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Wrestling with the issue of Brexit: the economic arguments for and against Britain’s membership of the EU

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OVER a month remains until the thorny issue of Britain’s membership of the European Union is decided, but the rhetoric from both sides increases in decibels every day. By the time 23 June rolls round the debate will reach a cacophony.

By denouncing the Out Campaign’s post-Brexit Atlantacist trade dream as just that, President Obama added an unequivocal international tone to the growing din. Britain, he said, would end up at the ‘back of the queue’ in trying to secure a trade deal with the US if it were to leave the EU. Critics have suggested that Obama was either speaking with the voice of Number 10 by the use of the word queue – Americans use the word line – or because of some anti-imperialist motivation, ignited by his Kenyan ancestry, or simply that he is a ‘lame duck’ president who will play no role in future trade negotiations.

Regardless, so far neither of the campaigns for remaining or exiting the EU has been able to make a compelling case for why the UK would be economically stronger if their respective choice is taken. Here is a summary for the key economic arguments for and against Britain’s membership of the EU.

The effect on trade

Recent Treasury data has found that Britain’s trade with EU free trade agreement (FTA) nations, the EU and the European Economic Area (EEA) is valued at £637bn, leading pro-EU group Britain: Stronger In Europe to claim that direct EU-UK trade is worth £247bn.

Those in the Remain camp note that the EU is the UK’s main trading partner, worth more than £400bn a year, or 52% of the total trade in goods and services. Thus, as a share of exports Britain is more dependent on the rest of the EU than vice versa. Indeed, they argue that the UK would still have to apply EU rules to retain access to the single market, while complete withdrawal from the EU would see trade barriers erected with companies facing import and export tariffs.

The Leave campaigners argue that Brexit would free UK companies from the burden of EU regulation, while trade with EU members would continue because of the balance of imports and exports between the UK and Europe, while Britain would be able to negotiate its own trade deals with other countries.

Treasury graph on EU trade

The effect on tax

The UK tax implications of Brexit are difficult to predict, not least because the terms of any future exit are, as yet, unclear.

However, we can say that unless the UK enters into comparable arrangements with other EU member states exiting the EU, it could mean that UK companies cease to be able to benefit from tax advantages currently available as a result of the EU’s fundamental freedoms – for example, those provided by the Parent-Subsidiary directive, the Merger directive and the Capital Duty directive.

Although in some cases, it could provide certain benefits. A UK government unconstrained by EU state aid rules and fundamental freedoms could provide UK businesses with more favourable tax treatment than that provided to other businesses.

The effect on jobs

According to a paper buy the Institute of Economic Affairs, the worst case scenario would be a failure to negotiate a free trade deal in the case of Brexit. If this were the case, both parties would be bound by the World Trade Organization’s ‘most favoured nation’ (MFN) tariffs paid by other developed countries. This would prevent the imposition of punitive tariffs by the EU following the UK’s exit, meaning job losses would not be significant.

“Jobs are associated with trade, not membership of a political union, and there is little evidence to suggest that trade would substantially fall between British businesses and European consumers in the event the UK was outside the EU,” the IEA said.

Remain campaigners, like the CBI, claim millions of jobs would be lost as global manufacturers moved to lower-cost EU countries. According to a report commissioned by the CBI, leaving the European Union would cause a serious shock to the UK economy that could lead to 950,000 job losses and leave the average household £3,700 worse off by 2020, a report commissioned by the CBI business lobby group has warned.

The effect on the economy

In the short-term, much will depend on the reaction of the markets and the nature of the trade agreements a post-EU Britain would be able to negotiate.

The Treasury view – and hence the view of the Remain camp – is that an EU exit would decrease the size of the economy to the extent that it equated to £4,300 per household. Similarly, the stark prediction the CBI’s director-general Carolyn Fairbairn is making alongside research from PwC, suggesting the shock of a British exit could cut economic output between 3% and 5.4% in 2020, dependant on the quality of deals Britain manages to negotiate with its trading partners.

The best-case scenario, according to think tank Open Europe, is that the UK would be better off by 1.6% of GDP a year by 2030. That is assuming the UK carried out widespread deregulation after its exit and managed to strike favourable trade deals. Some economists are even more optimistic, with eight “Economists for Brexit”, which includes Roger Bootle, suggesting the UK economy would be about 4% bigger 10 years after leaving the European Union than if it stayed in, according to a group of leading economists who support an exit.

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