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How the United Kingdom can soften the hard Brexit

Summary:
The ifo Institute in Munich has calculated how the United Kingdom can keep the negative economic consequences of a hard Brexit as small as possible: by unilaterally waiving all import duties after March 29. "That would be a very smart trick for the British government," says Gabriel Felbermayr, head of the ifo Center for International Economics. "Without British import duties, consumption in the Kingdom would fall by only 0.5 percent, much less than with a hard Brexit with import duties à la World Trade Organization (WTO). This would shrink consumption by 2.8 percent. With comprehensive free trade agreements with many countries à la Global Britain, consumption would still fall by 1.4 percent." British Prime Minister Theresa May wanted to travel to Brussels on

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The ifo Institute in Munich has calculated how the United Kingdom can keep the negative economic consequences of a hard Brexit as small as possible: by unilaterally waiving all import duties after March 29. "That would be a very smart trick for the British government," says Gabriel Felbermayr, head of the ifo Center for International Economics. "Without British import duties, consumption in the Kingdom would fall by only 0.5 percent, much less than with a hard Brexit with import duties à la World Trade Organization (WTO). This would shrink consumption by 2.8 percent. With comprehensive free trade agreements with many countries à la Global Britain, consumption would still fall by 1.4 percent." British Prime Minister Theresa May wanted to travel to Brussels on Thursday for talks with the EU.

"In the case of food in particular, WTO tariffs would lead to extreme price effects, presumably in the order of 12 to 15 percent, similar to those for cars, textiles and shoes," Felbermayr continues. "It is questionable whether this is so favourable for the British government from a domestic political point of view.“ In any case, the question is whether Great Britain is at all technically capable of implementing comprehensive customs controls on its high imports.

With a hard-but-smart strategy, the country saved itself the burden of sometimes very high new tariffs on 68 percent of its imports from the EU or from countries with free trade agreements. The political price for this would be to also have to exempt the rest of imports that do not originate from the EU or from countries with free trade agreements. This applies in particular to China and the USA. "This may create problems in some sectors, but the sudden imposition of tariffs on more than two-thirds of imports will certainly cost the British government more than waiving tariffs on less than one-third," Felbermayr said. 

Publication (in German)

  1. Felbermayr, Gabriel, "Brexit: Eine “Hard-but-Smart”–Strategie und ihre Folgen", ifo Schnelldienst 72 (04), 2019 | Details | PDF Download

Clemens Fuest
Clemens Fuest took over from Hans Werner Sinn as chairman of the IFO Institute in April 2016. He is professor at the Faculty of Economics of the University of Munich.

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