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Michael Hüther / Matthias Diermeier / Markos Jung / Andrew Bassilakis in Intereconomics External Publication 9. October 2018 If Nothing is Achieved: Who Pays for the Brexit?

The United Kingdom will depart from the European Union in March 2019. Numerous open questions remain about details and conditions especially with regard to post-Brexit EU-UK trade relations. In case of a negotiation failure, a "hard Brexit" could cause considerably high costs on both sides of the Channel. In the short run, companies will be charged more than 15 billion euro as tariffs. In the long run, UK-EU trade could be reduced up to 50 percent.

Who Pays for the Brexit?
Michael Hüther / Matthias Diermeier / Markos Jung / Andrew Bassilakis in Intereconomics External Publication 9. October 2018

If Nothing is Achieved: Who Pays for the Brexit?

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German Economic Institute (IW) German Economic Institute (IW)

The United Kingdom will depart from the European Union in March 2019. Numerous open questions remain about details and conditions especially with regard to post-Brexit EU-UK trade relations. In case of a negotiation failure, a "hard Brexit" could cause considerably high costs on both sides of the Channel. In the short run, companies will be charged more than 15 billion euro as tariffs. In the long run, UK-EU trade could be reduced up to 50 percent.

On 23 June 2016, the Brexit referendum gave the British electorate the choice to remain in the European Union, with its freedom of capital, goods, services and people as well as its budgetary requirements, or to leave it and redefine Britain's relationship with its former partners as well as with the rest of the world. Exactly what this new relationship between the EU and the UK will lock like is still murky. Recent cumbersome negotiations within Britain revealed little concrete strategy for the negotiations. After a hasty election failed to result in any clear Brexit mandate, Britain sought to buy additional time by declaring a presumably two-year transition period starting on 29 March 2019. However, this can only serve to give households and businesses more time to adapt, but not to prolong negotiations.

The instability and disorientation of the British negotiation position increases the risk of a hard Brexit that would cut off most ties with the EU in a more or less chaotic and sudden manner. In the newly-opened void, trade from across the Channel could be charged WTO tariffs, exposed to new non-tariff barriers (NTBs) comparable to those faced by US exporters to the EU, and cut off completely from market access for many service exporters in the British financial and legal sectors. In the face of this insecurity, businesses are starting to react and are increasingly deciding to pull out of the British market and relocate plants to the continent in order to prevent harmful frictions in their value chains.

From an economic point of view, it had always been obvious that splitting these two highly-integrated regions would create a lose-lose situation. Nevertheless, the jury is still out on who is going to pick up the tab – both on a regional and on a sectoral basis. A quick refresher on the development of trade within the EU clarifies the different interests in Anglo-Euro trade. While the EU27 prepare for the exit of one of the most important economic regions in the EU, the UK faces the loss of market access to all EU27 member states. Nevertheless, for the British, the EU market was never as vital as for export driven business models like that of Germany.

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