The surprise vote in Britain for exit from the EU has raised concerns about long-term damage to the European and global economies.  It has also sparked concerns about future defections from the EU and damage to the postwar transatlantic security alliance.  I focus here only on the near-term economic implications of Brexit.

Britain’s exit creates uncertainty about future economic relationships between Britain and both EU and non-EU countries.  Such uncertainty roils financial markets and may have some impact on expectations that affect macroeconomic activity.  But close substitutes exist for most of the economically important features of EU membership, and it is possible that these substitute arrangements will be put in place as the process of exit advances, so that the ultimate economic impact of Brexit may be small.

Regarding international trade in goods and services, Britain will remain a member of the WTO, and will be entitled to all benefits of WTO membership, including a most-favored-nation obligation owed to Britain by all WTO members with respect to tariff rates and other aspects of commercial policy in goods and services sectors.  But the exit of Britain from the EU means that Britain will no longer enjoy the preferential trade benefits of EU membership with respect to intra-European trade in goods and services, and with respect to preferential arrangements negotiated between the EU and certain third countries – these preferences are an exception to the most-favored-nation obligation under WTO law for the provisions of customs unions and free trade areas (FTAs).  Britain will thus have to negotiate with the remaining EU members if it wishes to retain existing preferences, and negotiate on its own behalf to maintain any FTA preferences given to EU members by third countries.  That said, all parties concerned could in principle agree to maintain the status quo trading arrangement by creating new free trade areas between Britain and the EU, as well as between Britain and the EU’s other FTA partners.   In addition, Britain will be free to negotiate its own FTAs with other countries on terms that the EU as a whole might not accept, leading to more liberal trade in some cases.

Britain’s exit from the EU also means that British citizens no longer have the right to move freely to work within the EU, and EU citizens no longer have the right to move to work within Britain.  This “free movement” right is somewhat exaggerated, however, as many EU members retain their own local qualification requirements that must be satisfied before anyone can work, requirements that are much more challenging for foreigners to meet (such as local bar requirements for lawyers).  Furthermore, national immigration policies can be modified to create the rough equivalent of the free movement right if work visas are granted readily by each side to nationals of the other.

On the regulatory front, Britain will no longer be subject to centralized product and service market regulations out of Brussels, or to Brussels’ decisions about competition policy and state aid.  It will be free to craft its own rules.  The economic impact of this change is unclear.  On the one hand, many observers are critical of regulatory policies in Brussels, and the opportunity to devise more pro-market policies in Britain may work to its advantage.   On the other hand, different British regulatory policies on matters such as product standards or prudential requirements in service sectors may become regulatory impediments to trade with the EU.  And Britain will lose the benefit of the principle that goods sold in one EU market are presumed to be suitable for sale in others.  Nevertheless, regulatory impediments to commerce are avoidable through negotiations over regulatory approvals and mutual recognition policies.  The balance of economic effects here is hard to predict, but it need not be a serious problem by any means.

In sum, the economic impact of Brexit need not be greatly detrimental, and will depend importantly on the course of future negotiations between Britain and its international economic partners.  It is difficult to predict the pace of those negotiations, and whether bargaining failures may lead to counterproductive impasse at times.  Accordingly, the uncertainty that troubles financial markets in the immediate aftermath of the Brexit vote is understandable.  But Britain and its partners have a mutual interest in avoiding changes to their relationship that would damage their economies, and this mutual interest will create pressure to preserve many of their current policies through alternative treaty, statutory and administrative arrangements.

Alan O. Sykes is Professor of Law and director of the Masters Program in International Economic Law, Business and Policy at Stanford Law School.