EU Exit Analysis Cross Whitehall Briefing January 2018 House of Commons Exiting the European Union Committee Official - Market Sensitive - Draft Analytical Thinking with eC CIC CyRAF R SIONA\ House of Commons Exiting the Context ss European Union Committes je of analysis will support Robust analysis will inform decision making on potential end states and support negotiations to deliver on the Florence speech. Economic analysis is a key tool, deployed al alongside wider policy anata 16 essen options and trade-offs. + Results for different scenarios’ re. wage ttion aN but provide) useful indicators of the broad range of potential outcomes: + HMG’s new analysis'provides ¢ ‘an evidence-based rameter to consider upsides and downsides of scenarios overall. and by sector, and supports development of policies i in responses, + Analysis is made more\difficult by the lack of precedents for bot both the individual elements and overall deal we are seeking to agree with the EU, as'Set out in n the he lorence speechsW ch are We have to necessarily simplify our assumptions. + Excessive weight should not:be given to)single-point estimates, given uncertainties, ranges of opinion on assumptions, global and sector trends ahd a variety of potential end states. + Instead, we highlight'the key factors likely to impact UK economieipetformance and use the analysis to explore Sata and sensitivities around these When\comparing options. Itis useful to consider what analysis government may ne need at different points in the process and what information is likely to be public (from UK’and EU side). + This needs to balance negotiating requirements’and tactics, increasing expectations about sharing analysis, and need to preserve Confidentiality: Careful handling will be crucial. * While this negotiation is unprecedented for the EU as well, the Commission will almost certainly take a very analytical approach to negotiations, including likely publication of analysis (as is routine for all FTAs). This summary presentation sets out the overarching principles underpinning the analysis, the distinct building blocks of the work and some emerging initial results. ERR ar wane)2. The Analytical Challenge ‘Our challeng House of Commons Exiting European Union. Commi We need to base our exit negotiations and Preparations on the best possible evidence and analysis. Analysing the potential impact of different exit scenarios is an unprecedented challenge. Pinel Tol ML OTN ee ae at Analysis can nevertheless play a role in Wine taclia) supporting decisions + Economies anyway face an unusually uncertain path: + Ongoing adjustment fromifinancial crisis; + New technologies and sectors; + Next phases of globalisaton. + The exact nature of any futuré exit'scenario is difficult to predict. + Uncertainty around'the impaet and timing of any given policy.scenafio,is compounded by no precedent of leaving/a major trading blocks Using’a variety of analytical tools will, in aggregate, provide a"directional picturé of overall impacts across different partnershipsmodelsy We seek to identify the main,factofs which materially impact outcomes between end state options: Exploring the key assumptions driving estimates and the uncertainties around these; Approaching these assumptions through multiple methodologies; Actively testing these assumptions against the full range of external views. There is no single model or analysis which can provide a definitive assessment of all potential outcomes, but economic analysis nevertheless provides us with the best available evidence base on which to draw a “broad” directional picture (and illustrate the importance of key uncertainties). NR EW ascotitt i House of Commons ¢ © Freest possible trade for goods and services between the UK afid the EU's member states © New balance of rights and obligations, with consequences'for market acdess © Zero tariff trade.in a and minimise barriers toltrade in gests and services oes Qhcont trade acy. Contfoliover UK borders Control over domestic laws nd regulation ° Clas 5 © _End)to CJEU jurisdictionand a stfong and appropriate disp solution mechanism 2% Not in Single MarketionGuistoms Union © Not EEA — Wouldjmean accepting rules over whi6h little influence and no vote © Not Ganada FTA “not €noigh mutual market access Dereon CoM mee 9" Unique starting point - convergenceiitrust, shared values and ambition Cee ELT] ® Shared commitment to high regulatory,standards, Bet earn) Support prosperity for EU and UK citizens © {Committed to avoiding’a hard land border between Northern Ireland and Ireland Dec erik) ©” Underpinnedity high standards ered © And a practical approach,to,regulation This would form an unprecedented, comprehensive and ambitious economic partnership. * To that end, it is difficult to assess the economic impacts at this stage. + We therefore position this model against a range of existing EU trade arrangements, where the economic outcome of a preferred model should seek upside from new trade deals and UK regulatory optimisation compared to these existing ‘EEA’ and ‘standard FTA’ precedents.z nm ee = House of Commons Exiting the 4. Scenario definitions underpinning analysis Europagn Union Commit Status Quo “EEA” as proxy Autraive ton itigh Access estimates: more — = economic impact ‘Straightforward to vests qo — ode! et “Average FTA” as proxy (Low Access “Smooth” No Deal (ro) Simpiied “book snd" "Strict tabour mobility ‘in the New Customs Partnership, there would fikely be no.castoms NTBs_ ?Potential for non-EU trade deals wil depend on the nature of the agreement but in the modeling of the EEA-type ‘scenario — as in the FTA and WTO scenarios — we assume we have material potential to ste new trade deals,i ROVISIONAL RESULTS. - OFFICIAL - SENSITIVE House of Commons Exiting the 5. Core drivers of economic change European Union Committee There are four broad (inter-related) driversof economic effects, from Awariced ®. consider how the exit: Overall economy reacts 2 dynamically to these impacts, + Reduced EU market access may prévent, or increase the costs of; including ag knock-on and hence reduce our trade with the EU due'to; impaetsion FDI. + Non-Tariff Barriets (atand behind the border). Me myer ‘we assess as the most material factor We also we it to consid * Tariffs (if present in any ney FEN FTA) ve Sank “'sectofalpdistributional and consumer impacts and are .. also prioritising the variation in regional impact across the + Regulatory and other domestic policy ovtiisevon could UK. improve competitiveness, + Trade with non-EU courtries wou hired via new tage deals Wider global and technolo, * Migrationycould change as a result Ketlrstetroment renin have impacts - policy . Le independent of EU exit. the transitional pathwa or consider | NCS ee LeU Ne a RaO R l House of Commoris Exiting the a P é Jnion Com 6. Broad building blocks of exit analysis EETOpaeT v0R Cori A number of k Neue ea en Coenen e partnership represent the most critical assumptions Top-down NTB CTE a Li) Coco cl CST eno CeCe SUES Cr ec EEE aioe a RECO Ciuc omuiil OCS Use trade statistics Analytical case Application Ability to flex Analysis of the potential to estimate NTB silidies'of highly —_,of "Standard" \..uK policy benefits from: “costs” of different = impacted sectors, tariffs’ where fewer Greater scope to trade deals, a using “order of (mostly zero —_constraifits Conclude ambitious adjusting for other caitraton/ _Magnittde” where FTA) trade deals e.g. US, fact .g. distance °°"""@"°"__apprBach Australia and New aciokse Gedistan Zealand (or other trade blocs) + Opportunities for regulatory optimisation Computable General Equilibrium (CGE) Model takes key assumptions and attempts to estimate the long run effect on the economy. They capture interactions between sectors and types of economic activity.DRAF T PROVISIONAL RESULTS 7. Key considerations in economic modelling of scenarios mptions reflect comprehensive analysis, but we recognise the spectrum of opinion and significant uncertainty A number of key assumptions,afS Feltvey zs straightforward: + Tariff rates are well understood. + Basic elements of new trade deals can be modellet straightforwardly. But: * NTB costs are very hard to estimate: + ‘Top down” estimatesiti8ing, among other tools “gravity” type estimates, don’t nécessarily reflect the partnership We seék of the future mix of olgpaP Ao * Estimating regulatory opportunities isparttaty trade * “Bottom-up”estimates generally undg splay, potential impacts ¢ difficult. ey Hou > of Commons Exiting the OFFICIAL — SENSITIVE Unior r 1 Union Cor nitolol = Lac ori) Models which then combine these assumptions are sophisticated, but necessarily simplify how the economy might adjust “CGE models" (nofluse¥pre-referendum) allow a much __smore sophisticated analysis of overall economic 2 ‘adjusters They provide: “yee®¥"A clear picture of the Ukveconomyratia sectoral level and accounts for the'interactions between sectors. Estimates of macroeconomic (GDP* wages etc), j sectoralandiemployment Variables. + Away tolmodal bespoke policy scenarios once _ defined. G et " ao can capture all of the dynamic economic “effects. + Estimates are long term; different modelling required for shorter term adjustments. + Other effects, such as the changing nature of global trade towards digital and services, are not captured so need to be assessed separately,8. Difference in modelling eee from HMG pre- There are two main modelling FT PROVIS Ai —SENSITIVE House of Commons Exiting the European Union Commit referendum analysis LRESULTS: OF Vie) CGE model that al The HMT pre-referendum long-run analysis use € thewidely. \dopted ote Ir a approach to determine the long-term economic effect: three alternative existing relation central estimates were within a ayange externa stimates — erg. 0EC D ASE NIESR. Since the referendum we hi Government, including't ~ + s-Whitehall ne * a1 available framework mengrey g-run Ce analyse: Z, To generate sector NB into the 2. lel We level. S41, expanded tical too! bea al trade model — a CGE model ~ the best ‘e scenariosThe model allows us to A Trade and migration scenario’ ame ate * 140 countries ane 5 57 sectors ee The effect of miti ctions w trade deals\and deregulation. Estimation a other variables €1g. sectoral GVA, Ve BYmrentgexporis and wages 0 bie gravity modelling at a sector er » “> We can then translate e CGE model’ VJ WTO scenario 2p + EU tariffs ras are an ave! . This Id increase first order export costs by around £500 Mono ould be additional maha barriers set out above. ey,DRAFT PROVISIONAL RESULTS OFFICIAL — SENSITIVE nels of one : F Bia uropean Unior 21. Sector narrative — Professional and Business services (PBS) LITT ce fola Mol ate oX-SRe Maem Colmes t TIN rele might be introduced The PBS sector includes legal services, accountancy, audit/”advertising, architecture, Itar recruitment, and other administrative services. EEA-type scenario + Using EEA asa precedent} ie Nir |- additional barrie! FTA-type scenario . ¢ + Existing FTAs such as CETA do not removi ae individual restrictions, services trade. For legal services, col ial’pre: for example, this includes EU nationality ani sence requirements for sérvicé provision in some Member States. a" mn localisation, requirir companies to store their data on the EU * There could be additional re servers. WTO scenari 3 + Additional state restrictions on il absence of an FTA include foreign equity icesitrad restrictions, no visa waiver sche ity restrictions for business services.DRAFT PROVISIONAL RESULTS OFFICIAL — SENSITIVE House of Corrimons Exiting * 22. Sector narrative — Financial services European Union Commit. Illustration of the types of non-tariff barriers that might be introduced Financial services includes banking (retail, corporate andiinvestme ent banking), asset management, insurance and financial markets infrastructure. EEA-type scenario + Using EEA as a precedent, there fi ial i 5 inancial services across eeu FTA-type scenario y* gm + Under an FTA-type scenatic ‘CETA) market ads e rei almost to th: ime extent as ina WTO scenario. These scenarios would Prohiit bi ee poole services to the EU from the UK outside of certain exemptions, for ae tl 's equivalency regi s. However, the limitations of the current equivalency regimes (wl nly available for certain areas. of EU re: ition and can be withdrawn by the EU authorities) would le “so iter ling substantial aml activity the UK to the EU. ‘ *, wt AF + Inaddition to tradewbarriers, Eleni impede thesectorias: 9) i) theresis sabskthat the undertakes;meéasures:wh ld be harmful to the UK financial sector ii)the rel6cation of EU-facing busi ss into the EU Could have knock-on implications for rest of world i currently carried outin tl ie audtotfioss of economies of scale for UK-based institutions. * Asa result of these factors, LondOn’s status afinancial centre could be severely eroded. Be WTO-type scenario * _ In addition to the above, in a strict migration scenario (an option ina WTO scenario) the sector's access to talent could be limited.DRAFT PROVISIONAL RESULTS: OFFICIAL — SENSITIVE House of Gommons E sb Nal 23. Provisional regional and national results Curopean Union Committee We can begin to consider initial estimates of how these findings differ acros: ions and nations of the UK + Geographical effects may be likely to be greater i régions nations that are i) ne sed to the change in trade barriers by nature of their export congoston eg. good barriers relative tovservi and ii) have a higher dependence on exports as a proportion of egional economy. « Our regional analysis i is still soca: it cay consider is 1-5 | ES effe istoms and the luding any “een ine ‘hat hare (which the 1) ich would be ext ern Ireland more than the rest of the UK. _ 5 0% st + Ce gg aes al -2% > 4% 6% 8% 10% “= r ' ' 12% relative to underlying output 14% -16% —@g@—___— -18%. ——_— % change in regional GVA impact estimates from status-quo North") Wales Scotland East Eastof South Yorkshire South London’ UK West Midlands England East and The West HumberDRAFT PROVISIONAL RESULTS OFFICIAL — SENSITIVE House of Commons Exiting the 24. Impact on EU Member States European Union Commit. ‘Changes to the UK and EU trading relationship would have economic implications for other member states. + A Future Economic Partnership scenario that resultsiin arket access and higherosts of trade for the UK would also have economic implications for tl and the individuakmember states. * The scale of the economic impact on individual er states will depend, among ot thi in the size, composition and importance of their current trading relationships with the UK. fimates of th impacts on member states. + Weare in the process of producitig CGE + Ahead of this, the chart s! of s that is accounted for by trade with the UK alongside theshare UK trade ab UK" Ireland | Luxembourg = | Cyprus Netherlands =omsmsfem Greece tm ‘ Germany Denmark Portugal man France Belgium < Latvia Fintand ‘ Italy | 0%) 5% - 10%15% 20% 25% 30% 35% 40% 45% 50% Proportion of total goods and services trade with the UK “Fortis Uk, thie chart dhow® the propaHI OT 0508 and services that ia wih the EL 27, Matta | sweden a | | | | |IS AL RESULTS OFFICIAL 25. Fiscal implications NSITIVE House of Commons Exiting the European Union Committee ‘Annual change in borrowing relative to status-quo in 2033-34 Borcawing Impact E(bn) (EEA type) (FTAtype) an as echoes en nae (eS Cla ae MCStlT6 ee viene arco WTO (imooth) a oe see ne — wie © atte Brome et elite eee Cush Leer tea a sa26. Stress testing and sensitising our results DCRR once ur analysis to explo: full range of factors that infl the projections { UK Modelling Capability Current Priority “4 Analyse the potential Refine NTBs and a benefits/costs of reconcile with bottom-up Tormmorey deeper EtAs regulatory change analysis Assess alternative policy scenarios and use these to rol-tal LVM b Lene] o1<}[0 (<3 ETate MANIA AATOLAAM® LO NQIBS L612) Test alternate model Assess distributional Refine regional specifications impacts impacts rs Ta Plurilateral service ey anaes | (iraeieatnontait trade liberalisation barrier liberalisation around specific model fis icine Wide Sensitivity analysis on are felt / transition parameters future global FTA trade blocs athway developments Speed at which impacts | Cee Further analysis of Further incorporation of to EU programme budgets migration policy options || FDI Commission Modelling We expect the EU to ramp up its analytical capability around UK exit, both in inputting to negotiations and where some of this is likely to reach the public domain. We need to be teady to respond to this appropriately. Race a settDRAFT PROVISIONAL RESULTS» OFFICIAL — SENSITIVE House of Commons Exiting the European Union CommitteeDRAFT OVISIONAL RESULTS OFFICIAL — SENSITIVE Annex A. differences between external analyses House of Commons Exiting the European Union Commit ea Garett Le SUR Ute -4 CaS Deregulation 7 . Australia and India (IEA) Highest Positive Approach Highest Negative Approach Unilateral reduction inNTBs + (EFT) UK able to access 20% pl cheaper importslof same —" quality (EFT) Trade feduction with EU upyto ~ 55%" (World Bank) No FDI reduttionassumed (LSE static) + @edlinesin'twardIEDI up to 45% (QECD) No wider impacts on,firm™. §\ Lower openness, R&D spend Productivity (Qpén Europe) “\y, \ and domestic compétition reduce { 1 ~ productivity and lowenUK growths rate by 40% (Rabobank), mpi air EsIng 5 FTAs and UK iSassut o ‘access to new trade deals with USA, all existing FT) (GED, PWC) China, Brazil, Russia, » No gains from deregulation (LSE, NIESR) Up to 2% GDP gain front” deregulation oe (EFT, Open Europe)» Thinking with Prelimina Key differences in approaches include estimates of. + Trade Barriers; * FDI Impacts; * Impacts on productivity; + Non-EU Trade Deals; - Deregulation. Most analysts use econometric (e.g. ‘gravity’ models) or structural (e.g. Computable General Equilibrium) models of the | economy, or a combination of the two (as we do in HMG).