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The End of the Beginning

Assessing the potential economic implications of prolonged UK–EU trade policy uncertainty

by Charles P. Ries, Marco Hafner, Clement Fays, Erez Yerushalmi

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Research Questions

  1. Have there been economic implications for the UK due to Brexit uncertainty since the EU referendum?
  2. What would be the economic effects of prolonged trade policy uncertainty?

This report examines the potential economic implications of prolonged trade policy uncertainty associated with the renegotiation period between the UK and EU after Brexit. Specifically, the report focuses on the effects on UK trade and foreign direct investment.

Key Findings

  • Brexit uncertainty likely had negative economic consequences for the UK since the EU referendum in 2016.
  • It is estimated that by the end of the initially planned transition period in 2020, UK GDP could be 0.17 percentage points lower compared to the baseline where the UK is not in a renegotiation period about its future trading relation with the EU. This is the equivalent of a GDP loss of about $5.5bn.
  • If the renegotiation period lasts longer, by 2025 the estimated effect is a 0.39 percentage point lower UK GDP compared to the baseline (about $14bn).

Recommendations

  • The implications of this analysis are that even though the negotiated withdrawal agreement and accompanying transition period are due to be approved imminently, the UK will need to define and resolve its long-term relationship with the EU (and other partners) in the upcoming phase of the Brexit negotiations, weighing up the potential short-term cost of prolonged trade policy uncertainty against the potential long-term economic implications associated with the comprehensiveness of any future agreement.
  • Britain's allies, especially the United States, will also be concerned by any prolonged period of uncertainty about the UK's security and defence relationships with its neighbours.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    The UK since the vote to leave the EU

  • Chapter Three

    Estimating the macroeconomic implications of trade policy uncertainty related to the ongoing UK–EU renegotiation period

  • Chapter Four

    Conclusions — The end of the beginning

  • Appendix A

    The macroeconomic model

  • Appendix B

    GDP effects for the EU-27

Research conducted by

Funding for this research was made possible by the independent research and development provisions of RAND's contracts for the operation of its US Department of Defense federally funded research and development centres. The research was conducted by RAND Europe.

This report is part of the RAND Corporation research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.