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ACCORDING to the World Bank, the vote in Britain to exit the European Union (EU) marks the withdrawal of the country from the EU's project of "deep economic integration" - which raises the possibility that the same factors that engendered Brexit will lead to an interruption of trade openness and integration in other parts of the world.
In a new report, the World Bank said that the process of economic integration - the flows of goods, services, capital, people and ideas - on both regional and multilateral levels has reduced trade costs among members and been the engine of global economic growth in the post-World War II era.
Brexit, however, marks a "historical shift in trade policy attitudes", and risks a more protectionist trade policy stance that could damage global growth, said the report, believed to be one of the first comprehensive studies of the Brexit impact on global trade and investment.
Britain's depature from the EU will have a "negative direct impact" on trade and investment flows not just for the UK, but also for the countries with the largest exposure to the UK, the report said. The indirect impact of a Brexit-induced recession in the UK will also be felt in the EU, owing to their strong trade, investment and financial linkages.
The magnitude of these impacts will depend on the new trade relationship that the UK will negotiate with the EU, the duration of the negotiations, and the market confidence on the leadership in the UK, EU and other major players during the transition period. In terms of trade, the World Bank projects that the post-Brexit outcome on the UK is "more negative the weaker is the trade deal negotiated with the EU". It paints three broad possible outcomes: the "Norway", "Swiss" and "No trade agreement" scenarios (see graphic).
The "Norway" scenario dominates the "Swiss" scenario. In the former, the UK will end up in the European Economic Area (EEA), supported by a "deeper" trade agreement that entails nearly duty-free UK-EU trade and the free movement of people. The "Swiss" scenario dominates the "No trade agreement" scenario, in which tariffs will be imposed for UK-traded goods and UK trade with the EU could contract by up to 55 per cent.
Beyond the UK, lower trade flows will impact EU countries such as Hungary, Poland, Czech Republic and Ireland, which have higher trade linkages with the UK. Other non-EU countries with high trade exposure to the UK include South Africa, Nigeria and to a lesser extent, the Caribbean.
In terms of investment, Brexit's impact on UK foreign direct investment (FDI) flows will be "significant", the report suggested. EU-bound, efficiency-seeking FDI is likely to be the first casualty of the investment diversion generated by Brexit, given that most UK investors cited "access to the European single market" as key to the UK's investment attractiveness.
Natural resource-seeking and market-seeking FDI may also decline considerably in the longer term. The report said: "With Scotland already aiming for revisiting the referendum for independence, the scenario of an independent, EU-bound Scotland has become more probable after Brexit." If this materialises, the UK will lose the oil and gas reserves within the Scottish territory, exports of which came up to about US$49 billion in 2012.
The impact of Brexit on global FDI is more uncertain, and will likely emerge through a deterioration of global investor confidence, according to the report. There are policy implications for the countries affected by Brexit: the UK and countries exposed to UK trade will need to seek clarity in trade relations so as to minimise policy uncertainty. This could involve freezing current rules and commitments in preferential and World Trade Organization agreements, as well as setting up a clear roadmap to renegotiate agreements the UK.
For the UK, while "renegotiating upward" with the EU (ie, preserving the existing depth of economic integration) would be more efficient from a trade perspective, it is also "more difficult politically in the current context".
For more coverage of the EU referendum, visit bt.sg/BrexiT