Benefits and Costs of UK Free Trade with EU

Free trade can be defined as “The movement of goods and services among nations without political or economic barriers.” Businesses partake in markets like EU due to the benefits that it gives such as trading to other countries in the EU without the trading barriers. By having a bigger market size there is higher levels of competition which leads to lower prices for consumers, moreover, businesses have more options as to where they can buy from etc. International trade enables goods and services to be traded across a country’s borders, therefore, consumers in different parts of the world can buy goods and services manufactured abroad, meaning substantial resources, as border crossing includes certain costs like taxes. A hard Brexit means that UK trades only under the rules of the world trade organisation with the EU and Theresa Mays decision in January 2017 shows that hard Brexit is more likely as she wants free trade with EU while leaving the single market (Dhingra et al., 2017). This essay will explore the benefits and costs of free trade and the possible implications if we leave the EU.

Free trade with EU is good for businesses in the UK because according to Directorate-General For Trade Of The European Union “the EU works to conclude agreements with countries around the world which break down barriers to trade, making it easier for European companies to enter markets and find new customers”. EU providing a larger market size leads to more competition for businesses as they get to trade more freely. This leads business’ into being more innovative, resulting in better quality products for the customers and can gain customer loyalty which generates more income to the businesses, this reduces the costs for consumers as well as firms won’t add any taxes onto the products since the barriers to trade were removed. However, if UK withdrew from the EU then there’s lower levels of trade and investment because the barriers increase. EU remains as the most important export marketplace for UK goods and services, but its share of total UK exports has gone down from 55% in 1999 to 45% in 2014, also UK holds at least a tenth of EU exports. Since exports decrease, businesses loose profit as it becomes expensive for other countries to purchase from them due to tariffs being added. One-way to improve this, is by joining the EEA which is a soft Brexit scenario. This would allow trade with EU without tariffs and new barriers however, the downside to this is that EEA members aren’t part of the customs union and exports from EEA member to EU has to satisfy certain rules of origin to enter EU without tariffs, as a result the trade costs increase. To conclude, right now the government sees the EEA membership as something that’s not ideal as there is no restrictions on immigration from EU. 

Secondly, free trade with EU and UK affects foreign direct investments. Since being in the EU, UK’s total FDI has grown over time and reached around £1 trillion by 2014. FDI lets firms invest in another country and is the key for economic development. About 42.6%, from January 2018 of FDI comes from EU countries (Tetlow and Stojanovic, 2018). With the help of free trade agreements, the restrictions to invest are removed. When there’s large amounts of regulations in starting a business abroad it prevents investments. If UK wants to invest in another country, it could benefit both country’s because knowledge can be transferred as they are able to learn certain skills that are different from UK. Moreover, the EU country that UK is investing into gets employment opportunities as more labour is required to produce the goods and services which increases productivity as more workers can produce more goods which leads to more profit for the company. So not only is the business benefiting from increased profit from business being successful abroad, they also gain skills and technology advantages.

However, FDI could fall in UK if Brexit happens assuming that UK unilaterally tightens controls on European Union FDI and also assuming that both economies restrict the movement of capital across the borders of each other. If the UK operates alone, tightening EU constraints on FDI, the EU Organizations have less incentives to invest in technology. Lower EU investments will then have a negative impact on UK firms. In order to fight back to this, firms in UK would have to start investing more in research and development which is expensive. So, consumption goes down and employees would have to work more so there is overall welfare loss for UK and businesses would make a loss as wage costs increase.

Thirdly, productivity is another advantage of free trade. When looking at long term economic growth productivity is highly important because being more productive leads to more output being produced by workers. This is the key when it comes to getting better living standards (Tetlow and Stojanovic, 2018). With free trade, countries are able to produce more goods while not using more resources. By expanding to other EU countries, they are able to take advantage of the larger market and technological advancements which allows them to produce goods faster therefore being more efficient and increasing productivity. Being in a larger market means economies of scale can be a big advantage when it comes to lowering costs of production. As a result, it decreases costs for businesses as they don’t have to hire more people to do work for them. However, when leaving the EU, impact on productivity happens from lower exports and FDI. As mentioned previously, UK plays a big part on exports and when there’s a reduction in UK’s exports especially in manufacturing and business services productivity is affected negatively. Foreign owned companies in UK significantly improved productivity levels as their average productivity is higher than in UK. So, after EU exit, UK would miss out on additional dynamic spill over effects from this FDI. This is backed up by statistics which show that trading with the EU on WTO terms instead of staying a as a member reduces the GDP by 2.7% in 2030 but this is considering that there isn’t an impact on productivity. However, if effect on productivity is considered then there is a 7.8% loss in output showing that overall productivity goes down. 

Migration is also related with productivity because when barriers are removed you get more inflow of workers. Migrant workers could have better skills compared to workers in the UK, this enables them to produce more altogether; and migrant workers may promote UK workers to enhance their skills, so overall productivity is higher. Therefore, leaving the EU means that less migration equates to a loss of between 0.2% and 1.6% of GDP, but this depends on how strict the migration policies are. This affects companies that use migrant workers such as agriculture which can have a huge impact as employment goes down to 350,000 and 600,000 in both FTA and WTO scenarios.

In conclusion, there is enough evidence showing Brexit has a negative impact with both FTA and WTO scenarios. When one factor such as trade is affected, it leads to a multiplier effect of other factors being affected, for example, when productivity goes down so does levels of trade and so does migration. All these combined leads to a much higher impact if we leave the EU. As mentioned above, GDP goes down to 2.7% without productivity taken to account, but once that’s considered it reaches 7.8% loss. Alongside this, migrant workers also improve productivity as they are more skilled and can get more work done, this is affected negatively if we leave the EU. Moreover, competition decreases as there is a smaller market size, so consumers won’t get the benefits of lower prices and this adds more costs to the businesses.