Trade Relations Between the UK and the EU After Brexit
Britain’s idea to ultimately terminate membership within the European Union after a lengthy period of debate has officially been dubbed ‘Brexit’ by headlines meaning “Britain’s exit”. On Friday, March twenty-ninth, Britain publicly announced their choice and proposed a two-year transition to facilitate their plans. This is intended to provide enough time to adapt to changes in Britain’s policies and adjust to other unpredictable circumstances. An estimated half of the UK’s trade income is with the EU and is its largest trade partner, indicating that significant consequence would entail from their choice. As a previous EU member, the UK was privileged to curtailed trade expenses between the UK and the EU, effectively making services and products cheaper for UK consumers while allowing UK businesses to export more. Disassociating from the EU (‘Brexit’) would reduce trade between the UK and the EU due to higher tariff (taxes on imports/exports) and non-tariff obstacles to trade. Moreover, the UK would also gain considerably less benefit from future market integration within the EU. Their intended economic benefit of leaving the EU would be a lower contribution to the Union’s budget. Further analysis is able to quantify the effects Brexit will have on trade and income. Considering an optimal outcome, the UK would obtain full access to the EU single market similar to Norway. This would result in a 1.3% decrease in average UK incomes. In contrast, with larger increases in trade costs, Brexit lowers income by 2.6%. Depending on the policies Britain chooses to adopt, and the choices their country makes, Brexit could potentially become a failure with unintended catastrophic effects on the British economy. Because of the evidenced history of failure Brexit has produced, Britain should withdraw their initial plans and work towards restoring their economy.
Firstly, regardless of potential benefit or lack of such, experts are certain Brexit will have drastic effects on the economy of the UK. Ever since the decision, the Financial Times Stock Exchange 100 Index has increased 13% before the close prior to the vote on June twenty-third. Shortly before leaving the European Union, the British pound dropped a staggering five percent since its initial value at $1.47. This steep devaluation of currency has altered merger calculations for companies internationally. Some companies have instigated bargains due to the decline of the pound. Even though the UK’S situation is currently in an unreliable position, some companies have opted to invest even more money into their economy. For example, Nissan, a prominent overseas employer of Britain, stated it will manufacture a new car in their Sunderland plant, basically supplying its economy with more income. For the UK, the best case scenario assumes that after Brexit, the UK’s trade relations with the EU will stabilize to provide benefits analogous to Norway’s favorable economic position. Unfortunately, the UK was not successful in negotiating a new trade agreement with the EU and, therefore, future trade between them would become governed by World Trade Organization laws. The latter would result in larger increases in trade costs, more than the UK would appreciate since most favoured nation tariffs are imposed on UK-EU trade and because the WTO has not made sufficient progress with nontariff barriers than the EU. Inflated trade expenses resulting from Brexit consists of three parts: higher non-tariff barriers to trade, higher tariffs on imports, and the UK may discontinue future participation in events that the EU takes in order to integrate deeper and reduce non-tariff barriers within the EU. As recent news has proven, this exact scenario has come to pass. There has been an observed 40% faster decline amongst European Union countries in comparison to other countries not included in the EU. In the case of Brexit, the UK’s benefits from any future reductions in EU trade costs would continue to be highly unlikely.
Furthermore, considering Britain is a leader in world economy, Brexit will have a considerable effect on other countries as well. Overall, EU members suffer the most repercussions as a result of Brexit. Being as the countries which trade with the European most often, Ireland, Netherlands, and Belgium are most negatively affected. On the contrary, countries outside the EU, including Russia and Turkey, stand to actually gain from Brexit. As trade diminishes amongst the EU, the lost trade will be directed toward these countries in order to fill the economic void. Minford of Cardiff Economics Working Papers says, “Altogether the EU loses between -0.12% and -0.29% of its gross domestic product which is offset by a 0.01% to 0.02% gain for non-EU countries”. These seem to be small percentages, but the rest of the world’s gross domestic product is notably larger than that of the UK. So whereas the UK devalues between £26 billion to £55 billion from Brexit, the rest of the EU collectively loses around £12 billion to £28 billion. The rest of the EU countries will mutually experience half of the impact Brexit has on the UK. As a previous member of the EU, the UK was constricted by common trade policy shared among EU nations and were represented by the EU in all international trade negotiations. Now, the UK fully intends to become an independent nation, free to choose and adjust their own international deals. This new-found freedom allows the UK to form new economic relations with leading countries such as China and the US. Experts agree Brexit has definitely increased trade with non-EU countries. However, the magnitude of these increases is not entirely adequate enough to balance the decline in trade with the EU. Once again, the Brexit movement has proven to provide a net deficiency.
Finally, there will obviously be long term effects and consequences which arise from Brexit. Britain’s government itself and an ever diminishing population of supporters still hold strong beliefs in Brexit’s future success which they claim would make their current economic downturn worthwhile. Less optimistic supporters believe it is a simple necessity which must be endured until stabilization. Whichever way it is viewed, the evidence is undeniable Brexit has been a failure up to this point, bringing to question is future success is at all possible. Protestors are increasing by the day as Britain’s economy continues to destabilize. It has become clear the majority vote no longer supports Brexit even if they did so initially. When negotiating post-Brexit trade deals, the UK would not be inclined to compromise with other EU nations; but, the UK would reimburse civil servants to restore its advantageous ability to undertake future trade negotiations. Additionally, the UK is placed at a disadvantage in terms of bargaining powers because of its smaller market. Qualified economists say, “research estimates that trade deals mediated by the EU over the past two decades have reduced the quality-adjusted prices of imports into the UK by over one-third.” Changes in investment, migration, and regulation could also have considerable effects on the UK. In order for Brexit to prove truly beneficial, the positive impacts on the UK economy must greatly outweigh the impact of the negative. In retrospect, analysis predicts the optimal scenario of Brexit is quite unlikely to ever occur.
In the long term, the consequences of Brexit will be entirely dependent on the policies which the UK chooses to adopt. This is a far cry from their optimal expectations as their government continues to operate amongst chaos. Brexit has already torn through two prime ministers. Past prime ministers, Boris Johnson and Teresa May, were unable to deliver a strategy or their strategy had failed to facilitate Brexit, thus leading to their swift resignations amongst career turmoil. The current prime minister, Boris Johnson, has yet to deliver an effective solution himself. Sampson says “Even without factoring foreign investment, migration, and the dynamic consequences of reduced trade, estimates say the effects of Brexit on trade alongside the UK’s contribution to the EU budget will equate to a decrease in income of between 1.3% and 2.6% (£850 to £1,700 per household per year).” Including the long-run effects on UK productively, the decline in income further explodes to between 6.3% and 9.5% (about £4,200 to £6,400 per household per year). The ultimate effects for the UK will unfortunately be negative while Britain’s fate is yet to be determined depending on how much their foreign trade and policies benefit their economy. Given the proven record of failure, the government should economically plan for the worst and enact their policies accordingly for future prosperity.
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