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Brexit costs for the Netherlands arise from reduced trade

CPB Policy Brief 2016/07, 9 June 2016

A Brexit will have a relatively severe effect on the economy of the Netherlands, because the Dutch economy is more connected to the economy of the United Kingdom (UK) via trade than to that of the European Union (EU) as a whole. By 2030, the costs for the Netherlands could run up to 1.2% of GDP, or 10 billion euros. And, if we also assume innovation is trade-induced as recent examples in the literature have shown, then the Brexit-related costs of 10 billion euros could increase with another 65%.

Read the accompanying press release and the accompanying Background Document . The figures (infographics) are attached below as PDF-files.

If the majority of voters in the UK would choose to leave the EU, we assume the actual withdrawal of the UK from the EU will take two years to complete. Next to that, the UK may enter a renegotiation process for various trade agreements that will likely last a number of years. This will involve some uncertainty about the ultimate relationship between the EU and the UK, which will also affect the business community. The economic damage caused by that uncertainty will be the greatest in the short term and can already be seen in the run up to the UK referendum.

After a possible Brexit, the UK would become less attractive to foreign investors as a gateway to the EU. The EU may profit from that situation when those foreign investments are shifted from the UK to other countries within the EU. However, the more substantial losses for the UK and the EU will occur in the long term, as a result of economic adjustments caused by the increase in trade costs and the non-tariff barriers to trade (NTBs) between the UK and the EU. NTBs result from differences in technical specifications or environmental standards that traded products must meet before they are allowed to be sold within the EU.

The GDP losses in the Netherlands induced by a Brexit are sector-specific. Sectors such as ‘other transport’ and ‘transport equipment’ hardly will be affected, because they are connected more closely to the EU than to the UK. However, this does not apply to other sectors, such as ‘chemicals, plastics and rubber’, ‘electronic equipment’, ‘motor vehicles and parts’, ‘food processing industry’ and ‘metals and minerals’ (together 12% of Dutch GDP). These sectors could suffer production losses of around 5% – losses that could be reduced with 40% under a new free trade agreement.

Following a possible Brexit, the UK will have various options with respect to trade agreements with the EU. On the one hand, there will be the fallback option of the standard WTO regulations. According to such regulations, the UK will face the higher, external EU tariffs. If the UK, in addition, would decide to implement standards and regulations that deviate from those of the EU, this will create non-tariff barriers to trade.

On the other hand, it is possible to enter into a new free trade agreement that would result in a substantial reduction in trade costs. Such an agreement would circumvent trade tariffs and would set standards and regulations that would apply to both the UK and the EU. It would not be able to completely restore the current full access to the internal market, however. Should the EU and the UK reach a free trade agreement, the economic consequences of a Brexit for the Netherlands would be reduced by 20%, because one of the important elements of such an agreement would be that NTBs will increase by only 6%, instead of the 13% under WTO regulations. The other element of a free trade agreement would be the absence of trade tariffs for goods traded between the EU and the UK.

A new free trade agreement poses a dilemma for the EU. On the one hand, the EU wants to avoid the Brexit setting a precedent, or encouraging Member States to pick and choose from the different benefits and costs of EU membership. It would therefore want to increase the costs of the withdrawal as much as possible. On the other hand, this would then also lead to higher costs for the EU itself. A new trade agreement could reduce those costs for the EU– but also for the withdrawing country.

Furthermore, the Brexit-related costs are relatively low for countries in eastern and southern Europe, as they are less connected with the UK. Those countries, therefore, would benefit less from a new free trade agreement than countries such as the Netherlands, Ireland and Belgium. For this reason, it is conceivable that countries with a large economic interest in a new free trade agreement with the UK will not be able to muster the support of all EU Member States.

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