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Summary

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Research Questions

  1. What are the economic effects to the UK, EU and U.S. from the different post-Brexit trade scenarios?
  2. What are the key factors that could affect the outcome of Brexit negotiations between the UK and EU?
  3. What is the likely impact of Brexit on U.S. interests in the UK and Europe?

Whether Brexit is judged to be success or not will depend to some degree on its economic impact. Much of the debate in the UK around Brexit has been focused on a 'hard' or 'soft Brexit', which relates to whether the UK should leave the Single Market and the Customs Union. However, there are a range of different trade opportunities and arrangements that could happen between the UK and European Union (EU), and other countries, such as the U.S., post-Brexit.

The chosen trade arrangement will largely depend on the UK's negotiations with the EU. This will involve a complex set of talks between both parties involving multiple issues. The Brexit negotiations appear to be particularly challenging for the UK, as it attempts to disentangle its current ties with the EU, while also negotiating arrangements for a future UK–EU trading relationship.

RAND explored eight plausible post-Brexit trade scenarios involving the UK, EU and U.S. after Brexit. Game theory insights were also used to create a better understanding of how a variety of factors might affect the outcome of Brexit negotiations.

The UK is likely to be economically worse-off outside of the EU under most plausible scenarios, particularly if the UK leaves the EU with no trade deal. It is in the UK's best interests to achieve some sort of open trading and investment relationship post-Brexit. The most beneficial trade scenario would be a trilateral UK-EU-US agreement, but this is seen as very unlikely in the current political environment.

Key Findings

  • The economic analysis shows that the UK will be economically worse-off outside of the EU under most plausible scenarios. The key question for the UK is how much worse-off it will be post-Brexit.
  • The option of leaving the EU with no deal and entering World Trade Organization (WTO) rules would lead to the greatest economic losses for the UK. This would reduce future GDP by around five per cent over ten years, which is a loss of $140 billion.
  • Under WTO rules, the EU would also lose out economically, but nowhere near the same proportion as the UK — about 0.7 per cent of its overall GDP, which is $97 billion.
  • Of all the scenarios analysed, the one that would have the most benefit would be a trilateral UK-EU-U.S. agreement, essentially a TTIP-like free-trade agreement. However, this is seen as very unlikely in the current political environment.
  • The U.S. will miss the influence and global perspective that the UK brings to the EU decision-making process, particularly around foreign policy, security and defence.
  • It will be important for the UK to move into a 'positive-sum game' in Brexit negotiations to ensure the best possible deal for all parties. Although the EU is likely to cooperate with the UK, it may see greater benefit in adopting a 'negative sum game'.
  • Overall, it is in the best interests of the UK, and to a lesser extent the EU, to work together to achieve some sort of trade deal post-Brexit.

Table of Contents

  • Chapter One

    Background to Brexit

  • Chapter Two

    Issues for negotiation

  • Chapter Three

    Examining Brexit negotiations: priorities of the various parties

  • Chapter Four

    Examining Brexit negotiations: implications from game theory

  • Chapter Five

    Estimating the economic effects of Brexit

  • Chapter Six

    US interests

  • Chapter Seven

    Conclusions

  • Appendix A

    EU27 country groupings

  • Appendix B

    Game theory examples

  • Appendix C

    Non-tariff costs over time

  • Appendix D

    Changes in trade flows

  • Appendix E

    Free trade agreements and foreign direct investment

  • Appendix F

    The effect of Brexit on FDI

  • Appendix G

    Foreign direct investment and economic growth

This project is a RAND Venture. Funding was provided by gifts from RAND supporters and income from operations. The research was conducted by RAND Europe in association with the International Security and Defense Policy Center within the RAND National Defense Research Institute.

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