How Much Will Brexit Impact the UK’s Trading Power?

Since June 2007 India and the EU have undergone negotiations for a Free Trade Agreement. Despite some complications, there has been some consensus on issues such as rice, sugar, textiles and pharmaceuticals after 12 rounds of talks. However, any future trade agreement between EU and India will not include the United Kingdom anymore, which, on June 23rd 2016, has voted to leave the European Union. This blogpost will look at the effects of Brexit on an EU-India Free Trade Agreement and will assess whether the UK could compete with the EU for a future FTA with India, which is continuing to expand its role as a major player in global trade.

Calculating the Effects of Brexit on Britain’s Trading Power

In our recently published study “Europe and India: Relaunching a Troubled Trade Relationship” we found that within the EU, the United Kingdom would be the biggest beneficiary amongst the large member states of an EU-India Free Trade Agreement. The average UK citizen could hope to reap a gain in annual income of about USD 80. This value is substantially lower in Germany or France, where it stands at about USD 61 or USD 30 per year. Table 4 summarizes the income effects of an EU-India FTA for all parties involved and indicates that the net benefit is positive for all countries involved in the agreement.

However, any future trade agreement between the EU and India will not include the United Kingdom, which, on June 23rd 2016, has voted to leave the European Union. Consequentially a “hard” Brexit would reinstate tariffs and lead to higher costs of non-tariff barriers in the trade of the UK with Europe. The left-most column of table 6 shows that the welfare losses registered by Brexit would cost the average European (non-UK) citizen “only” about USD 68 a year, whereas the average Brit would suffer a loss of USD 858. In comparison, India would remain almost unaffected by the Brexit with USD -0.1.

With the UK being a major beneficiary of the deal, it makes sense that an FTA between India and Europe excluding the UK would be worth less than a deal that includes the UK. Table 6 shows that a deep agreement with the EU27 yields only USD 17.30 for the average Indian citizen, which is USD 4.70 less than what a deal including the UK would generate. In different words, for India, the Brexit lowers the potential gains from an FTA with the EU by 21% or more than a fifth. This is substantial and must be expected to weaken India’s interest in the undertaking. Table 6 also shows that an agreement with India without the UK can actually benefit some EU members. For example, Germany would see larger gains from the FTA if Britain is excluded. The reason for this is that it would face smaller competition from UK competitors in the Indian market, e.g., for automobiles. Other countries would lose, for example Luxembourg, which offers financial products that are complementary to those provided by Britain (e.g., depository services). Of course, this does not mean that Brexit would be beneficial in the first place for any of the countries listed in table 6 except some third countries.

Cant the UK Compete With the EU for an Indian Trade Agreement?

Quite interestingly, November 6th marks Theresa May’s first big bilateral trip abroad; a three-day visit to India where she wants to promote ties and free trade between small and medium businesses. Nevertheless, it seems unlikely that she can make some quick gains.  It would be counterintuitive for the Indian government to divert its overstretched trade negotiators to work on a bilateral trade deal with the UK after 12 rounds of somewhat successful negotiations with the EU. A trade deal with the EU offers access to a larger market than just the UK market itself. Secondly, it is very unlikely that British negotiators would be more efficient in scrapping some of the sticking points, such as India’s 150% tariff on imports of Whisky from Scotland, without EU-wide bargaining power. Lastly, one of the major problems is Britain’s ever colder shoulder towards Indians that want to study, travel or work in the UK. Linked to the Brexit referendum, it seems that Britain has become more hostile to immigrants in recent times. If negotiating with India, it would be important for the UK to not only focus on investment and trade, but also to focus on opening up their universities to Indian students for example. The US and some other European countries are already effectively recruiting high-skilled Indian migrants for the software and engineering industry, creating a win-win for both sides. For these reasons it seems unlikely that the UK would be able to compete with the EU in negotiating a FTA with India, despite the fact that a FTA in general without the UK will be less valuable for India and Europe.