Economie
Economie
Economie
Cm 9742
EU Exit
Long-term economic analysis
November 2018
Presented to Parliament
by the Prime Minister
by Command of Her Majesty
November 2018
Cm 9742
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EU Exit: Long-term economic analysis 1
Contents
Executive Summary 3
Section 1 - Introduction 11
1.1 Context 11
1.2 Structure of the publication 12
Section 2 - Analytical approach 14
2.1 Trade analysis overview 14
2.2 Scenarios 15
2.2.1 Explanation of scenarios 16
2.3 Assessing changes and associated costs of new economic relationships 18
2.3.1 UK-EU tariff and non-tariff barriers methodology 18
2.3.2 UK-EU trade: assumptions 20
2.3.3 UK-Rest of World trade: methodology 22
2.3.4 UK-Rest of World trade: assumptions 22
2.3.5 Regulatory flexibility 23
2.3.6 Summary of assumptions 24
2.4 Macroeconomic tools 26
2.4.1 Regional modelling 26
2.4.2 Migration 27
2.4.3 Fiscal modelling 28
2.4.4 Additional sensitivity analysis 28
2.5 Analytical limitations 29
2.6 Key factors relevant to future economic performance not quantified in this analysis 30
2.6.1 Factors not modelled 30
2.6.2 Wider domestic economic policy not modelled 30
2.6.3 Global trends not modelled 31
Section 3 - Sectoral implications for UK-EU trade barriers 33
3.1 Potential changes in trade barriers with the EU and associated costs 33
3.2 UK Sectors 35
3.2.1 Manufactured Goods 35
3.2.2 Agri-food 38
3.2.3 Services 40
3.2.4 Financial Services 43
3.2.5 Networks 45
2 EU Exit: Long-term economic analysis
Executive Summary
As the UK leaves the European Union it does so with strong economic fundamentals. The economy
is growing, unemployment is low and real wages are rising. The Government's future economic
relationship with the EU and independent global trade policy will be important drivers of future trade
flows both with the EU and the rest of the world. This will in turn influence productivity and economic
output. Economic analysis can support an understanding of how these changes might affect the UK
economy. But it does not seek to predict how the UK economy will perform in the future, not least
because the UK’s exit from the EU will be just one of a number of factors impacting economic growth.
The Government has undertaken economic analysis of EU exit under different scenarios, with the
objective of providing Parliament and the public with an assessment of the long-term economic
impacts of the UK's future relationship with the EU. The analysis compares potential future policy
scenarios against today's arrangements, holding all other factors constant. The analysis considers
the potential impacts from changes to specific trade-related policies, including analysis of EU trade
costs and opportunities from an independent UK trade policy.
The Government's analysis brings together evidence from across Government, insight from external
stakeholders and a range of data and analytical tools. It considers both the costs and benefits of
moving to new trading relationships with the EU and the rest of the world. An integral part of this
analysis is an assessment of how trade barriers could affect costs for businesses in the long run
across different sectors of the economy, both as a result of different trading relationships with the EU
and signing ambitious new Free Trade Agreements (FTA) with non-EU countries. The analysis uses
macroeconomic tools to assess the potential overall impact on the UK economy of these changes in
the long run.
This analysis is not an economic forecast for the UK economy. In particular:
• It only considers the potential economic impacts that are specific to EU exit. Leaving the EU is just
one of many factors that will influence the UK's economic performance in the long run. Other
factors such as the rise of global value chains, the increasing importance of services trade,
technological developments, and global demographics are held constant;
• The analysis does not make judgements about any future UK Government policy decisions or
responses; and
• The estimates show the relative impacts of different trading arrangements in the long term and do
not estimate the absolute increase or decrease in economic output compared to today. The
results therefore show the broad relative impacts of the different scenarios, and in all scenarios
the economy would be expected to grow.
No modelling can completely capture the complex ways in which the UK economy could be affected
by exiting the EU, particularly given the unprecedented circumstances of the UK's departure. While
the analysis draws on a robust set of tools and evidence, there is an inherent uncertainty
around this type of economic analysis. The results are therefore presented as ranges, and
should be interpreted with caution.
4 EU Exit: Long-term economic analysis
Modelled scenarios
In line with external studies and analysis previously undertaken by the Government, the work
considers four analytical scenarios: 1
• The policy position set out by the Government in the July 2018 White Paper on “The future
relationship between the United Kingdom and the European Union” (“modelled White Paper”);
• A hypothetical FTA, with zero tariffs, reflecting average FTA non-tariff costs such as being outside
the Customs Union and standard customs arrangements with the EU, regulatory barriers and
other costs (“modelled average FTA”);
• An EEA-type scenario, which reflects being outside of the Customs Union and as such primarily
reflects the costs of standard customs arrangements with the EU. Zero tariffs are applied
(“modelled EEA-type”); 2 and
• A no deal scenario based on an assessment of average non-tariff barriers (NTBs) between
countries trading on non-preferential World Trade Organization (WTO) terms and applying EU
applied Most Favoured Nation (MFN) tariffs (“modelled no deal”).
The average FTA, EEA-type and no deal scenarios do not deliver the Government's policy objectives.
These scenarios are therefore included as reference points. The EEA-type scenario would mean
staying in the Single Market, implementing new EU legislation automatically and in its entirety, and
continued free movement of people. An average FTA, EEA-type scenario or trading with the EU on
WTO terms would not meet the Government's commitments to ensure no hard border between
Northern Ireland and Ireland.
The UK and the EU have agreed the Political Declaration which sets the framework for the UK's
future relationship with the EU. It sets out a free trade area for goods, including no tariffs, with
ambitious customs arrangements. It will be the first such agreement between an advanced economy
and the EU. It will also allow the UK to develop an independent trade policy beyond the partnership,
with the ability to sign new trade deals with other countries.
Agreement of the Political Declaration will now be followed by negotiations on the legal text. The UK
and the EU recognise that this means there could be a spectrum of different outcomes, and both
have agreed that we should be as ambitious as possible. The UK has put forward proposals that
would enable frictionless trade to be achieved outside the Customs Union and Single Market. That is
not something that is accepted by everyone in the EU, but the UK has the ability in the future
negotiations to continue to work for its objective of achieving frictionless trade.
Given the spectrum of outcomes, and ahead of the detailed negotiations on the legal text, an
appropriate analytical approach to modelling the impacts of the Political Declaration is to present a
range of possible outcomes. To do this, the analysis applies a sensitivity to illustrate the potential
impact of higher NTBs, including checks at or behind the border and other regulatory costs. This
illustrative sensitivity point reflects the midpoint in the difference of NTBs to trade between the
modelled White Paper at one end, and the modelled average FTA scenario at the other, and does not
represent an expected outcome.
1 The four scenarios, and the policy assumptions underpinning them, were approved by ministers.
2 The analysis isolates the impact of changing trading relationships, relative to a baseline of the UK’s current trading
arrangements with the EU. From the perspective of this modelling approach, the baseline of the UK’s current trading
arrangements is equivalent to membership of both the EEA and the Customs Union.
EU Exit: Long-term economic analysis 5
In each scenario, changes to UK-EU trade costs are considered. The analysis also considers
ambitious new trade deals with the rest of the world by assessing the potential impact of eliminating
tariffs and reducing non-tariff barriers with an illustrative range of potential partners.
The four scenarios, and the additional sensitivity, are then considered in two ways. The modelled
White Paper and average FTA scenarios are compared against the no deal scenario. All of the
scenarios are also compared against today's arrangements, as committed to Parliament on 19
November 2018, 3 but this is not a specific projection of future membership of the EU. This analysis
does not consider any potential impact of the UK aligning with the EU as it changes its rules in the
future. The future direction of EU policy is uncertain, and could have both positive and negative
impacts on the UK economy.
This analysis looks only at the long-term economic impacts, and for this purpose the long term can be
interpreted as around 15 years after the UK's new relationship with the EU comes into effect. It is
focused only on the specific changes triggered by EU exit and as such is not an overall economic
forecast. The analysis does not consider short-term operational or wider economic effects, including
where there is potential for short-term effects to sustain in the long run.
Economic impacts
It is expected that in all scenarios considered in this publication, the economy will continue to grow in
the long run. The estimates show the relative impacts of different trading arrangements.
The analysis shows that higher barriers to UK-EU trade would be expected to result in greater
economic costs.
The analysis compares the long-term economic impact of each of the modelled scenarios against
today's arrangements, first considering trade effects only (migration effects are considered separately
and described below). It also compares the central estimates of the modelled White Paper and
modelled average FTA scenarios to the modelled no deal scenario over the long run, by again
considering trade effects only.
Table E.1: Summary of trade only impacts on GDP compared to the modelled no deal scenario. 4 5
3 HC Deb (19 November 2018), vol. 649, col. 661 “The baseline for this comparison will be the status quo - that is,
today's institutional arrangements with the EU”.
4 Differences may not reconcile with other tables due to rounding.
5 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome.
6 Ranges are not modelled for the differences between scenarios, or for the NTB sensitivity.
6 EU Exit: Long-term economic analysis
Table E.2: Summary of trade only impacts on GDP compared to today's arrangements. 7
The analysis then considers the impact of these scenarios on different sectors of the economy, on
the nations of Scotland, Wales and Northern Ireland, and on the English regions. The analysis
shows that the modelled White Paper scenario, and the sensitivity modelled as the difference
between NTBs in the modelled White Paper and the modelled average FTA scenarios, would
support higher economic output for all sectors, nations and regions than the no deal
scenario.
Free movement of people will end as the UK leaves the EU. Future migration arrangements will be
determined in the UK's national interest, and will be set out in a White Paper, in line with the
Government's overall policy to reduce net migration to sustainable levels. Changes to migration will
have an impact on the economy. Migration is affected by both government policy and the relative
strength of the economy and demographic factors. Ahead of final decisions on the UK's long-term
migration arrangements, an illustrative range of potential changes to net EEA worker flows is
analysed alongside changes to the economy from trade. 9 The analysis estimates that the illustrative
scenario of zero net inflows of EEA workers could reduce GDP by around 1.8 per cent and GDP per
capita by around 0.6 per cent in the long run, compared to today's arrangements. The analysis does
not assume any changes to non-EEA migration. In the no change to migration arrangements
scenario, any migration effects reflect only the impacts on migration of a smaller economy.
The analysis then combines the estimated impact of changes in trade policy, modelled illustrative
migration arrangements, and the impact from potential regulatory flexibility in the long run from
leaving the EU to describe an overall impact on the economy. The analysis also considers potential
fiscal implications of these scenarios.
7 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome.
8 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
9 The Government's migration analysis first establishes future flows of EEA workers independent of any policy changes.
EU Exit: Long-term economic analysis 7
Table E.3: Summary of total GDP impacts (considering trade, migration, regulatory flexibility effects) compared
to the modelled no deal scenario. 10
Table E.4: Summary of total GDP impacts (considering trade, migration, regulatory flexibility effects) compared
to today's arrangements, for the illustrative no change to migration arrangements and zero net inflows of EEA
workers scenarios. 11 12
10 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome.
11 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome.
12 Modelled EEA-type scenario is not shown because the illustrative zero net inflows of EEA workers migration scenario
does not apply to the modelled EEA-type scenario.
13 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
8 EU Exit: Long-term economic analysis
These total impacts on GDP and GDP per capita are also shown in Figure E.1 and E.2 below. Figure
E.3 demonstrates the different factors that drive the total GDP impacts, including new rest of world
trade deals, additional regulatory flexibility, NTBs (at or behind the border) including customs costs,
tariffs and changes in migration. Figures E.1, E.2 and E.3 include the impact of the modelled
sensitivity from the White Paper scenario to illustrate that, if at-the-border or behind-the-border
frictions and costs were higher, the impact on the economy would be greater.
Figure E.1: Summary of total impacts on GDP compared to today's arrangements for the illustrative no change to
migration arrangements and zero net inflows of EEA workers scenarios.
14 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
EU Exit: Long-term economic analysis 9
Figure E.2: Summary of total impacts on GDP per capita compared to today's arrangements for the illustrative no
change to migration arrangements and zero net inflows of EEA workers scenarios.
15 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
10 EU Exit: Long-term economic analysis
Figure E.3: Decomposition of total impacts on GDP compared to today's arrangements for the illustrative no
change to migration arrangements and zero net inflows of EEA workers scenarios.
Central estimates only. *NTB estimates for the modelled no deal and modelled average FTA scenarios are derived from
econometric modelling, which does not isolate individual NTB components. Customs costs for these scenarios are shown
illustratively in line with the modelled EEA-type scenario estimates.
This considers trade, migration and regulatory flexibility effects.
There are a number of external assessments comparable to the modelled no deal, average FTA and
EEA-type scenarios. The Government's estimates sit within the range of external estimates, noting
that key differences between studies relate primarily to assumptions on changes to trade costs and
how economic models simulate the economy's adjustment to these. Few studies have sought to
model the stated government policy.
EU Exit: Long-term economic analysis 11
Section 1 - Introduction
1.1 Context
1. The UK's exit from the EU represents a change in its relationships both with the EU and the rest
of the world. The UK will be leaving the Customs Union and Single Market, which determine
how goods, capital, services and people move between the UK and the EU. The UK will also be
implementing an independent global trade policy which allows the UK to sign new Free Trade
Agreements (FTAs) with non-EU countries.
2. The Government has undertaken long-term economic analysis of EU exit, with the objective of
providing Parliament and the public with an assessment of the possible long-term economic
impacts of the UK's future relationship with the EU.
3. The analysis compares potential future policy scenarios against today's arrangements, holding
all other factors constant.
4. The UK and the EU have now agreed the Political Declaration which sets the framework for the
UK's future relationship with the EU. This will now be followed by negotiations on the legal text.
The UK and the EU recognise that this means there could be a spectrum of different outcomes,
and both have agreed that we should be as ambitious as possible. The UK has put forward
proposals that would enable frictionless trade to be achieved outside the Customs Union and
Single Market. This is not something that is accepted by everyone in the EU, but the UK has the
ability in the future negotiations to continue to work for its objective of achieving frictionless
trade. Given the spectrum of outcomes and ahead of the detailed negotiations on the legal text,
an appropriate analytical approach is to present a range of possible impacts of the Political
Declaration.
5. The analysis considers the potential long-term impacts from changes to specific trade policies,
including analysis of EU trade costs and opportunities from an independent UK trade policy.
The long-term can be interpreted as around 15 years after the UK's new relationship with the
EU comes into effect.
6. Free movement of people will end as the UK leaves the EU. Future migration arrangements will
be determined in the UK's national interest, and will be set out in a White Paper, in line with the
Government's overall policy to reduce net migration to sustainable levels. For the purposes of
this analysis, decisions on trade and migration are assumed to be largely separate. However,
ending free movement of people between the UK and the EU has economic consequences that
are important to consider in analysing the impact of EU exit. Two illustrative variants for long-
term migration arrangements have been used to estimate the wide range of possible impacts,
reflecting the range of policy options. These are represented as no change to migration
arrangements and zero net inflows of EEA workers. These scenarios illustrate a very wide
range of impacts and are not intended to indicate any future migration arrangements. The
analysis does not assume any changes to non-EEA migration. Potential migration impacts are
then combined with trade impacts and an illustrative impact of regulatory flexibility to show the
overall impact on the UK economy.
7. Changes affecting UK trade and migration will influence the size and shape of the UK economy.
The UK is a large, developed economy, ranked the fifth largest in the world in 2017, 16 with
16 'Gross domestic product 2017', GDP ranking, World Bank, September 2018.
12 EU Exit: Long-term economic analysis
around 80 per cent of economic activity coming from services activities. 17 The UK is an open
economy and is highly integrated into global supply chains. Trade has become increasingly
important, rising from 36 per cent of GDP in 1967, to 62 per cent in 2017. 18 There were 3.5
million EU (excluding Irish) nationals living, working and studying in the UK in 2017. 19
8. EU exit is just one factor that could influence the UK economy in the long run. Wider global
trade and investment trends, such as growth in emerging markets, as well as new technologies,
will also have an impact. These factors have not been modelled as part of this analysis, and are
discussed in more detail in Section 2.6.
9. Theory and evidence 20 indicate that higher trade 21 increases economic output and prosperity
over the long term through multiple channels. For example, trade allows countries to specialise
more in their areas of comparative advantage and allows businesses to sell their goods and
services to a larger market. To serve a larger market, firms scale up their workforce and
production, increasing overall demand in the economy. Trade can increase productivity, a key
driver of economic growth, by exposing firms to competition, best practice, new technologies
and through investment. This can contribute to higher wages, employment and households'
living standards.
12. The sectoral assessments set out an analysis of potential changes that different industries may
face. These estimates can also be brought together as an input into the Government's long run
trade and macroeconomic modelling. Section 4 sets out the results of this analysis for the
modelled trade scenarios. This estimates how economic output may change in the long run in
response to the estimated changes in trade costs, through trade flows, sectoral economic
activity, and real wages. The analysis also considers potential regional impacts. The potential
effects of illustrative migration scenarios are set out separately from the trade effects. These are
then combined with the trade analysis and the illustrative impacts of greater flexibility over UK
regulations, to estimate the total impacts of EU exit. Finally, this section sets out the potential
fiscal implications of these scenarios. This section also presents additional sensitivity analysis
and provides guidance on interpreting the results.
13. Section 5 presents the Government's assumptions, methodology and results in the context of a
range of external studies. This demonstrates that the Government's analysis of the modelled
precedent scenarios falls within the range of other comparable studies. Few studies have
sought to model the stated government policy.
14 EU Exit: Long-term economic analysis
23 'The Gravity Equation in International Trade: An Explanation', NBER Working Paper, August 2013.
24 'Demystifying Modelling Methods for Trade Policy', WTO Discussion Paper, 2005.
EU Exit: Long-term economic analysis 15
scenario. These trade costs and assumptions then feed into a macroeconomic model to
estimate the potential whole economy impacts in the long run, holding other factors constant. As
is common to trade modelling, this analysis does not consider wider external drivers of
economic performance and, as such, should not be interpreted as an economic forecast.
19. Migration effects are assessed separately. The Government's migration analysis first
establishes the potential future flows of EEA workers independent of any policy changes. The
analysis shows two illustrative variants for long-term migration arrangements. 25 This is
represented as a range between no change to migration arrangements and zero net inflows of
EEA workers. These scenarios illustrate a very wide range of impacts and are not intended to
indicate any future migration arrangements. The analysis does not assume any changes to non-
EEA migration. The migration effects are combined with the impact of the change in trade policy
and the economic impact of some flexibility over UK regulations to estimate the overall
economic impact on the whole economy.
20. The following sections describe the main scenarios included, as well as the overarching
methodology, assumptions and analytical tools used. Further details on the Government's
analytical approach can be found in the accompanying EU Exit Long-Term Analysis: Technical
Reference Paper.
Figure 2.1: Simplified illustration of the Government's analytical approach.
2.2 Scenarios
21. The UK and the EU have now agreed the Political Declaration which sets the framework for the
UK's future relationship with the EU. This will be followed by negotiations on the legal text that
will set out in detail the UK's future trading arrangements. The UK and the EU recognise that
this means there could be a spectrum of different outcomes, and both have agreed that we
should be as ambitious as possible. Given the spectrum of outcomes and ahead of the detailed
negotiations on the legal text, the analytical approach presents a range of possible outcomes of
the Political Declaration.
25 Long-term migration is defined as workers intending to stay more than one year in duration.
16 EU Exit: Long-term economic analysis
22. The Government's policy was set out in the July 2018 White Paper, “The future relationship
between the United Kingdom and the European Union”. 26
23. In line with external studies and analysis previously undertaken by the Government, the work
considers four analytical scenarios:
a. The policy position set out in the July 2018 White Paper, “The future relationship between
the United Kingdom and the European Union” (“modelled White Paper”);
b. A hypothetical FTA, with zero tariffs, reflecting average NTB costs such as standard
customs arrangements with the EU, regulatory and other costs (“modelled average FTA”);
c. An EEA-type scenario, which reflects the UK being outside of the Customs Union, reflecting
the average NTB costs, such as of standard customs arrangements with the EU. Zero tariffs
are applied (“modelled EEA-type”); 27 and
d. A no deal scenario, based on an assessment of average NTB costs between countries
trading on non-preferential World Trade Organization (WTO) terms and applying EU Most
Favoured Nation (MFN) tariffs (“modelled no deal”).
24. The modelled average FTA, EEA-type and no deal scenarios do not deliver on the
Government's objectives, and have been included for analytical purposes only. The EEA would
mean staying in the Single Market, implementing new EU legislation automatically and in its
entirety, and continued free movement. An average FTA, EEA-type scenario or trading with the
EU on WTO terms would not meet the Government's commitment to ensure no hard border
between Northern Ireland and Ireland.
26 'The future relationship between the United Kingdom and the European Union', HM Government, July 2018.
27 From the perspective of this modelling approach, the baseline of the UK’s current trading arrangements is equivalent
to membership of both the EEA and the Customs Union.
28 While not a specific projection of future membership of the EU, this baseline can be interpreted as the status quo
comparison as committed to Parliament on 19 November 2018.
29 The four scenarios, and the policy assumptions underpinning them, were approved by ministers.
30 This is a modelling assumption only. The Government would be free to set its own tariff schedule post-EU exit.
EU Exit: Long-term economic analysis 17
28. This is not representative of possible government policy, as it would not meet UK objectives
including avoiding a hard border between Northern Ireland and Ireland. Care should be taken in
the interpretation of results, as the modelled no deal scenario does not perfectly reflect how the
UK and EU might trade on WTO terms. The results could over- or under-state the impact of a no
deal scenario in some areas. For example, the UK and EU start from a position of regulatory
alignment, meaning that differences in regulation could be smaller than in typical trading
relationships on WTO terms. 31 Conversely, many countries trading on WTO terms also have a
range of side agreements for different products or sectors, which may be captured in the
analysis and may therefore overstate the benefits of trading on WTO terms should the UK not
achieve these. Modelling of the no deal scenario also focuses only on trading relationships, and
as such, does not reflect any impacts of changes to wider aspects of the UK-EU relationship, for
example cooperation on science and innovation.
29. A modelled average Free Trade Agreement (FTA) 32 scenario represents a hypothetical FTA,
with zero tariffs, based on estimates of average NTBs between relevant FTA partners. These
are used as a proxy for how the UK could trade with the EU under this type of arrangement. As
such, it does not seek to define or model a bespoke agreement. This scenario is not indicative
of government policy, as it would not meet UK objectives including avoiding a hard border
between Northern Ireland and Ireland.
30. A modelled EEA-type agreement scenario represents membership of the Single Market,
reflecting that non-EU EEA states are not part of the Customs Union 33 and there is free
movement of people. For modelling purposes, in this scenario the UK is modelled as striking a
deal with the EU with zero tariffs. This includes zero tariffs on agri-food products. This
assumption differs from current EEA arrangements, where agri-food is excluded. Therefore,
additional sensitivity analysis considers the impact of applying EU applied MFN tariffs to agri-
food sectors. This scenario is not consistent with government policy as it would mean staying in
the Single Market, implementing new EU legislation automatically and in its entirety, and would
also mean continued free movement. It would also not meet the Government's commitment to
ensure no hard border between Northern Ireland and Ireland. The analysis does not seek to
project any changes to future EU regulation and how this might impact the UK.
31. A modelled White Paper scenario uses trade cost estimates based on policy assumptions set
out in the Government's July 2018 White Paper, “The future relationship between the United
Kingdom and the European Union”. 34 Trade costs are estimated based on assumptions set out
in the White Paper. Details of the relevant economic factors within this policy for each sector
group of the economy are set out in section 3, with further information provided in section 2 of
the Technical Reference Paper.
32. Sensitivity analysis illustrates the potential impact of different levels of trade costs, including
checks at or behind the border and other regulatory costs. Ahead of detailed negotiations on the
legal text, the analytical approach presents a range of possible outcomes of the Political
Declaration. The analysis applies a sensitivity to illustrate the potential impact of higher NTBs,
including checks at or behind the border and other regulatory costs. This illustrative sensitivity
31 An adjustment is made for this in the analysis. Further details are set out in section 2.3.3 of the Technical Reference
Paper.
32 This scenario assumes a zero tariff agreement and uses estimates of average NTBs. This does not represent
government policy and is for modelling simplicity. Historically, agri-food tariffs have been difficult to eliminate in FTAs,
so an additional sensitivity with EU-applied MFN tariffs is considered (see section 4.9).
33 Costs are assumed to arise from a customs border and the administrative requirements to trade under zero tariffs with
the EU (rules of origin).
34 'The future relationship between the United Kingdom and the European Union', HM Government, July 2018.
18 EU Exit: Long-term economic analysis
point reflects the midpoint in the difference of NTBs to trade between the modelled White Paper
at one end, and the modelled average FTA scenario at the other and does not represent an
expected outcome. For more details, see section 2.3.2.
national requirements, and the loss of “passporting” in financial services. 36 These could
increase costs for service providers, or lead to additional barriers to trade.
iii. Movement of people including temporary mobility for business purposes. Temporary
mobility covers business travel to another country, including to provide a service in that
country. In the absence of such arrangements, these barriers could affect businesses who
provide services alongside goods exports, and all service exporters.
iv. Other, including trade costs affecting multiple sectors. Examples include data protection
regulations, government procurement, cross-border VAT and intellectual property rights.
38. The Government's approach to estimating NTB costs is rooted in an analysis of global trade and
validated against a variety of external evidence. Using robust methods common to international
trade modelling and academic studies, real world data from existing trading relationships are
used to estimate changes to trade costs in different sectors for different modelled scenarios.
36 'Passporting', Bank of England, accessed 13 November 2018. Passporting: “A firm authorised in an EEA state can
carry on activities that it has permission for in its home state and any other EEA state by either establishing a branch
or agents in an EEA state or providing cross-border services. This is known as 'passporting'.”
20 EU Exit: Long-term economic analysis
Figure 2.2: Simplified illustration of the Government's approach to assessing trade costs.
37 Within certain sectors, the EU allows improved market access to WTO members at below EU-applied MFN tariff rates
for set quantities through the use of tariff-rate quotas (TRQs). However, these have not been considered for the
purposes of this modelling.
38 EU applied MFN tariffs are trade-weighted using 2014-16 UK-EU trade data from TradeMap at the HS-8 level to the
base GTAP 57 sectors. Tariffs for all GTAP 57 goods sectors are subsequently weighted to the modelling sectors
using 2011 GTAP data. 'UK-EU trade 2014-16', Trade Map, accessed on 20 November 2018; 'EU applied MFN tariffs'
Macmap, accessed on 20 November 2018; 'GTAP 57 2011', GTAP, accessed on 20 November 2018.
39 Sensitivity analysis included in section 4.9.
EU Exit: Long-term economic analysis 21
45. An adjustment is made to the NTBs to reflect the potential difference between joining and
exiting a trade agreement, reflecting the UK's unique starting point. Further details are set out in
section 2.3.3 of the Technical Reference Paper.
41 Only those EU agreements that existed up to 2011 are included in the base data for modelling. This includes EU trade
agreements with Canada, Japan and Vietnam. See Technical Reference Paper for more details.
42 For the purposes of EU exit modelling, the UK is assumed to pursue successful trade negotiations with the United
States, Australia, New Zealand, Malaysia, Brunei, China, India, Mercosur (Brazil, Argentina, Paraguay and Uruguay)
and the Gulf-Cooperation Council (UAE, Saudi Arabia, Oman, Qatar, Kuwait and Bahrain). For more details please
see section 3.1 of the Technical Reference Paper.
EU Exit: Long-term economic analysis 23
applied to all other countries. This is an assumption made for modelling purposes only, and
does not prejudge future government policy. 43
52. The analysis estimates potential changes to UK-RoW import tariff costs for each sector group,
expressed as a percentage of the value of UK-RoW trade with FTA partners. It assumes that,
compared to today's arrangements, under all modelled scenarios, trade costs from import
tariffs are zero for all FTA partners.
Non-tariff barriers
53. The analysis assumes an illustrative reduction in NTBs with the rest of the world from future
trade agreements. This is in line with analysis of current FTAs between advanced economies.
Sensitivity analysis also considers the potential impact of further reductions in NTBs with these
partners.
54. The analysis produces a set of estimates for potential changes to UK-RoW NTB costs for each
sector group, expressed as a percentage of the value of UK-RoW trade. It assumes that,
compared to today's arrangements, under all modelled scenarios, there is a reduction in NTBs
equivalent to, for goods, 2 to 4 per cent of the value of trade and, for services, 3 to 5 per cent of
the value of trade, on average. 44
55. The analysis assumes the same level of NTB reduction across all scenarios. Further detail on
the analytical approach and estimates is presented in the Technical Reference Paper.
43 Additional sensitivity analysis considers the impact of agri-food tariffs between the UK and potential trade agreement
partners remaining at their current levels. This is to account for the fact that historically, agri-food tariffs have been
difficult to eliminate as part of free trade agreements. The results are presented in section 4.9.
44 Ranges generated by the direction of bilateral trade to RoW trade partners.
45 'Assessing the Economic Implications of Brexit', Oxford Economics, March 2016. The upper end of this range is from
their “Liberal Customs” scenario, where, on regulation, they assume “revealed preference” for regulation whereby, if
the UK is currently the least regulated member in the EU and there is another country in the dataset with a lower
degree of regulation, they assume that following Brexit, the UK moves halfway towards the “best practice” level
amongst OECD economies. The lower end of this range is from their “Populist MFN scenario” where they assume “do
nothing” for regulation. Their analysis considers four potential scenarios for regulation post exit.
46 'The economic consequences of Brexit: a taxing decision', OECD, April 2016.
47 'Economy-wide regulation', OECD Product Market Regulation Statistics (database), OECD, accessed 26 November
2018.
48 'Doing Business 2019', World Bank Group, October 2018.
24 EU Exit: Long-term economic analysis
60. Open Europe suggest gains of 0.7 per cent to 1.3 per cent of GDP. 49 The lower end of these
gains assumes the repeal or scaling back of a range of EU-derived regulations including across
social, employment, environment and renewables targets. Such changes would therefore not be
consistent with UK Government policy to maintain or enhance standards and to continue to
meet existing international commitments. The higher end of the range relies additionally on
removing further regulatory requirements, including on climate change, energy performance of
buildings, restrictions on GM crops, data protection, product standards, and health and safety.
61. The Centre for European Reform finds that changes to regulation would not result in “large
gains in economic output”. They note that there may be “some gains from more relaxed
standards in particular sectors, especially in technologies that may drive up productivity”. 50 The
London School of Economics Centre for Economic Performance suggests that weakening
“social, employment and environmental regulation to some degree”, even if it were politically
possible, would “make little economic difference”. 51 Business bodies such as the EEF, 52 IoD53
and CBI 54 have publicly expressed a preference to minimise regulatory change in most sectors
to ensure stability for businesses and facilitate access to EU markets.
62. Recognising this range of estimates, the analysis focuses on the studies which assume relative
regulatory efficiency rather than any fundamental changes in standards. An illustrative 0.1 per
cent benefit to GDP in the long run is applied in all modelled scenarios except for the modelled
EEA-type scenario.
63. It is important to note that in making this assumption:
a. GDP impacts do not fully capture non-market impacts of regulation such as environmental
protection or equality;
b. For modelling purposes, the cost of adopting new EU regulations is assumed to be zero.
The analysis makes no assumptions as to how EU regulations could change in the future.
As such, it does not capture any potential impact of alignment with EU rules in the future;
c. The UK-EU NTB estimates under the modelled no deal and modelled average FTA
scenarios implicitly assume a degree of long-term regulatory divergence, as these are
calculated using trade data between countries that do not have closely aligned regulation.
49 'What if...? The Consequences, challenges & opportunities facing Britain outside EU', Open Europe, March 2015.
50 'Brexit and EU regulation: A bonfire of the vanities?', Centre for European Reform, February 2016.
51 'The consequences of Brexit for UK trade and living standards'. LSE Centre for Economic Performance, March 2016.
Also published as, ‘The costs and benefits of leaving the EU: trade effects’ Swati Dhingra, Hanwei Huang, Gianmarco
Ottaviano, Joao Paulo Pessoa, Thomas Sampson, John Van Reenen, Economic Policy, 32(92) 651-705, 2017.
52 'UK Regulation Beyond Brexit: Creating the stability, certainty and clarity manufacturing need', EEF, 2018.
53 'The business end of Brexit IoD survey on planning & trade', Institute of Directors, November 2017.
54 'Smooth Operations: An A-Z of the EU Rules that Matter for the Economy', Confederation of British Industry, April
2018.
EU Exit: Long-term economic analysis 25
Table 2.1: Summary of headline analytical assumptions for each scenario compared to today’s arrangements.
Coverage Impact Modelled no deal Modelled average Modelled EEA-type Modelled White
channel scenario FTA scenario scenario Paper scenario
UK - EU Tariffs 55 UK and EU apply the Zero tariffs Zero tariffs No tariffs
(as per cent shared UK-EU MFN
of trade tariff schedule.
value) Agri-foods: 20 per
cent
Manufactured goods:
3 per cent
Non-tariff Customs Customs Customs No customs-related
barriers 56 administration costs administration and administration and costs
and delays rules of origin costs, rules of origin costs,
(as per cent and delays and delays 57
of trade Minimal additional
value) Significant additional Additional barriers to No additional barriers barriers to goods
barriers in goods and goods and services to goods and trade. New barriers to
services. trade. services trade. service trade.
Zero tariffs for FTA partners, MFN tariffs for RoW (see WTO assumptions)
Current EU MFN tariffs with other countries.
Non-tariff No change in NTBs for all current EU trade deals.
barriers Illustrative ambitious reductions in NTBs with potential trade agreement partners. 58
(as per cent Goods: 2 to 4
of trade Services: 3 to 5
value)
UK Regulation Some flexibility assumed for the UK to decide No regulatory Some flexibility
regulatory policy flexibility. assumed for the UK
to decide regulatory
(Illustrative economic impact: 0.1 per cent of policy
GDP). (0.1 per cent GDP).
These are assumptions made to enable economic modelling, rather than statements of government policy.
For UK-EU NTBs, ranges reflect uncertainty around the central estimates and are calculated using statistical distributions
from econometrics. For UK-RoW NTBs, ranges reflect the range of NTBs estimated across UK bilateral trade with RoW
trade partners.
55 EU-applied MFN tariffs are trade-weighted using 2014-16 UK-EU trade from TradeMap at the HS-8 level to the base
GTAP 57 sectors. Tariffs for all GTAP 57 goods sectors are subsequently weighted to the modelling sectors using
2011 GTAP data. 'UK-EU trade 2014-16', Trade Map, accessed on 20 November 2018; 'EU applied MFN tariffs'
Macmap, accessed on 20 November 2018; 'GTAP 57 2011', GTAP, accessed on 20 November 2018.
56 Aggregated to 'Goods' and 'Services' level for presentational purposes, see Technical Reference Paper.
57 Costs are primarily assigned to goods sectors. Where new customs procedures affect cross-border activity in services
(e.g. e-commerce), the costs are assigned to the relevant services sector. In the modelled average FTA and EEA-type
scenarios firms must meet rules of origin, and the associated costs, to be able to pay zero tariffs. Firms may pay tariffs
rather than face these costs.
58 A sensitivity further significantly reduces NTBs with new trade deal partners (not modelled for the modelled White
Paper and modelled EEA-type scenarios).
26 EU Exit: Long-term economic analysis
59 The regional results from the preliminary Cross-Whitehall Analysis published by the Exiting the EU Select Committee
(March 2018) were provisional and reflected an early stage in the analysis. The modelling has been developed to
better capture interregional linkages through supply chains, resulting in less variation between regions and nations
than in March. However, the results in this publication no longer capture the impact of migration and are therefore not
directly comparable with the preliminary estimates from March.
EU Exit: Long-term economic analysis 27
will not capture these factors. This analysis does not factor in the impact of changes in
migration.
73. While this analysis considers Northern Ireland, it does not capture any short-term changes and
does not account for specific factors relating to the border, including in the long-term.
2.4.2 Migration
74. The analysis considers migration implications from leaving the EU, including the economic and
fiscal impacts of ending free movement and determining an independent long-term migration
arrangements in line with the UK's national interest.
75. The Migration Advisory Committee has published a comprehensive assessment of the role of
EU migration in the UK economy. 60 This presented a range of evidence examining where EU
nationals are working, contributing to UK economic output, generating tax revenues, and
consuming goods and services. The report also considered how migrants affect productivity and
innovation.
76. The analysis set out in this publication estimates the potential economic impacts of illustrative
changes in net inflows of EEA workers. These include changes in the UK's population and
workforce in the long run, which are then reflected in changes in GDP and GDP per capita.
77. The results consider expected changes to migration flows that might be driven by both changes
to migration arrangements and changes to the wider economy affecting migrants' decisions to
come to the UK. This analysis therefore shows two illustrative migration variants.
Scenarios
78. Free movement will end as the UK leaves the EU. The Government will be setting out its
proposals for future migration arrangements in due course. This analysis therefore shows two
illustrative variants for migration arrangements. This is represented as a range between no
change to migration arrangements and zero net inflows of EEA workers. These scenarios
illustrate a very wide range of impacts. While no change to migration arrangements is modelled,
this is not reflective of government policy. The zero net inflows of EEA workers is a stylised
variant and illustrative only.
79. The modelled migration scenarios are the same under each trade scenario, reflecting the fact
that the UK will set migration arrangements independently, with the exception of the modelled
EEA type arrangement, where free movement of people is assumed.
Approach
80. The impacts of changes in migration arrangements have been considered over a 15 year
period, in order to be as consistent as possible with the Government's trade analysis.
81. The Government's migration analysis first establishes the potential future flows of EEA workers
independent of any policy changes. This analysis draws upon evidence of the relationship
between migration and its economic and demographic drivers.
82. The future flow of EEA workers is then adjusted to account for changes in the economy as a
result of different trade arrangements. Any trade impact on the economy would be expected to
itself affect migration flows, influencing EEA workers' decisions to come to the UK for work –
independent of any change to the UK's migration arrangements.
60 'EEA migration in the UK: final report', Migration Advisory Committee, September 2018.
28 EU Exit: Long-term economic analysis
83. Changes to migration flows from migration arrangements decisions, using the illustrative policy
changes on EEA workers, are then estimated.
Limitations
84. This migration analysis draws upon a wide range of evidence on the labour market and
demographic characteristics of migrants. However, estimating future levels of migration is
difficult. Migration trends are the result of a range of factors affecting any individual decision to
migrate, such as economic and demographic conditions in the home country of any individual
migrant, economic conditions in the UK, or in other potential migration destinations. The
migration modelling does not account for changes in migrant behaviour or labour market
adjustments in response to any policy changes.
justified, identifying the specific sectors and markets where government policy can add
most value.
108. These supply side or 'microeconomic' policies are complemented by a 'macroeconomic' policy
framework designed to deliver a stable and growing economy, low and stable inflation and
sound public finances.
109. The analysis does not make judgements about future economic policy and no assumptions are
made on the impacts of any future policy, including on seeking to realise any wider opportunities
from exit beyond the illustrative new trade partnerships explicitly modelled with the rest of the
world.
63 These trends have been selected for illustrative purposes only, and do not represent a complete assessment of global
trade trends.
64 Gross trade refers to gross exports. 'World investment report', UNCTAD World Investment Report, 2013.
65 'International Trade and Balance of Payments, Trade in Value Added', based on internal calculations using 2011 data,
OECD, December 2016.
66 'GDP output approach - low-level aggregates', ONS, September 2018.
67 'Employee Jobs by Industry', ONS, June 2018; 'Self-employment Jobs by Industry', ONS, June 2018. Average of 2017
quarterly figures.
68 'The Emerging Middle Class in Developing Countries', OECD, January 2010.
32 EU Exit: Long-term economic analysis
Given the inherent uncertainty around these global trends, the analysis in this publication
does not attempt to forecast how these trends might evolve over time. Some studies point
to the scale of potential impacts. The IMF provide forecasts for trade growth which imply
that the UK trade share with the EU can be expected to marginally increase over their
forecast horizon, due to high expected trade growth in the EU. 70 The OECD provide long-
term projections for global GDP growth, which can similarly be used to inform the
assessment of how UK trade shares with different countries might evolve. 71 This data
projects an increase in the GDP of middle income countries relative to high income
countries. Applying these OECD long-term projections to the base data and the time
horizon used in the Government's analysis, and making no changes for other long-term
trends which would be expected to affect UK trade, would indicate only a small difference to
the estimated trade impacts modelled in the Government's analysis. Over the long term, as
incomes rise in these economies, and as they become more open to trade, the composition
of both their supply of and demand for products and services with the rest of the global
economy will change, affecting the pattern of global trade.
d. Technological advancement: New technologies continue to transform the way ideas and
information are communicated. Globally, the UK was ranked as the fourth most innovative
economy in the world in 2018, 72 reflecting its market sophistication, creative outputs and
infrastructure. The UK also continues to be Europe's top hub for international technology
investors, with a record level of venture capital investment (£3 billion) in its technology
sector in 2017 - almost double that seen in 2016 73 - while UK digital firms have seen their
international trade grow by more than 20 per cent. 74 The UK's ability to stay at the forefront
of innovation will impact on both what is traded and how it is traded, and the overall
performance of the UK economy.
69 'The Unprecedented Expansion of the Global Middle Class: An Update', OECD, February 2017.
70 Based on trade import and export volume growth from the IMF, 'World Economic Outlook', October 2018.
71 'GDP long-term forecast', OECD, July 2018.
72 'Global Innovation Index 2018', Cornell University, INSEAD, World Intellectual Property Organisation, 2018.
73 'Record Year for London and UK Tech investment', London & Partners, January 2018.
74 'DCMS Sectors Economic Estimates 2016: Trade', Department for Digital, Culture, Media and Sport, August 2016.
EU Exit: Long-term economic analysis 33
75 Sector definitions have been purposely defined as mutually exclusive groups using 2 digit Standard Industrial
Classification (SIC) codes in order to present sectoral assessments and outputs of the macroeconomic modelling in a
clear and consistent way. These bespoke definitions and corresponding statistics presented may therefore not align
with other government publications.
76 'UK GDP(O) low level aggregates', ONS, September 2018.
77 'UK GDP(O) low level aggregates', ONS, September 2018.
78 'UK Economic Accounts: all data', ONS, September 2018.
34 EU Exit: Long-term economic analysis
Table 3.1: Mapping of the five sector groups into the eleven modelled sectors.
Other manufacturing
Construction
Other services
114. For each sector group, this section sets out: descriptive statistics showing the sector group's
size, including trade flows, and the potential new trade barriers and possible associated trade
costs faced in the modelled scenarios.
115. Data and digital issues are incorporated into estimates for sector groups, with specific
considerations for each also described separately.
3.2 UK Sectors
116. The following paragraphs set out the Government's analysis of potential changes to trade costs
for each of the five sector groups in the context of the current economic output and trade flows.
Table 3.2: Summary of key estimates of changes to trade costs for manufactured goods compared to today's
arrangements.
88 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in non-tariff barriers between the modelled White Paper
scenario and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent
on this range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and
does not represent an expected outcome. Ranges are not estimated for the NTB sensitivity.
89 The range of total trade costs is the sum of tariffs and non-tariff barrier costs, where point estimates for tariffs are
combined with a range of non-tariff barrier estimates. Figures may not sum due to rounding.
90 The estimates provided are central estimates of the ranges given in brackets. All ranges are calculated using statistical
distributions from econometrics.
91 EU applied MFN tariffs are trade-weighted using 2014-16 UK-EU trade data from TradeMap at the HS-8 level to the
base GTAP 57 sectors. Tariffs for all GTAP 57 goods sectors are subsequently weighted to the modelling sectors
using 2011 GTAP data. 'UK-EU trade 2014-16', Trade Map, accessed on 20 November 2018; 'EU applied MFN tariffs'
Macmap, accessed on 20 November 2018; 'GTAP 57 2011', GTAP, accessed on 20 November 2018.
92 'European Commission Market Access Database', European Commission, accessed 21 November 2018. HM
Government will set out its plans for the UK's MFN tariff schedule before the UK leaves the EU. These tariffs would
apply to all trade in goods in the absence of preferential trade agreements. They may differ from rates in the EU's
Common Customs Tariff. A sensitivity applying zero tariffs is considered in section 4.9.
93 'World Tariff Profiles 2018', WTO, 2018.
EU Exit: Long-term economic analysis 37
3.2.2 Agri-food
124. The UK agri-food sector group covers a range of unprocessed and processed food products, as
well as agriculture, forestry and fisheries. In 2017, the sector contributed £41 billion to UK GVA
(2 per cent of total GVA) 94 and 0.9 million jobs to the UK economy (3 per cent of total
employment). 95 The UK agri-food sector group traded £17 billion of goods and services with the
EU in 2016, 74 per cent of the sector group's trade. 96 In 2017, the fishing sector contributed £4
billion to UK GVA. 97
125. As noted in section 2.6.1 the analysis does not assess the implications of access to waters and
fishing opportunities. Although trade in fisheries products is included in the modelling, access to
waters is a separate issue where the Government has separately set out its approach to
becoming an independent coastal state.
UK-EU potential trade costs: Summary
126. The Government's analysis has considered potential impacts of changes to trade arrangements
for agri-food products across tariffs; new customs procedures; checks to ensure human, plant
and animal health; and regulatory burdens. Additionally, for sectors where trade in service
products is also important, trade barriers discussed in the services sector are also accounted
for. The estimates for the barriers in each of the scenarios are set out in Table 3.3 below. 98
Table 3.3: Summary of key estimates of changes to trade costs for agri-food compared to today's arrangements.
Modelled White Paper
Compared to today's Modelled White Paper
arrangements Modelled Modelled Modelled Modelled with 50 per cent NTB
(per cent change) no deal average FTA EEA-type White Paper sensitivity 99
New tariffs (A) +20 Zero tariffs Zero tariffs No tariffs No tariffs
New non-tariff barriers (B) +15 +13 +6 +1 +7
(+9 to +22) (+8 to +19) (+4 to +9) (+1 to +1)
Total changes to trade +35 +13 +6 +1 +7
costs (A+B) 100 (+29 to +42) (+8 to +19) (+4 to +9) (+1 to +1)
Central estimates and ranges in brackets. 101
Estimates are rounded to the nearest per cent. Owing to rounding, narrow ranges (less than one per cent variation) are
not distinguishable in the table.
102 'European Commission Market Access Database', European Commission, accessed 21 November 2018. HM
Government will set out its plans for the UK's MFN tariff schedule before the UK leaves the EU. These tariffs would
apply to all trade in goods in the absence of preferential trade agreements. They may differ from rates in the EU's
Common Customs Tariff.
40 EU Exit: Long-term economic analysis
Additional scenarios
130. In the modelled average FTA scenario, additional trade costs on UK-EU trade are estimated to
be equivalent to, on average, 8 to 19 per cent of the value of trade compared to today's
arrangements. This is because assumed new customs procedures and regulatory checks at the
border are estimated to lead to additional costs for UK businesses exporting to the EU. The
increased physical checks at the border would be most notable for plant and animal health
checks. There would be higher regulatory burdens compared to today's arrangements, as well
as RoO costs required to claim preferential tariffs, which are not required under today's
arrangements. Tariffs are assumed to be zero. 103
131. In the modelled EEA-type scenario, additional trade costs on UK-EU trade are estimated to be
equivalent to, on average, 4 to 9 per cent of the value of trade than under today's arrangements.
This is because, as with manufactured goods, there would be additional barriers associated with
new customs procedures arising from customs administration costs. There would also be costs
as businesses would need to comply with RoO requirements for UK businesses so they can
access preferential tariff rates. Tariffs are assumed to be zero. 104
3.2.3 Services
132. The services sector group includes heavily traded sectors such as business services, 105 as well
as sectors with lower trade flows, including construction, or public administration, defence,
education and health services.
133. In 2017, the services sector group made up the majority of the UK economy, contributing £1.1
trillion to UK GVA (60 per cent of UK GVA) 106 and 28 million jobs (80 per cent of UK jobs). 107
The UK traded a total of £265 billion in services with the EU in 2016, 52 per cent of the sector
group's trade. 108 The UK has particular strengths in business services, for example,
hosting global headquarters of four of the world's top ten law firms, and six of the world's top ten
accountancy firms. 109 Although considered in separate sections, many of the channels of impact
identified will also affect financial and network services in the same way.
UK-EU potential trade costs: Summary
134. The Government's analysis has considered potential impacts of changes to trade arrangements
for services including: restrictions on temporary mobility for business purposes; possible new
restrictions on investment and cross-border services activity for UK firms; regulatory burdens
resulting from the loss of a framework for the recognition of professional qualifications; and
restrictions on the exchange of personal data. Additionally, for sectors where trade in goods
103 Historically such tariffs have been difficult to eliminate in FTAs so a sensitivity with EU applied MFN tariffs has also
been modelled.
104 This includes zero tariffs on agri-food products. Agri-food is excluded from current EEA arrangements so additional
sensitivity analysis considers the impact of assigning EU applied MFN tariffs to agri-food sectors in section 4.9.
105 Financial services is covered in section 3.2.4. Networks services are covered in section 3.2.5.
106 'UK GDP(O) low level aggregates', 2016 data, ONS, August 2018. The 2016 data are used for consistency across all
sector groups.
107 'Employee Jobs by Industry', 2017 data, ONS, June 2018. The 2016 data are used for consistency across all sector
groups.
108 'Trade in goods and services by industry, experimental estimates', ONS, October 2018. For consistency with the
macroeconomic modelling results the trade statistics presented are on a sector rather than a product basis. Therefore,
headline figures may not align with other HM Government publications that are on a product basis. Sector definition
does not exactly align due to disclosure.
109 'Networks: Fee data', page 4, International Accounting Bulletin, February 2017. By fee income.
EU Exit: Long-term economic analysis 41
products is also important, trade barriers discussed in the manufactured goods section are
relevant. The estimates for the barriers in each of the scenarios are set out in Table 3.4 below:
Table 3.4: Summary of key estimates of changes to trade costs for services compared to today's arrangements.
New tariffs (A) Zero tariffs Zero tariffs Zero tariffs No tariffs No tariffs
110 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome. Ranges are not estimated for the NTB sensitivity.
111 The range of total trade costs is the sum of tariffs and NTB costs, where point estimates for tariffs are combined with a
range of NTB estimates. Figures may not sum due to rounding.
112 The estimates provided are central estimates of the ranges given in brackets. All ranges are calculated using statistical
distributions from econometrics.
113 Arrangements on the exchange and protection of personal data between the UK and the EU will sit alongside the
future economic relationship, but would affect the UK economy. This impact is captured in the modelling.
42 EU Exit: Long-term economic analysis
125 'Passporting', Bank of England, accessed 13 November 2018. Passporting: “A firm authorised in an EEA state can
carry on activities that it has permission for in its home state and any other EEA state by either establishing a branch
or agents in an EEA state or providing cross-border services. This is known as 'passporting'.”
126 Arrangements on the exchange and protection of personal data between the UK and the EU will sit alongside the FEP
but would impact on the UK economy. This impact is captured in the modelling.
EU Exit: Long-term economic analysis 45
3.2.5 Networks
147. The network sector group, which includes energy and transport services, provides vital
connectivity within the UK and beyond. Energy and transport services are key enablers for both
businesses and consumers. In 2017, it contributed 8 per cent to the UK economy (£140 billion
in GVA)128 and 1.9 million jobs. 129 The UK traded a total of £68 billion with the EU in 2016 in
networks, 49 per cent of the sector group's total trade. 130 In 2017, transport networks also
facilitated 55 million visits from the UK to the EU, with UK residents spending £27 billion. 131
127 Arrangements on the exchange and protection of personal data between the UK and the EU will sit alongside the FEP
but would impact on the UK economy. This impact is captured in the modelling.
128 'UK GDP(O) low level aggregates', ONS, September 2018.
129 'Employee Jobs by Industry', ONS, Sept 2018 ; 'Self-employment Jobs by Industry', ONS, September 2018.
130 'Geographical breakdown of the current account, The Pink Book', ONS, July 2018. Statistics for trade in networks are
currently not published on an industry basis with a sufficient level of coverage to aggregate up to our defined sectors.
These trade statistics have therefore been produced on a product or type of service basis. The values of trade
therefore reflect the value of trade in networks products not the value of trade for the networks sector. In addition
statistics are not available that exactly align with the sector definitions used in this report. Here networks include
'Transport' and 'Travel'.
131 'Travel trends estimates: UK residents' visits overseas', Table 5.01, ONS, August 2018.
46 EU Exit: Long-term economic analysis
132 Sensitivity analysis highlights the impact on trade costs if the NTBs are higher than estimated in the Government's
modelled White Paper scenario. The central estimate for a sensitivity point, reflecting 50 per cent of the difference in
NTBs between the modelled White Paper and modelled average FTA scenarios, is presented. Implicitly, the modelled
White Paper scenario represents zero per cent on this range, and the modelled average FTA scenario represents 100
per cent. Ranges are not estimated for the NTB sensitivity.
133 Within the networks sector, tariffs can only apply to goods trade (products traded in energy) since services trade does
not face tariffs. In the table the weighted average is taken across both goods and services for consistency with sector
definitions used across the document. More detail is provided in the Technical Reference Paper.
134 The range of total trade costs is the sum of tariffs and NTB costs, where point estimates for tariffs are combined with a
range of NTB estimates. Figures may not sum due to rounding.
135 The estimates provided are central estimates of the ranges given in brackets. All ranges are calculated using statistical
distributions from econometrics.
EU Exit: Long-term economic analysis 47
Additional scenarios
152. In the modelled average FTA scenario, additional trade costs on UK-EU trade are estimated to
be equivalent to 1 to 8 per cent of the value of trade than under today's arrangements. This is
because not all barriers to trade in energy and transport are addressed in typical FTAs. For
example, in the transport sector group, Air Services Agreements are typically dealt with on a
separate, bilateral basis. Therefore, under the modelled average FTA scenario, trade barriers
are similar to those under the no deal scenario, which may overstate any potential additional
trade costs.
153. In the modelled EEA-type scenario, additional trade costs on UK-EU trade are estimated to be
equivalent to 0 to 1 per cent of the value of trade under today's arrangements for energy and
transport businesses, reflecting the similarity with today's arrangements.
136 'Digital' is defined in this publication as 2 digit Standard Industrial Classification (SIC) codes 58-63 ('Information and
Communication') encompassing activities such as publishing, telecommunications and broadcasting. Alternative
definitions of Digital are available, notably the wider "Digital Sector" definition used by Department for Digital, Culture,
Media and Sport (DCMS) (see 'DCMS Sector Economic Estimates Methodology', DCMS, August 2018). Statistics
used in this publication therefore do not align with those produced by DCMS, and represent underestimates compared
to DCMS figures of "Digital Sector" GVA, trade and employment.
137 'UK GDP(O) low level aggregates', ONS, Sept 2018.
138 'Employee Jobs by Industry', ONS, Sept 2018;'Self-employment Jobs by Industry', ONS, Sept 2018.
139 'Trade in goods and services by industry, experimental estimates', ONS, October 2018.
48 EU Exit: Long-term economic analysis
Data
The UK's data economy was estimated to be worth around £65 billion in 2016, 140 with external
analysis predicting that data will benefit the UK economy by up to £241 billion between 2015 and
2020. 141 Individuals and organisations across the private, public and charity sectors increasingly
depend on the use and exchange of personal and non-personal data, including across borders.
The modelled White Paper scenario assumes no new trade costs on UK-EU in data compared to
today's arrangements. This is because free flows of personal and non-personal data would be
maintained, and continue to be underpinned by strong data protection standards and cooperation
between data protection authorities. The modelled White Paper assumes data adequacy has been
granted by the EU.
The modelled EEA-type scenario assumes no new trade costs in data compared to today's
arrangements. This is because EEA states benefit from the free flow of personal data and regulatory
cooperation across the EEA.
The nature of the economic analysis of trade costs for the modelled no deal scenario and the
modelled average FTA scenario means that “average” arrangements on data between countries are
reflected in the modelled cost estimates. These scenarios do not fully capture the impacts of data
adequacy decisions and therefore do not represent specific estimates of the likely outcome faced by
the UK in these scenarios.
140 'The Data Economy Report 2018', Digital Realty, 2018; and 'HMRC Exchange rates for 2018: monthly', HMRC,
October 2018 (Note: November exchange rate has been published).
141 'The Value of Big Data and the Internet of Things to the UK Economy' page 6, CEBR and SAS, February 2016.
EU Exit: Long-term economic analysis 49
Table 4.1: Summary of impacts on GDP and GDP per capita, compared to today's arrangements, for the
illustrative no change to migration arrangements and zero net inflows of EEA workers. 142
trade barriers such as a fall in tariffs with trading partners, reduce the price of UK exports and
imports, which would be expected to incentivise businesses to trade more and enable
consumers to purchase more goods from abroad. Conversely, higher trade barriers between
countries would be expected to raise the cost of exports and imports and incentivise a focus on
the domestic market.
157. The analysis estimates that new trade barriers between the UK and the EU would be expected
to result in lower UK-EU trade volumes in the long run, compared to today's arrangements (see
Table 4.2). The impact on sectors is higher for those where the share of EU trade compared to
total trade is higher.
158. The analysis shows that UK trade with the EU in terms of trade volumes is highly sensitive to
the addition of new NTB and tariff costs. This reflects closely integrated supply chains and price
sensitivities in traded goods and services. There could also be some domestic substitution
including on-shoring of some supply chains. Estimates show businesses would also shift some
of their trade to other markets where barriers become relatively lower, with trade with non-EU
partners replacing some of the lost trade with the EU.
Table 4.2: Summary of UK-EU trade volume impacts compared to today's arrangements.
145 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome. Ranges are not estimated for the NTB sensitivity.
146 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
EU Exit: Long-term economic analysis 53
164. The impact on UK-EU trade volumes is substantially smaller in the modelled White Paper
scenario than in the modelled no deal scenario, reflecting lower trade barriers with the EU. At
the same time, the increase in trade with the rest of the world is somewhat smaller than in the
147 Sensitivity analysis highlights the impact on GDP if the NTBs are higher than estimated in the modelled White Paper
scenario. A sensitivity point is measured reflecting 50 per cent of the difference in NTBs between the modelled White
Paper and modelled average FTA scenarios. Implicitly, the modelled White Paper scenario represents zero per cent
on this range, and the modelled average FTA scenario represents 100 per cent.
148 Ranges are not modelled for the differences between scenarios, or for the 50 per cent NTB sensitivity.
54 EU Exit: Long-term economic analysis
modelled no deal scenario as the incentive to shift trade to non-EU markets is lower. Overall,
the impact on total UK trade is considerably smaller in the White Paper scenario.
149 The assumption of fixed population in the model implies that GDP per capita impacts of trade-related effects are the
same as GDP impacts.
150 Sensitivity analysis highlights the impact on GDP and real wages if the NTBs are higher than estimated in the
Government's modelled White Paper scenario. The central estimate for a sensitivity point, reflecting 50 per cent of the
difference in NTBs between the modelled White Paper and modelled average FTA scenarios, is presented. Implicitly,
the modelled White Paper scenario represents zero per cent on this range, and the modelled average FTA scenario
represents 100 per cent. Ranges are not estimated for the NTB sensitivity.
151 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
EU Exit: Long-term economic analysis 55
Figure 4.3: Summary of trade only impacts on GDP compared to today's arrangements.
152 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
56 EU Exit: Long-term economic analysis
Figure 4.4: Summary of trade only impacts on aggregate real wages compared to today's arrangements.
153 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
EU Exit: Long-term economic analysis 57
154 Sensitivity analysis highlights the impact on GDP if the NTBs are higher than estimated in the modelled White Paper
scenario. A sensitivity point is measured reflecting 50 per cent of the difference in NTBs between the modelled White
Paper and modelled average FTA scenarios. Implicitly, the modelled White Paper scenario represents zero per cent
on this range, and the modelled average FTA scenario represents 100 per cent.
58 EU Exit: Long-term economic analysis
Table 4.6: Summary of trade only impacts on sector group economic activity compared to today's arrangements.
155 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome.
156 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
process, which draws several thousand input values from their full distributions.
EU Exit: Long-term economic analysis 59
Figure 4.5: Summary of trade only impacts on UK sectors, compared to today's arrangements
157 The ranges around these results are set out in the Technical Reference Paper. All ranges have been generated by a
Monte Carlo statistical process, which draws several thousand input values from their full distributions.
158 GDP (gross domestic product) and GVA (gross value-added) are closely related concepts. They differ by taxes and
subsidies, which can be difficult to robustly attribute to a particular sector.
159 'UK GDP(O) low level aggregates', ONS, September 2018.
60 EU Exit: Long-term economic analysis
NTB and tariffs. In particular, within manufactured goods, heavily traded sectors such as
chemicals, pharmaceuticals, rubber and plastics and motor vehicles and parts are estimated to
see the largest reduction in economic activity.
Agriculture modelling
The modelling results suggest that the agri-food sector is particularly affected across the scenarios.
However, other analysis has looked at the agriculture sector at a more disaggregated and detailed
level, allowing for consideration of the complex and variable tariff structure in the agri-food sector. 160
These approaches generally find the sector would benefit from higher tariffs, with domestic producers
benefitting (given the UK is a net-importer of agri-food products), though this may result in higher
prices for consumers. These results generally derive from models which consider the direct impact on
the sector but do not tend to account, as macroeconomic models do, for changes in demand from the
rest of the economy – which can be lower when the overall size of the economy falls (though this
effect is likely to be limited in this sector given low levels of substitution away from food
consumption). This difference in results between modelling approaches is unlikely to significantly
affect the overall economy-wide modelling estimates given the size of the agriculture sector.
179. The financial services and services sector groups, representing 80 per cent of economic
production, 161 are also estimated to see lower economic activity compared to today's
arrangements; 162 however, the impact is smaller than manufactured goods and agri-food. The
service sector is more domestically focused in its economic activity, leading to a smaller
estimated effect from the rising trade barriers.
180. Although the direct impact of new barriers is estimated to be lower, services are purchased by
many other sectors of the economy, including those within the manufactured goods sector
group. The modelling captures this indirect impact of the demand for services falling from other
sectors of the economy alongside the direct impact from new barriers to trade.
181. Economic activity in the networks sector group, 8 per cent of economic production 163, is also
estimated to be lower.
Analysis of modelled White Paper scenario
182. The modelled White Paper scenario is estimated to result in lower economic activity than under
today's arrangement in most sector groups.
183. In a number of sectors, the range indicates a small positive impact compared to today's
arrangements is possible. However, outcomes at each end-point of the range are less likely to
occur than central estimates. In manufactured goods, a positive impact is possible as a result
of low trade barriers with the EU combined with additional opportunities outside of the EU in
trading more with the rest of world. It is however important to note that the central estimate for
economic activity is lower relative to today's arrangements.
184. The networks sector group (which includes energy) is also estimated to see a small impact
across the range of modelled scenarios compared to today's arrangements, despite higher
160 For example 'EU – UK agricultural trade: state of play and possible impacts of Brexit', European Parliament, Policy
Department for Structural and Cohesion Policies, October 2017; 'Impacts of Alternative Post-Brexit Trade Agreements
on UK Agriculture: Sector Analyses using the FAPRI-UK Model', Agri-Food and Biosciences Institute, August 2017.
161 'UK GDP(O) low level aggregates', ONS, September 2018.
162 Please note that the statistics for services trade has higher uncertainty around it than goods trade given the difficulty in
estimating flows. Please see Technical Reference Paper, sections 5 and 7 for further information.
163 Please note that the statistics for services trade has higher uncertainty around it than goods trade given the difficulty in
estimating flows. Please see Technical Reference Paper, sections 5 and 7 for further information.
EU Exit: Long-term economic analysis 61
trade barriers. As the products supplied by the networks sector are important inputs into most
sectors, businesses are less able to substitute to lower cost alternatives. As a result, demand
does not change substantially in response to changes in costs, leading to a small change in
sector economic output.
185. Services and financial services sector groups are estimated to see a small negative impact
on output in the modelled White Paper scenario. While the sector group see a comparatively
large increase in NTBs with the EU, this impact reflects the importance of domestic demand and
their supply of services to goods sectors, which are impacted less significantly.
186. The sensitivity run on the modelled White Paper scenario demonstrates the additional negative
impacts as NTBs rise towards those in the average FTA scenario. The NTBs rise more in
manufactured goods than in services, leading to an increase in barriers to sectors that trade the
most with the EU.
Analysis of other scenarios
187. The modelled average FTA scenario results in lower economic activity across all sector
groups compared to today's arrangements, particularly in chemicals, pharmaceuticals, rubber
and plastics.
188. The modelled EEA-type scenario results in lower economic activity across most sector groups
compared to today's arrangements. Goods sectors see the largest negative impact driven by
customs costs.
Comparison to modelled no deal scenario
189. Table 4.7 sets out comparisons between the modelled White Paper and modelled average FTA
scenarios, and the modelled no deal scenario.
Table 4.7: Summary of trade only impacts on sector groups compared to the modelled no deal scenario
164 Sensitivity analysis highlights the impact on GDP if the NTBs are higher than estimated in the modelled White Paper
scenario. A sensitivity point is measured reflecting 50 per cent of the difference in NTBs between the modelled White
Paper and modelled average FTA scenarios. Implicitly, the modelled White Paper scenario represents zero per cent
on this range, and the modelled average FTA scenario represents 100 per cent.
62 EU Exit: Long-term economic analysis
165 The analysis uses Nomenclature of Territorial Units for Statistics (NUTS) 1 classifications to capture national and
English regional impacts.
166 The regional estimates from the preliminary Cross-Whitehall Analysis published by the Exiting the EU Select
Committee (March 2018) were provisional and reflected an early stage in the analysis. The model has been developed
to better capture interregional linkages through supply chains, resulting in less variation between regions and nations.
However, the regional analysis in this publication does not factor in the impact of changes in migration and is therefore
not directly comparable with the preliminary estimates in March.
EU Exit: Long-term economic analysis 63
Figure 4.6: Summary of trade policy impacts on UK nations and English regions compared to today's
arrangements.
167 The ranges around these results are set out in the Technical Reference Paper.
64 EU Exit: Long-term economic analysis
activity is estimated for London, since it is relatively more specialised in business services and
financial services that are relatively less affected in the modelled no deal scenario.
Analysis of modelled White Paper scenario
197. The Government's White Paper scenario is estimated to result in moderately lower economic
output for Scotland, Wales and Northern Ireland, compared to today's arrangements. Wales and
Scotland have a relatively larger specialisation in energy which is estimated to perform relatively
well, and therefore experience a relatively smaller impact.
198. Within England, London, is estimated to be most affected in the modelled White Paper scenario,
followed by the South East, although impacts are still small relative to other scenarios. This is
driven by the larger increase in trade costs in financial services and business services relative to
good sectors compared to today's arrangements.
199. For the sensitivity run on the modelled White Paper scenario, the higher NTBs increase the
estimated regional impacts relative to today’s arrangements. This does not include migration or
regulatory flexibility effects.
Analysis of other scenarios
200. In the modelled average FTA scenario, all nations and regions of England are estimated to
have lower economic output compared to today's arrangements. In the modelled EEA-type
scenario, economic activity is also lower than today's arrangements.
Comparison to modelled no deal scenario
201. Table 4.8 sets out comparisons between the modelled White Paper and modelled average FTA
scenarios, and the modelled no deal scenario.
Table 4.8: Summary of trade policy impacts on UK nations and English regions compared to the modelled no
deal scenario.
Modelled White Paper
Compared to modelled no deal Modelled White Paper
(percentage point difference in Modelled with 50 per cent NTB Modelled
GVA) White Paper sensitivity 168 average FTA
North East +10.1 +8.4 +4.0
North West +8.9 +7.2 +3.6
Yorkshire and the Humber +8.2 +6.5 +3.2
East Midlands +8.2 +6.6 +3.4
West Midlands +9.2 +7.5 +3.9
East of England +8.0 +6.3 +3.1
London +5.0 +3.5 +2.0
South East +7.1 +5.7 +2.8
South West +7.2 +5.7 +2.9
Wales +8.1 +6.4 +3.2
Scotland +8.0 +6.0 +3.1
Northern Ireland +8.9 +7.2 +3.5
168 Sensitivity analysis highlights the impact on GDP if the NTBs are higher than estimated in the modelled White Paper
scenario. A sensitivity point is measured reflecting 50 per cent of the difference in NTBs between the modelled White
Paper and modelled average FTA scenarios. Implicitly, the modelled White Paper scenario represents zero per cent
on this range, and the modelled average FTA scenario represents 100 per cent.
EU Exit: Long-term economic analysis 65
Table 4.9: Summary of additional GDP, population and per capita GDP impacts of illustrative migration scenarios
compared to today's arrangements.
207. The illustrative migration scenario of zero net inflows of EEA workers leads to the same total
reduction in labour supply across all scenarios, and hence to the same impact on GDP and
GDP per capita. The EEA type scenario would see continued free movement. Under no change
to migration arrangements, the impact on GDP is driven by migration flows impacted by the size
of the economy, which are assumed to be lower when the economy is smaller. This impact is
greatest in the modelled no deal and average FTA scenarios.
169 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome.
EU Exit: Long-term economic analysis 67
209. In addition, the illustrative 0.1 percentage point economic benefit of greater flexibility over UK
regulations discussed in section 2 is included in all modelled scenarios with the exception of the
modelled EEA-type scenario.
210. The combined impact on GDP and GDP per capita is summarised in Table 4.10.
Table 4.10: Summary of overall GDP and GDP per capita impacts of combined trade, migration and regulation
effects compared to today's arrangements, for the illustrative no change to migration arrangements and zero net
inflows of EEA workers scenarios. 170
170 The estimates provided are central estimates of the ranges given in brackets. All ranges have been generated by a
Monte Carlo statistical process, which draws several thousand input values from their full distributions.
171 Sensitivity analysis highlights the impact on GDP if NTBs are higher than estimated in the modelled White Paper
scenario. The sensitivity reflects 50 per cent of the difference in NTBs between the modelled White Paper scenario
and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero per cent on this
range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and does not
represent an expected outcome. Ranges are not estimated for the NTB sensitivity.
172 The combined impact on per capita GDP is the sum of per capita GDP impacts from trade and migration scenarios.
173 Analysis assumes no change to migration arrangements in a modelled EEA-type scenario.
174 Analysis assumes no change to migration arrangements in a modelled EEA-type scenario.
175 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
68 EU Exit: Long-term economic analysis
Figure 4.7: Summary of overall impact on GDP compared to today's arrangements, for the illustrative no change
to migration arrangements and the zero net inflows of EEA workers scenarios.
176 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
EU Exit: Long-term economic analysis 69
Figure 4.8: Summary of overall impact on GDP per capita compared to today's arrangements, for the illustrative
no change to migration arrangements and the zero net inflows of EEA workers scenarios.
177 The central estimates are not necessarily the midpoint of the range. All ranges have been generated by a Monte Carlo
statistical process, which draws several thousand input values from their full distributions.
70 EU Exit: Long-term economic analysis
deal and modelled White Paper scenarios when the combined impacts of trade, migration and
regulatory flexibility are considered.
215. A zero net inflows of EEA workers scenario would not apply in the modelled EEA-type
scenario as this would require continued free movement. Since the induced migration impacts
are small and there are no assumed impacts from regulatory flexibility in this scenario, the
combined impacts of trade, migration and regulation changes are estimated to be the same as
those for trade impacts only, compared with today's arrangements.
Comparison to modelled no deal scenario
216. Table 4.11 sets out comparisons between the modelled White Paper and modelled average
FTA scenarios, and the modelled no deal scenario.
Table 4.11: Summary of total impact on GDP and GDP per capita compared to the modelled no deal scenario, for
the illustrative no changes to migration arrangements and the zero net inflows of EEA workers scenarios.
178 Sensitivity analysis highlights the impact on GDP if non-tariff barriers are higher than estimated in the modelled White
Paper scenario. The sensitivity reflects 50 per cent of the difference in non-tariff barriers between the modelled White
Paper and modelled average FTA scenarios. Implicitly, the modelled White Paper scenario represents zero per cent
on this range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative only and
does not represent an expected outcome.
179 Including temporary movement of people to supply a service.
EU Exit: Long-term economic analysis 71
Table 4.12: Summary of drivers of the long run aggregate GDP impact, compared to today's arrangements. 180
Modelled White Paper
Modelled White
Compared to today's Modelled Paper with 50
arrangements Modelled no deal average FTA Modelled EEA- Modelled White per cent NTB
(per cent change in GDP) scenario scenario type scenario Paper scenario sensitivity 181
Trade contribution:
Tariffs -1.4 0 0 0 0
NTBs -6.5 -5.1 -1.5 -0.9 -2.3
New trade deals +0.2 +0.1 +0.1 +0.2 +0.1
Total Trade impact -7.6 -4.9 -1.4 -0.7 -2.2
Additional regulation and migration contributions:
Regulatory flexibility +0.1 +0.1 0 +0.1 +0.1
Migration (no change to migration -0.2 -0.1 0 0 0.0
arrangements)
Migration (zero net inflows of EEA -1.8 -1.8 N/A -1.8 -1.8
workers)
Overall combined impact
UK GDP (no change to migration -7.7 -4.9 -1.4 -0.6 -2.1
arrangements) (-9.0 to -6.3) (-6.4 to -3.4) (-2.4 to -0.9) (-1.3 to -0.1)
UK GDP (zero net inflows of EEA -9.3 -6.7 N/A -2.5 -3.9
workers) (-10.7 to -8.0) (-8.1 to -5.1) (-3.1 to -1.9)
Central estimates and ranges in brackets. 182 Central estimates only presented for trade and regulatory contributions,
noting that an uncertainty range exists around these results.
Figure 4.9: Impact on public sector net borrowing compared to today’s arrangements, per cent of GDP in 2035-36
The EEA-type scenario has not been modelled with zero net inflows of EEA workers, as EEA membership requires free
movement of people. In the modelled EEA-type scenario there are future financial contributions based on Norway's
existing precedent. There are no future financial contributions assumed in the other modelled scenarios. The July White
Paper set out that the UK will make an appropriate financial contribution where the UK participates in EU programmes or
agencies, and this is open to negotiations.
The cost of the financial settlement and ODA in 2035-36 are small and not visible in the chart. The Technical Reference
Paper includes a detailed breakdown of the fiscal results.
EU Exit: Long-term economic analysis 73
Table 4.13a: Summary of impact on public sector net borrowing compared to today's arrangements, for the
illustrative no change to migration arrangements scenario.
Compared to today's
arrangements as a
percentage of GDP Modelled no deal Modelled average Modelled EEA-type Modelled White
in 2035-36) scenario FTA scenario scenario Paper scenario
Net direct impacts -0.6 -0.2 0.0 -0.2
(-£22.0bn) (-£7.0bn) (-£0.9bn) (-£7.0bn)
Net indirect impacts +2.7 +1.7 +0.5 +0.2
(+£104.2bn) (+£67.4bn) (+£19.6bn) (+£8.9bn)
Debt interest +0.3 +0.3 +0.1 0.0
(+£12.8bn) (+£11.6bn) (+£3.8bn) (-£0.5bn)
Additional borrowing +2.4 +1.8 +0.5 0.0
associated with EU exit (+£95.1bn) (+£72.0bn) (+£22.5bn) (+£1.3bn)
Central estimates only
Direct impacts include departmental spending on administration, the UK-EU financial settlement, future EU financial
contributions, spending on EU related programmes, customs revenues and EU Budget savings.
Indirect impacts include migration, NTBs, tariffs, regulatory flexibilities and rest of world trade.
Table 4.13b: Summary of impact on public sector net borrowing compared to today's arrangements, for the
illustrative zero net inflows of EEA workers scenario.
Compared to today's
arrangements (change as
a percentage of GDP in Modelled no deal Modelled average Modelled EEA-type Modelled White
2035-36) scenario FTA scenario scenario Paper scenario
Net direct impacts -0.6 -0.2 N/A -0.2
(-£21.2bn) (-£6.9bn) (-£7.0bn)
Net indirect impacts +3.2 +2.2 N/A +0.7
(+£123.4bn) (+£87.2bn) (+£29.7bn)
Debt interest +0.4 +0.4 N/A +0.1
(+£16.9bn) (+£15.7bn) (+£3.8bn)
Additional borrowing +3.1 +2.4 +0.6
associated with EU exit (+£119.1bn) (+£95.9bn) N/A (+£26.6bn)
Central estimates only.
Direct impacts include departmental spending on administration, the UK-EU financial settlement, future EU financial
contributions, spending on EU related programmes, customs revenues and EU Budget savings.
Indirect impacts include migration, NTBs, tariffs, regulatory flexibilities and rest of world trade.
savings of 0.6 per cent of GDP (£21.2 to 22.0 billion). There are additional debt interest costs of
0.3 to 0.4 per cent of GDP (£12.8 to 16.9 billion).
Analysis of the modelled White Paper scenario
223. In the modelled White Paper scenario, borrowing is estimated to be 0.03 per cent of GDP (£1.3
billion) higher in 2035-36 compared to today's arrangements assuming no change to migration
arrangements. Under the assumption of zero net inflows of EEA workers, the borrowing impact
is estimated to be 0.6 per cent of GDP (£26.6 billion). In both variants of the modelled White
Paper scenario, the net indirect fiscal costs due to a reduction in the size of the economy, 0.2 to
0.7 per cent of GDP (£8.9 to 29.7 billion), outweigh net direct fiscal savings of 0.2 per cent of
GDP (£7.0 billion).
224. The long-term borrowing impact of the modelled White Paper scenario is 2.4 per cent of GDP
(£93.7 billion) lower compared to the modelled no deal scenario in 2035-36 assuming no
change to migration arrangements. The borrowing impact is 2.5 per cent of GDP (£92.5 billion)
lower under the assumption of zero net inflows of EEA workers. The main driver of higher
borrowing in the modelled no deal scenario comes from the impact of NTBs and tariffs which
lead to a larger reduction in the size of the economy and tax receipts in the long run. These
negative indirect fiscal impacts outweigh the greater net direct fiscal savings estimated in the
modelled no deal scenario.
Analysis of other scenarios
225. In the modelled average FTA scenario, there is additional borrowing of 1.8 per cent of GDP
(£72.0 billion) in 2035-36 compared to today's arrangements assuming no change to migration
arrangements. Under the assumption of zero net inflows of EEA workers, additional borrowing
is 2.4 per cent of GDP (£95.9 billion). The additional borrowing impact in the modelled average
FTA scenario is higher compared to the modelled White Paper. This primarily reflects higher
indirect fiscal effects due to higher NTBs, which lead to a larger long-term reduction in the size
of the economy.
226. In the modelled EEA-type scenario, there is additional borrowing of 0.5 per cent of GDP
(£22.5 billion) in 2035-36 compared to today’s arrangements. Net direct fiscal savings are lower
in the modelled EEA-type scenario, reflecting an assumption that there are future financial
contributions to the EU based on Norway's existing precedent. There is no precedent for
estimating any financial contributions under the modelled White Paper scenario. The July White
Paper set out that the UK will make an appropriate financial contribution where the UK
participates in EU programmes or agencies, and this is open to negotiations. Under the no
change in migration arrangements variant, indirect fiscal costs are higher in the modelled
EEA-type scenario due to the economic effects of customs barriers. However, these are more
than offset by the indirect fiscal cost of restricting inflows of EEA workers in the alternative
migration variant of the modelled White Paper scenario.
Comparison to modelled no deal scenario
227. Table 4.14 sets out comparisons between the modelled White Paper and modelled average
FTA scenarios, and the modelled no deal scenario.
EU Exit: Long-term economic analysis 75
Table 4.14: Summary of impact on public sector net borrowing compared to the modelled no deal scenario, for
the illustrative no change to migration arrangements and the zero net inflows of EEA workers scenarios.
Compared to today's
arrangements (change as
a percentage of GDP in Modelled average Modelled White
2035-36) Modelled no deal FTA Modelled EEA-type Paper
Low +1.8 +1.1 +0.4 -0.1
(+£72.0bn) (+£46.0bn) (+£15.8bn) (-£5.9bn)
Central +2.4 +1.8 +0.5 0.0
(+£95.1bn) (+£72.0bn) (+£22.5bn) (£1.3bn)
High +3.1 +2.4 +0.9 +0.3
(+£117.8bn) (+£94.6bn) (+£37.4bn) (+£12.5bn)
Table 4.15b: Summary of impact on public sector net borrowing compared to today's arrangements, for the
illustrative zero net inflows of EEA workers scenario.
Compared to today's
arrangements (change as
a percentage of GDP in Modelled average Modelled White
2035-36) Modelled no deal FTA Modelled EEA-type Paper
Low +2.5 +1.8 N/A +0.5
(+£96.4bn) (+£70.4bn) (+£19.3bn)
Central +3.1 +2.4 N/A +0.6
(+£119.1bn) (+£95.9bn) (+£26.6bn)
184 Sensitivity analysis highlights the impact on GDP if the NTBs are higher than estimated in the modelled White Paper
scenario. A sensitivity point is measured reflecting 50 per cent of the difference in NTBs between the modelled White
Paper and modelled average FTA scenarios. Implicitly, the modelled White Paper scenario represents zero per cent
on this range, and the modelled average FTA scenario represents 100 per cent.
76 EU Exit: Long-term economic analysis
Compared to today's
arrangements (change as
a percentage of GDP in Modelled average Modelled White
2035-36) Modelled no deal FTA Modelled EEA-type Paper
High +3.8 +3.0 N/A +0.9
(+£141.5bn) (+£118.0bn) (+£37.5bn)
185 Sensitivity analysis highlights the impact on GDP non-tariff barriers are higher than estimated in the modelled White
Paper scenario. The sensitivity reflects 50 per cent of the difference in non-tariff barriers between the modelled White
Paper scenario and modelled average FTA scenario. Implicitly, the modelled White Paper scenario represents zero
per cent on this range, and the modelled average FTA scenario represents 100 per cent. This midpoint is illustrative
only and does not represent an expected outcome.
EU Exit: Long-term economic analysis 77
231. Figure 4.10 illustrates the impact of varying the modelling assumption on business investment,
as well as of varying some of the tariff and NTB assumptions. The sensitivity analysis considers
the following:
a. Business investment: It is possible to extend the Government's macroeconomic model to
capture how business investment responds to changes in trade policy. In this extension, a
change in trade policy means the insertion of EU-UK trade barriers; therefore a change in
trade policy resulting in lower productivity is associated with lower returns to capital and
78 EU Exit: Long-term economic analysis
lower incentives to invest. This leads to a lower aggregate business capital stock and in
turn, lower productivity and output. Including these business investment effects amplifies
the effects of trade policy on GDP, particularly in the modelled no deal, in which estimated
GDP would be a further 2.3 percentage points lower than in the modelled base scenarios.
In the modelled White Paper scenario the central GDP impact would be a further 0.1
percentage points lower, while in the modelled average FTA and modelled EEA-type
scenarios estimated GDP would be an additional 1.2 and 0.2 percentage points lower than
the base case respectively. External evidence reviewed in the Technical Reference Paper
suggests that the impact of trade policy on investment and capital accumulation can be
substantial, even when taking into account these transition effects. Nonetheless investment
has been modelled here as a sensitivity rather than in the core modelling, as it represents
an upper bound of the long-term impact on investment in this model.
b. Agri-food tariffs: Given that many trade agreements do not eliminate agri-food tariffs, this
set of sensitivities considers the impact of agri-food tariffs remaining at EU MFN levels for
new rest of world trade deal partners across all modelled scenarios, except the modelled
White Paper scenario, as well as for the EU in the modelled average FTA and modelled
EEA-type scenarios. The higher tariffs would generally lead to a downward effect on
economy-wide GDP. This lowers estimated GDP in the modelled average FTA scenario by
0.4 percentage points, and in the modelled EEA-type scenario by 0.9 percentage points.
c. High ambition rest of world trade deals: In addition to the ambitious set of new deals
included in each policy scenario, a sensitivity is considered which further reduces non-tariff
barriers with potential rest of world trade deal partners. The sensitivity illustrates a doubling
in the reduction in NTBs with rest of world trade deal partners, relative to the estimates in
the modelled base scenarios. The additional reduction of NTBs, when compared to the NTB
reductions with the EU in the modelled average FTA, could be seen as large. This
sensitivity is applied to the no deal and FTA scenarios, as elements of the modelled White
Paper or the modelled EEA-type scenario could constrain the UK's ability to further reduce
NTBs beyond the base scenario. This additional reduction in NTBs is estimated to result in
higher GDP of 0.2 percentage points in the no deal and modelled average FTA scenarios
compared to the modelled base scenarios.
d. Unilateral tariff liberalisation: In this sensitivity all UK import tariffs and associated Rules
of Origin costs are set to zero for all countries in the world in a modelled no deal scenario.
This is estimated to partly offset the GDP reduction (by +0.8 percentage points) in the
modelled no deal scenario. 186 The long-term effects are modelled here purely to illustrate
the potential benefits, and to enable a comparison to external literature which estimates the
impact of unilateral liberalisation scenarios.
186 A study by Oxford Economics looks at a broader set of policies including unilateral tariff liberalisation, tax cuts,
deregulation and some changes to migration arrangements, and finds somewhat larger GDP gains. Some studies
(Open Europe, 2018 and Economists for Free Trade, 2018) which find larger gains also make assumptions about the
UK's ability to reduce NTBs unilaterally.
EU Exit: Long-term economic analysis 79
232. The Government's results lie within the ranges of estimates from external studies
considering similar scenarios. There are a number of external assessments which model
comparable scenarios to the ones modelled by the Government. External studies deploy a
range of approaches to estimating non-tariff barriers (NTBs) and gross domestic product (GDP)
impacts associated with EU exit. Few studies have sought to model the stated government
policy. 187 Most studies typically consider no deal, Free Trade Agreements (FTAs), or EEA-type
scenarios. The Government’s modelled precedent scenario estimates are within the range of
estimates from external analyses.
187 'How much would a 'White Paper Brexit' cost the UK economy?', National Institute of Economic of Social Research,
August 2018.
188 A study by the Economists for Free Trade ('Alternative brexit economic analysis: assessing the economic impact of
Brexit', 2018) is one of the few to use a different methodology. The study attempts to estimate directly the changed
cost arising from NTBs rather than use trade data to infer these. It assumes that there would be no increase in the
NTBs with the EU, and do consider the potential for lowering NTBs with the rest of the world.
189 'Brexit – an economy-wide Impact Assessment looking into trade, immigration, and Foreign Direct Investment',
University of Bonn, June 2017. This paper assumes half of the NTBs that EU membership eliminated will be
reintroduced in a no deal scenario.
190 'Selected Issues: Britain', IMF, 2018. The study by CEPII could be interpreted as leading to goods NTBs consistent
with 21 per cent AVE but further calculations are required.
191 'Brexit – an economy-wide Impact Assessment looking into trade, immigration, and Foreign Direct Investment',
University of Bonn, June 2017. See footnote 114 for a description of the methodology.
192 'Brexit through the lens of new quantitative trade theory', CESifo, 2018.
193 See section 2.7 in the Technical Reference Paper for a more detailed summary of external estimates of NTBs.
194 Studies which do not separate NTBs from tariff costs find that costs in goods could be larger than this range.
195 Goods are defined as the manufactured goods and agri-food meta-sectors, as well as the energy component of the
networks meta-sector. Services include financial services and other services meta-sectors, alongside the services
components of the networks meta-sector.
80 EU Exit: Long-term economic analysis
235. Differences in NTB estimates are largely driven by the varying data sources, assumptions and
methodology used. Nevertheless, external studies provide a range of credible estimates and
literature against which to compare the Government's analysis.
196 These studies and the assumptions driving their results are discussed in section 6 of the Technical Reference Paper.
197 'Costs and benefits of a United Kingdom exit from the European Union', Global Economic Dynamics, April 2015.
198 'Assessing the economic impact of Brexit', Rabobank, October 2017.
199 Studies included in the 'static' category are, broadly defined, macroeconomic modelling or based on a dynamic model
such as NiGEM with the key dynamic effects turned off. Studies include macroeconomic modelling and reduced form
representations ('New Trade Models, Same Old Gains?', American Economic Review, 2012) as well as new
quantitative trade modelling (NQTM) approaches.
200 'Costs and benefits of a United Kingdom exit from the European Union', Global Economic Dynamics, April 2015.
201 'After Brexit: Alternate forms of Brexit and their implications for the United Kingdom, the European Union and the
United States', RAND Corporation, 2017.
202 'Brexit – an economy-wide Impact Assessment looking into trade, immigration, and Foreign Direct Investment',
University of Bonn, June 2017.
203 'Assessing the economic impact of Brexit', Rabobank, October 2017.
EU Exit: Long-term economic analysis 81
Figure 5.1: Summary of total impacts on GDP from external trade modelling compared to Government analysis.
The Government estimates relate to the GDP impacts from trade only.
240. Many of these same studies also analyse the impacts of moving to an FTA scenario. These
studies find a long-term effect on GDP that ranges from -0.6 per cent 204 to -12.5 per cent 205,
which is broadly consistent with the Government's findings of -3.4 to –6.4 per cent 206. Some of
this range can be explained by the fact that different studies make different assumptions about
the scope of the modelled average FTA and its implications for the UK economy. For example,
some model an FTA similar in scope to EU-Korea 207, others do so in line with the terms of the
European Free Trade Association (EFTA) 208, while some consider an average over a larger
group of FTAs.
204 'Costs and benefits of a United Kingdom exit from the European Union', Global Economic Dynamics, April 2015.
205 'Assessing the economic impact of Brexit', Rabobank, October 2017.
206 This range reflects only the impact of changed trade costs.
207 'Brexit through the lens of new quantitative trade theory', CES-ifo, March 2018.
208 The dynamic estimates in 'The costs and benefits of leaving the EU: Trade effects', Centre for Economic Performance,
April 2017.
82 EU Exit: Long-term economic analysis
241. Fewer studies model the GDP impact of moving to an EEA-type scenario. Those that do find
central estimates that range from -1.3 per cent 209 to -10.0 per cent, 210 which is broadly
consistent with the Government's estimates of -0.9 to -2.3 per cent. 211 One reason for the wide
range is the difficulty in estimating EEA trade costs based on precedents. 212
209 'The costs and benefits of leaving the EU: Trade effects', Centre for Economic Performance, April 2017.
210 'The costs and benefits of leaving the EU: Trade effects', Centre for Economic Performance, April 2017.
211 This range reflects only the impact of changed trade costs.
212 The non-EU EEA members are Norway, Iceland and Liechtenstein.
EU Exit: Long-term economic analysis 83
Glossary of Terms
EEA European Economic Area
FF Future Framework