On 28 November 2018, the Department for Exiting the European Union (DexEU) published a command paper on the long-term economic analysis of the UK’s withdrawal from the EU (the Paper), together with a number of supporting documents.
The analysis compares potential future policy scenarios against today’s arrangements, holding all other factors constant – only considering directly the impact on the economy of the UK’s withdrawal from the EU. The analysis within the Paper is derived from four scenarios:
- a no deal scenario based on an assessment of average non-tariff barriers (NTBs) between countries trading on non-preferential World Trade Organization (WTO) terms and applying EU applied Most Favoured Nation (MFN) tariffs (modelled no deal);
- the policy position set out by the Government in the July 2018 White Paper on “The future relationship between the United Kingdom and the European Union” (modelled White Paper);
- a hypothetical Free Trade Agreement (FTA), with zero tariffs, reflecting average FTA non-tariff costs such as being outside the Customs Union and standard customs arrangements with the EU, regulatory barriers and other costs (modelled average FTA); and
- an EEA-type scenario, which reflects being outside of the Customs Union and as such primarily reflects the costs of standard customs arrangements with the EU. Zero tariffs are applied (modelled EEA-type).
Financial services are addressed at 3.2.4 of the Paper. The analysis within the Paper estimates the potential impact of changes to trade arrangements for the provision of UK-EU cross-border financial services, arising from barriers to market access due to the loss of EU passporting, from restrictions on the temporary mobility of people for business purposes and from restrictions on the exchange of personal data. A table presenting the estimated impact of the aforementioned scenarios on trade costs is provided on page 43 of the Paper.
Modelled ‘no deal’ scenario
In the modelled no deal scenario, additional costs on UK-EU trade are estimated to be equivalent to, on average, 4 to 22 per cent of the value of trade compared to today’s arrangements. This is based on the following assumptions:
- barriers to market access arising from the loss of passporting would prevent UK firms from providing financial services in the EEA from UK-based subsidiaries or branches based in the EEA. The UK could seek assessments of equivalence from the EU under its third-country equivalence regimes that provide access to some areas of EU financial services markets. However, while the UK and EU will have equivalent regimes at the point of exit, there are no guarantees that equivalence decisions will be granted immediately;
- restrictions on the temporary mobility for business purposes, would also lead to higher costs. UK nationals visiting the EU for short-term business reasons may face administrative barriers or restrictions; and
- restrictions on the exchange of personal data would make data flows between the UK and EU more difficult and add administrative costs, including due to reduced cooperation between UK and EU data protection authorities.
Modelled White Paper scenario
In the modelled White Paper scenario, additional trade costs on UK-EU trade are estimated to be equivalent to 2 to 9 per cent of the value of trade compared to today’s arrangements. This is based on the following assumptions:
- barriers to market access arising from the loss of passporting would restrict the ability of UK financial services firms to provide services in the EEA from UK-based subsidiaries or branches based in the EEA. The modelled White Paper assumes that the UK will receive positive equivalence decisions under existing equivalence frameworks, at least six months before exit. It also assumes that the autonomous equivalence frameworks will be supplemented with close cooperation;
- restrictions on temporary mobility for business purposes would be minimised through a reciprocal framework for mobility, allowing for short notice, short term business visits between the UK and EU. This framework for mobility would not impact on the Government’s ability to set its future migration arrangements in the national interest; and
- the free flow of personal data would continue between the UK and EU, with continued strong data protection standards and cooperation between data protection authorities.
Modelled average FTA Scenario
In the modelled average FTA scenario, additional trade costs on UK-EU trade are estimated to be equivalent to 4 to 22 per cent of the value of trade compared to today’s arrangements. This is because FTAs do not typically provide meaningful market access for financial services, meaning UK firms would only rely on the mechanisms outlined in the modelled no deal scenario.
Modelled EEA-type scenario
In the modelled EEA-type scenario, additional trade costs on UK-EU trade are estimated to be around 1 per cent of the value of trade under today’s arrangements. This is because in an EEA-type scenario, UK financial services firms would continue to be able to use the EU “passport” to provide cross-border financial services across the EEA. NTBs are assumed to arise but they would be very limited and related to very specific areas of financial services activity, making it marginally more costly for firms to perform cross-border business. There could also be economic impacts arising from being aligned with EU rules.