The most open to trade is shown as CUS or Customs Union. This means that the UK, like Turkey now, would move to a customs union with the European Union. The next most open to trade is BIL or Bilateral Agreements. This means that the UK, like Switzerland now, would move to bilateral agreements with each individual member of the European Union. The least open to trade would be MFN. This means that the UK would remain outside the European Economic Area and the European Free Trade Association. This would give the UK what is called ‘Most Favoured Nation’ status. This is the position least open to trade.
Oxford economics calculate that the result of the UK being part of a Customs Union, together with a Liberal immigration policy, would see a negligible loss of GDP of 0.1% between now and 2030. Investment would actually be very slightly higher and GDP per capita would be very slightly higher. This position is shown on Chart 1 as LIB CUS.
At the other end of the scale, we have the populist policies of restricted immigration and restricted free trade. The result of this position would be to reduce GDP by 3.9% between now and 2030. This position is shown on the chart as POP MFN.
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Migration or Trade
One intriguing issue emerges from the Oxford economic analysis. What is actually more important to EU GDP: open migration or open trade?
My examination of the comparisons in Chart 1 suggests that around 62% of the beneficial effect to GDP within the EU is caused by open migration. This means that the fact that a skilled labour force can move rapidly within the EU tends to increase the potential GDP of the EU economies. This beneficial effect of open migration is much larger than the beneficial effect of open trade.
My examination suggests that only around 38% of the beneficial effect to GDP within the EU is caused by open trade. Populists are more offended by migration than they are offended by trade. This means that populists are most likely to shut down the most beneficial effect of being within the EU.
Would or could?
Let us dispose of one objection to Brexit. This is that it would place the UK in a poor bargaining position. The UK is the second largest economy in Europe. Right now Turkey has a customs union with the EU. If Turkey can negotiate a customs union, it is absurd not to believe that the UK could do so.
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Right now Switzerland has bilateral agreements with the EU. These bilateral agreements support an extremely high level of GDP per capita in Switzerland. If Switzerland can negotiate these bilateral agreements, it is absurd not to believe that the UK could do so.
Switzerland negotiated these bilateral agreements to protect its banking sector. Switzerland, like the UK, is ‘a banking system with a country attached’. The UK, like Switzerland, might wish to negotiate these bilateral agreements in order to protect its banking system. Should it do so, it would indeed become, as suggested by Lord Christopher Patten ‘like Switzerland with the bomb’.
The question is whether the UK would wish to enter into these agreements such as Switzerland has. Should the referendum on leaving the EU succeed, then it is likely that British Prime Minister David Cameron would be replaced by a more populist prime minister like Boris Johnson. A populist prime minister would tend to have a more restrictive trade policy and certainly a more restrictive immigration policy. It is this more restrictive policy of a populist regime which actually does the economic damage to the British economy.
Conclusion
The vote on whether Britain will leave the European Union appears finely balanced. The economic damage done by Brexit would be determined not by Brexit itself, but by the kind of deal that Britain does with the European Union after it leaves. Britain is the second largest economy in Europe. It is strong enough to get almost any kind of deal that it wants.
The more restrictive on trade and immigration the deal is, the greater the damage would be. The real problem is that the populists who might rule the British economy after it leaves the European Union might negotiate restrictive deals on both trade and immigration. They might manage to shoot themselves in both feet.
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