Foreign trade will not compensate for EU trade loss after Brexit, says NIESR

The National Institute of Social and Economic Research (NIESR) warned that lost trade from leaving the European Union will be hard to replace.

“It’s going to be difficult to replace lost trade from leaving the European Economic area single market with ordinary free trade agreements,” said research fellow Monique Ebell.

Another research fellow Leonard Alan Winters echoed that sentiment, saying: “The idea that we can take a 10 or 15% cut in our trade with Europe and make it up by trading with other countries is not a very plausible one.”

The long-term effects of changing over from the European economic Area (EEA) to a free trade agreement (FTA) with non-EU members will be felt particularly in services with a 61-66% reduction in trade. Ebell estimates the reduction in goods will be within the range of 35-44%.

“In terms of services trade we were unable to find any evidence that the standard free trade agreements for services are capable of generating any substantial amount of trade,” said Ebell.

Despite trade prospects being weaker outside the EU, there is some scope for growth in goods trade at 26-66% according to her findings.

The NIESR have revised their growth estimates for British gross domestic product from 1.7% to 2% in 2016 and from 1% to 1.4% in 2017 after the ONS released its 0.5% third-quarter growth results. The Confederation of Business Industry (CBI) on the other hand cut its GDP growth forecast for 2017 from 2% in May to 1.3%.

The think-tank also estimate that consumer price inflation will accelerate to around 4% in the second half of 2017 due to the 15% dive in the value of sterling since the referendum result.

Head of Macroeconomic Modelling and Forecasting at NIESR Simon Kirby said: “The depreciation of the sterling has been the most striking feature of the post-referendum economic landscape. This will pass through into consumer prices over the coming months and quarters.”

According to Kirby the rise in inflation will lead to a 0.5% drop in household incomes by 2017.

The Monetary policy committee is expected to keep interest rates stable at 0.25% until the end of Governor Mark Carney’s term in 2019. The Bank of England’s quarterly inflation report with updated forecasts for growth and inflation for the next two years will be published on Thursday.

On the plus side, sales abroad are expected to improve with the weak pound adding to the attractiveness of UK exports. The CBI echoed the positive outlook on net trade but believed an increase in import costs could offset “the competitiveness boost.”

Half of all of the UK’s trade is with the European Union, 40% in services and 56% in goods.

According to Winters, the average firm in Britain sends around 45% of its exports to the EU while an exporting firm in the EU sends merely 7% to the UK, leaving the UK with more to lose in negotiations.

With access to the free market hinging on the UK providing free movement of labour, Winters argued that access to the single market will be limited to certain sectors.

“Depending on how rigorous we are with the immigration regime that will condition how much the European Union will be prepared to give us access to something like the single market terms. But sector by sector we might be able to negotiate something pretty similar.”

He advocated for negotiations to be stretched out over longer than the two year period after Article 50 is invoked.

“We have to be serious about getting transitional arrangements. It will not be at all advantageous to the UK to rush at this and say we’ll get all this fixed within two years. We need to take the time to negotiate a sensible deal.”