Brexit and global development

13 March 2019
Insight

With new developments in the Brexit negotiations every day, follow our experts as they provide rolling commentary on the likely economic impact on low- and middle-income countries.

Brexit protestor flags near the Palace of Westminster, London. Photo: ChiralJon (CC BY 2.0)
The economic costs of a no-deal Brexit for the poorest countries

Dirk Willem te Velde (13 March 2019)

The government forecasts large economic costs of a no-deal Brexit. The Bank of England expects a 25% devaluation in the pound and an 8% drop in GDP compared to ‘current levels’.

A no-deal Brexit will also affect poorer countries, due to the impact it could have on trade deals between the UK and low- and middle-income countries, the UK’s general import regime and through weakened UK performance. Overall, ODI estimates that the costs to the poorest countries could be as much as $60 billion (the sum of the effects discussed below) if the UK leaves the EU without a deal.

Here are three ways we believe a no-deal Brexit could significantly impact developing countries, and what the UK should be thinking about to avoid negative effects.

UK imports of goods in case of no-deal Brexit

The UK has announced it will impose zero tariffs on the majority of imports in the event of a no-deal Brexit. If this happens, countries that currently have zero tariffs for the UK could see these benefits eroded as they suddenly come into direct competition with every other country in the world.  Our figures suggest this could halve the value of tariff preferences which would cost developing countries £0.9 billion (based on 2013-2015 data using current exchange rates). In Africa, this would mean a fall in the value of preferences from £318 million ($407 million) to £181 million ($232 million).

At the same time, UK import demand would decrease due to the projected 8% drop in UK incomes and a 25% devaluation in the pound, making imports more expensive. ODI estimates the total decrease in UK goods imports from all 127 preference-receiving developing countries is worth $25.1 billion*.

UK imports of services in case of no-deal Brexit

A 25% devaluation in the pound will make holidays abroad 25% more expensive for UK residents. This could have a significant impact on overseas tourism. UK imports of tourism services from Africa are worth £1.7 billion ($2.2 billion). Overall, we estimate a drop in demand from UK tourists visiting Africa could see the continent lose as much as £792mn ($1013mn)**.

UK imports of services from non-OECD countries in 2015 amounted to $54.1 billion, including $6.8 billion from Africa. Extending the above calculations to all non-OECD countries, UK services imports would fall by $25.2 billion.

Aid and remittances in case of a no-deal Brexit

The devaluation in the pound will also affect the value of the aid the UK provides to developing countries. In 2017 this amounted to £13.9 billion, or $17.8 billion. A 25% devaluation would buy $4.4 billion fewer goods and services in developing countries. In addition, the commitment to a fixed proportion of GNI on aid means that an an 8% decrease in UK income would be matched by an 8% decrease in aid, which would amount to to $1.1 billion. Furthermore, UK remittances abroad were £9.7 billion. Again, a 25% devaluation in the pound means this amount of remittances buys fewer goods and services globally, to the tune of $3.1 billion. The combination of reduced remittances and aid would amount to $5.5 billion ($4.4 billion + $1.1 billion) less for developing countries.

While this is admittedly based on some strong assumptions, what it shows is that a no-deal Brexit could have potentially damaging consequences, not just for the UK but also for poorer countries. As the government continues its ambition for a ‘Global Britain’, these consequences need to be addressed. The uncertainty alone, created by the prospect of no deal hanging over negotiations, is having an impact on the poorest countries as they decide how best to proceed in their political and economic relationships.

*ODI's analysis assuming a price elasticity of minus one and an income elasticity of one.

** ODI's analysis assuming a price elasticity of -1.2 and an income elasticity is 2.2.

New UK tariff schedule will hit poorer countries preferences

Maximiliano Mendez-Parra (13 March 2019)

In the wake of the Commons defeat for Theresa May’s Brexit deal last night, the UK has announced a new temporary tariff schedule in the event of a no-deal Brexit. The schedule suggests that 87% of the products imported in the UK, regardless of the origin, will face a zero tariff.

This may provide a tiny relief for consumers - a quick overview suggests that the products whose tariff is reduced represent around 13% of total household expenditure in the UK* - however, the new UK tariff will have a serious effect on the value of preferences provided to poorer countries.

Many low and middle-income countries export to the UK duty free, either because they have free trade agreements (FTAs) with the EU or because they receive unilateral preferences.

The benefit they receive is the difference between what non-preferential partners, such as the US, pay and the tariff paid by those with preferences. For low and middle-income countries with preferential access, this is around £1.8 billion in savings. This represents how much developing countries save in terms of duties when exporting to the UK.

However, the new UK tariff schedule would reduce the value of this benefit to £910 million, meaning developing countries will lose half the value of their preferences as zero tariffs are extended to all.

Loss in value of preferential access to the UK (in thousands of pounds)

Graph: loss in value of preferential access to the UK (in thousands of Pounds)

Source: own elaboration based on EU Comext database.

If we look at some of the specific sectors we can see how certain countries are going to fare worse from the new regime than others.

On garments, while not all products will be affected, many will have zero tariffs under the proposed schedule. This will have a particularly damaging impact on Bangladesh, Cambodia, India, Mauritius and Pakistan. Footwear will also fall to zero, severely impacting the value of preferences of Cambodia, Vietnam and Indonesia. The tariff for processed fish will fall, affecting Ecuador, Ghana, Mauritius, Philippines and Vietnam. Exports of bicycles from Bangladesh, Cambodia and Tunisia will also be affected, while Kenya will suffer because of the tariff reduction on cut roses.

South Africa, a country that agreed to roll over its FTA with the EU to the UK, will suffer due to the tariff reduction on fresh grapes, plums, clementines and wine. One wonders whether South Africa would have so easily agreed to roll over its FTA with the UK if it had known tariffs were going to be reduced for all regardless.

The problem only adds to the ongoing issue around whether the UK government will extend the preferential regime applied under the EU after Brexit, as we have previously highlighted. If preferences are not rolled over, it could mean low and middle-income countries currently enjoying zero tariffs will have to pay duty on many products whose tariffs would not be reduced under the new schedule.

The UK government must do two things. It must still roll over the current preferential regime to poorer countries so that they are protected from any rise in duty. At the same time, the UK must revise the list of products whose tariff is going to be reduced to zero to make sure the value of the preferences given to developing countries is not eroded. This would mean limiting the level of tariff reductions for some products that were announced today to protect preferential access for the poorest countries.

*Own calculation based on the computation of items in 2018’s household expenditure.