7. Option: If sense prevails

After leaving the EU, the UK would no longer be bound by the EU’s common external tariff, but, assuming WTO rules initially, could set its own MFN tariffs on imports. As a starting point, the UK may use the EU’s tariffs but it then may choose to reduce its import tariffs below EU levels to lower UK costs of exports to consumers from overseas and concomitantly make the UK more competitive.

The average tariff charged on imports to the EU is, however, just 1%, so there is limited scope for reduction. Nonetheless, this is worth considering in pounds sterling. Using a figure of £80 billion, a 1% tariff equates to £800 million. If this were reduced to 0.75% the tariff would equate to £600 million – a saving of £200 million pounds. The figure of £80 billion is not random and will be explained shortly.

The key thing for Brexit voters in this scenario is that the UK would not be bound by the four freedoms of the EU, especially the free movement of labour.

In addition, if the UK were to consider paying for access to the single market, either individually or via the EEA / EFTA, many commentators suggest that the UK, and UK firms, would find it easier, simpler and cheaper just to pay the tariffs rather than pay for single market access. Divergences between the UK and the EU may, however, cause inadvertent non-tariff barriers.

It is worth noting at this point that the current UK-EU trade deficit (goods and services) is around £80 billion for the year This equates to around 3.5 million EU jobs. If the UK faces tariffs from the EU it will undoubtedly reduce the UK's imports of EU goods and services. It is likely to result in the loss of EU jobs. EU politicians will be held to account by their populations. Right now, I would suggest that might be rather precarious.

The OECD has found that, even as a member of the Single Market, the UK’s labour and product markets are substantially less regulated and more flexible than those of other EU countries and the UK’s labour and product markets have similar levels of flexibility to those of Canada and the United States and are much less regulated than those of non-EU countries such as Norway and Switzerland. This puts the UK in a very competitive position.

Given all of the foregoing it would be in the interests of both parties to reach an agreement as soon as possible. Given what we know of the structures and of the protagonists that may be easier said than done. I would suggest therefore, that in the short run the worst of both worlds will be reached. Totting up the costs of High Court and Supreme Court trials, the referendum, short term damage due to sterling fluctuations, loss of confidence and reductions in investment are likely to mean that Brexit will result in a more expensive option for the UK than EU membership for the immediate post-Brexit future.

Given the net trade deficit with the EU and the UK’s highly flexible labour and product markets, it is likely that the long run will result in a sensible agreement that will benefit both parties. It may not achieve the savings that many Brexit voters envisaged, but it will take the UK out of freedom of movement of people. Both Brexit supporters and others support that move, with 70% of voters across the board citing free movement as a major issue. For many, any costs associated with EU withdrawal would be worth that alone. Given the UK's strong position, the future may be much brighter than that.

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