The IFS also warned in its report that new trade deals with non-EU countries are “unlikely to compensate fully for EU trade”.
The research organisation said that even small proportionate losses in trade with the EU would require “quite dramatic and probably implausible” increases in trade with other countries such as China and India.
The EU is the UK’s largest service export destination, accounting for 40% of service exports. Emerging economies like Brazil, Russia, India and China together account for less than 5%.
Even if UK exports increase in line with strong economic growth in China over the next decade, export values would unlikely match current levels with the US or the EU.
According to the report, access to the EU single market is a “virtually meaningless” concept, as any country in the World Trade Organisation has access to the EU as an export destination. For instance, single market membership involves the reduction of “non-tariff” barriers like licensing and other regulatory constraints.
The IFS also warned that maintaining the UK’s membership in the single market is particularly important for financial services as “passporting rights” enable financial firms to work with EU businesses and customers directly.
“The UK may have to make some very difficult choices between the benefits from passporting and the costs of submitting to external imposed regulation,” the organisation said.
France’s central bank governor Francois Villeroy de Galhau said that big US banks, including JPMorgan Chase, Goldman Sachs and Morgan Stanley, who have set up their European sales operations in London and then taken advantage of its EU passport to operate across the bloc’s capital market unhindered, may need to find a new legal home base if Britain fails to secure continued access to the single market in its exit talks.
Ian Mitchell, research associate at the IFS, said, “From an economic point of view we still face some very big choices indeed in terms of our future relationship with the EU.
“There is all the difference in the world between ‘access to’ and ‘membership of’ the single market. Membership is likely to offer significant economic benefits particularly for trade in services. But outside the EU, single market membership also comes at the cost of accepting future regulations designed in the EU without UK input.
“This may be seriously problematic for some parts of the financial services sector. Choices in these domains will most likely be far more important than any deal on budget contributions.”