Brexit

Question 1

Withdrawal agreement between EU27 and UK Oct 2019

Answer 1

Allowed time to negotiate post-Brexit agreements to give businesses more time to adjust

However uncertainty still for businesses as deal was last minute

Question 2

Transition period 1st Feb 2020- 31 December 2020

What was it essentially

Answer 2

UK follow EU rules, just dont participate in decision making. (Also option to extend for 2 years, which UK did not want)

Question 3

So UK do not extend and leave 31 Dec 2020

Which agreement followed

Answer 3

EU-UK Trade Cooperation Agreement

Question 4

EU-UK TCA: Ireland channels (2)

Answer 4

NI ‘green channel’ - no border checks on goods into N Ireland.

Whereas goods going to Irish republic and EU go through red channel

Question 5

Main points in EU-UK TCA (5)

Answer 5

Trade (tariffs removed but not services covered)
Immigration (control own policy - now need visas for stays above 90 days)
Budget (no contributing - saves £8bn PA.. only 0.5% GDP…)
Border in Ireland
Fishing (reclaim waters to benefit UK fishermen)

Question 6

Why was UK-Republic of Ireland/EU border and issue before and still after Brexit?

Answer 6

Before Brexit: Good Friday agreement 1998 removed borders between Republic and N Ireland

After Brexit: borders imposed undermining Good Friday agreement, tensions and violence

Question 7

Main impact of Brexit that models predict

Answer 7

Slower growth

Question 8

Main consequences of Brexit we consider (3)

Answer 8

Trade
FDI
Public finances and growth

Question 9

How has Brexit impacted living standards through trade

B) what is the long run dynamic loss estimated to be

Answer 9

As UK leave the EU, contraction of trade reduces productivity (long run dynamic losses)

B) loss is 6.3-9.5% of GDP

Question 10

Post Brexit estimates compared to Covid

Answer 10

Effect on GDP slower but permanent and double the impact of COVID in the long run (change in present value of future UK GDP for Brexit -3.7%, Covid -2.1%

(since COVID was an initial sharp fall - 23% of GDP)

Question 11

What do trade flows increase with, according gravity models (2)

B) so should EU be good or not for trade for UK

Answer 11

Increase with neighbouring countries (less distance)

Size of economies (GDP)

B) good as lowers trade barriers with EU countries which are large economies, and neighbouring/close proximity

Question 12

Does UK benefit from EU in terms of trade
B) UK trade in goods with EU vs gravity model prediction

Answer 12

Yes, as less trade barriers for UK

B) UK trade in goods is 55-76% higher than gravity model predictions

Question 13

2nd main consequence of Brexit; FDI

Estimates of inward FDI into UK fall by 2026

B) value of inward FDI 2021 vs 2022

Answer 13

Estimated to fall by 22%

Lowest levels as a % of GDP since 1980s

B) 43.1bn to 22.9bn

Question 14

How can we express this fall in FDI

Answer 14

Solow growth model

Or the reverse of SEM benefits (3 diagram model)

Question 15

3rd main consequence of Brexit: public finances and growth

What was UK’s net contribution to EU budget, and how much is this as a % of GDP

Answer 15

£8bn a year , 0.5% of GDP (this is small, gains from EU outweigh the cost of it!)

The argument was to leave EU to instead fund NHS

Question 16

UK sectors potentially at risk from Brexit (3)

Answer 16

Finance - loss passporting rights i.e cannot operate across EU freely

Cars: potentially 10% tariffs, and also an issue is car inputs; 70% components from EU

Food manufacturing: potentially 20% tariffs

Question 17

Impact of Brexit on other EU states: All suffer negative effects

Who in particular

Answer 17

All suffer negative effects, esp Ireland Netherlands & Belgium

Question 18

How can we apply theory

Answer 18

Reverse integration theory (since reimposes NTBs, border checks etc, e.g no more passporting rights for finance)

BE-COMP analysis

Question 19

What were the 3 most reported important barriers

Answer 19

Additional paperwork
Change in transportation costs
Custom duties

Question 20

What were the NTBs equal to

Answer 20

An 8% tariff

(ROO 3-5%)

Question 21

Use 3 diagram BE-COMP to show post Brexit (reverse integration)

Answer 21

Right diagram - less FDI, fewer firms as less willling to engage in market since NTBs introduced deter. So shift left, since less competition, UK markup increases

Middle - price increase in home market (as does markup in right diagram)
Left diagram - AC of UK increases

Question 22

Pre-Brexit trade options (3)

Answer 22

Norway option - join EEA (soft Brexit)

Strike a FTA - this was the EU-UK TCA (close towards hard Brexit)

Leave with no deal, just WTO rules (hard Brexit)

Question 23

Norway option - joining the European Economic Area (EEA)

What countries

Answer 23

EEA (Norway, Iceland and Lichtenstein) have a deal with EU. Part of SEM but not customs union i.e can trade freely but have to go through customs checks and rules of origin to verify!)

UK did not take this deal

Question 24

Policies in EU not part of EEA: (5)

B) It would remain part of:

Answer 24

CAP
Common fisheries policy
Customs union
European monetary union
No participation in decision making - just accept acquis communautaire (laid out in C summit 1993)

3C’s and 2 others

B) Would be part of SEM i.e free movement of goods and services labour and capital

Question 25

Why is being part of SEM important and beneficial still for the EEA

Answer 25

SEM eliminates NTBs. Since globally tariffs have fallen, so NTBs more more of an issue, especially when services is 70% of EU economy, 80% of UK economy.

Question 26

That was Norway option. Now look at EU-UK TCA

What’s different

Answer 26

UK would not be in the SEM so NTBs are a hindrance

Question 27

Why did UK not wanna be part of SEM

Answer 27

Because SEM allowed free movement of people - UK didn’t want this. Wanted its own migration policy

Question 28

Most pessimistic deal: No deal , just WTO rules

3 features

Answer 28

UK sets own tariff rules under MFN rules (any tariff cut negotiated with one WTO partner should be extended to all partners)

Also UK faces EU common external tariff

Own immigration policy

Question 29

So what did EU-UK TCA actually agree with the EU

Answer 29

No tariffs on GOODS between UK and EU (given rules of origin satisfied)

But services not covered (UK is comparative advantage in services 80% UK GDP, and thus why EU wanted to restrict services with NTBs)

Question 30

What would BE-COMP diagrams of optimistic vs pessimistic Brexit look like

Answer 30

Optimistic shifts BE curve left (less firms, increase markup and price due to less competition)

But pessimistic (hard Brexit) is even less firms so even higher markup

Question 31

So what did EU-UK TCA entail summary (4)

Answer 31

UK not in SEM
No tariffs on goods, but services not included
UK can negotiate trade agreements outside of EU
UK can control immigration policy