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Frontier Economics have modelled the economic effects of alignment in the areas of goods and services between the UK and the EU within the UK Government’s negotiating red lines of ‘no return to the single market, customs union or freedom of movement’.
The modelling also considered the United States (US) levying tariffs on the UK and other trade partners. The modelling used a gravity model for trade, embedded in a broader economic model, belonging to a class of models sometimes described as New Quantitative Trade Models (NQTM).
Let’s align our rules with the EU on goods and services wherever it makes sense.
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Deep alignment in goods could grow UK GDP by 1-1.5%, recovering up to more than one third of the OBR’s estimated 4% hit to UK GDP as a result of Brexit.
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Deep alignment in goods and services could grow UK GDP by 1.7-2.2%, recovering around half of the OBR’s estimated 4% hit to UK GDP as a result of Brexit.
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In the event of US tariffs, closer alignment between the UK and EU helps to offset their economic impact on both the UK and EU. Deep alignment in goods more than offsets the impact on US tariffs on the UK economy. Deep alignment in goods and services reduces the impact of US tariffs on the EU economy by around a third.
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Alignment generates positive results for all regions. The Midlands and Yorkshire record the strongest positive results. In particular, deep alignment in goods regulation reduces trade costs affecting goods, and therefore has a particular benefit to regions that are intensive in goods exports.
Regulatory alignment in services, by reducing trade costs affecting services, can have a beneficial impact on goods trade, because services are inputs into goods and often play a role in reducing the transactions costs with goods trade.
For all regions, the alignment scenarios help to at least offset the effects of tariffs, and in many cases dominate them. In addition to the Midlands, we see particular strong shielding effects in the North East, Yorkshire, Scotland, Wales and Northern Ireland.