is in the best interests of all EU member states to work together.

The EU is likely to engage with the UK during Brexit negotiations, but may see benefit in adopting a 'zero sum game' approach. Europe's top political priority is to discourage other member states from withdrawing.

Ries explains: “Based on our insights, it is in the best interests of the UK to cooperate with its EU partners to find a new relationship with Europe. This would preserve economic benefits for both sides, but also give the UK the freedom from EU rules which it seeks. However, the EU is likely to want to ensure that it does not give too much away to the UK during negotiations, and may seek to adopt a 'zero sum game' approach to preserve the union.”

The study determined that after Brexit the political and security effects are likely to be more important to the US than the economic impact. The potential economic gains and losses for the US after Brexit are relatively small, apart from the TTIP-like arrangement which would result in substantial economic gains for the US.

Ries explains: “The US will greatly miss the influence and global perspective that the UK brings to EU decision-making, particularly around security and defence. In fact, the UK's EU membership often ensured that EU measures did not undermine NATO and the strong transatlantic partnership. The economic impact from Brexit is very much a secondary concern for the US.”

Funding for this report—“After Brexit: Alternate forms of Brexit and their implications for the United Kingdom, the European Union and the United States”—was provided by donors and by the independent research and development provisions of RAND's contracts for the operation of its U.S. Department of Defense federally funded research and development centers. In addition, a grant from the Arconic Foundation supported the exploration of game theory in relation to the Brexit process, as well as outreach and dissemination of the research.

The other authors on the report are Marco Hafner and Martin Stepanek from RAND Europe, Troy D. Smith, Daniel Egel, Eugeniu Han and Howard J. Shatz from the RAND Corporation, and Frances G. Burwell from the Atlantic Council.

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Notes for Editors:

To request a copy of the report or to arrange an interview with the researchers please contact Jack Melling on jmelling@rand.org or +44 (0)7711209048 or Jeffrey Hiday on jhiday@rand.org or +1-202-415-9087.

The RAND Corporation is a nonprofit research organization that develops solutions to public policy challenges to help make communities throughout the world safer and more secure, healthier and more prosperous.

RAND Europe is a not-for-profit research organization whose mission is to help improve policy and decision making through research and analysis.