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LONDON – Failing to strike a deal with the European Union on trade during Brexit talks will lower income per household by at least £1,890 a year, according to research by the London School of Economics.
A report by the LSE’s Centre for Economic Performance said that returning to World Trade Organization rules would reduce the UK’s trade with the EU by 40% over 10 years.
The effect would be equivalent to a 2.9% fall in the UK’s average income per capita, according to the study.
Report authors Swati Dinghra and Thomas Sampson write: “While it is a tautology that a sufficiently bad deal must be worse than no-deal, in practice the no-deal outcome, where the UK and EU trade under WTO terms, is the worst-case scenario for the UK economy. The economic costs of Brexit would be twice as large in the no-deal case than if the UK remains in the Single Market.”
Prime Minister Theresa May is seeking to end freedom of movement for EU citizens and pull the UK out of the single market. However, she also want to secure a favourable trade deal for Britain with the EU, a difficult negotiating position.
EU officials have repeatedly said they cannot give Britain any deal that is better than full EU membership and have said that the UK can’t have free movement of goods and capital with the EU unless it accepts free movement of people, something the May and her government are unlikely to accept.
May and Brexit Minister David Davies have said that a bad trade deal would be worse than no trade deal. They have threatened to walk away from the negotiating table with nothing once talks end in 2019 unless the EU agrees to at least some of its demands.
The LSE reports says that no deal could be more damaging than conservative estimates suggest. The projections “are based on a static trade model that does not account for the dynamic effects of trade on productivity,” the analysts said.
“Alternative ways to estimate the impact of Brexit on the UK economy suggest accounting for these dynamic effects would double or triple the costs of Brexit described in the previous paragraph.”
The UK’s trade with the EU is starting to stall already. Around 45% of European companies are seeking to replace UK suppliers with local businesses in preparation for higher international tariffs if Brexit negotiations fail, according to a survey of 2,111 supply chain managers carried out by the Chartered Institute of Procurement and Supply.