EC4005 | Fundamentals of Economics | The Consequences of a hard Brexit

“Europe must wake up to the drastic consequences of a hard Brexit.” Luyendiyk, Y. The Guardian 19^th January 2018.

Examine and critically evaluate the consequences of a hard Brexit for EU and UK international businesses.

Introduction

The global economy and commercial scenario, over the years, have experienced considerable changes and dynamics, primarily owing to international phenomena like that of liberalizations of commercial aspects of different countries, Globalisation, progress in technological and infrastructural frameworks and also to the changes in the operational frameworks of the governments of different countries across the globe (Popescu 2013). All these factors have together contributed in making the global business and economic environment more interconnected, inclusive and integrated.

The increase in the integration and inclusiveness in the global business and economic environment, the economic, political, social as well as commercial frameworks of different countries across the globe are highly influenced by the different phenomena occurring across the globe of in different parts of the world, at different points of time. In the recent period, example of one such phenomenon is that of “Brexit”, which being an abbreviation of the notion of “Britain Exit” refers to the probable and pending exit of the United Kingdom from the membership of the European Union. Announced through a referendum in 2016, Brexit is expected to come into implementation on March, 2019 (Goodwin and Heath 2016).

Taking this into account, the essay tries to discuss and interpret the effects and implications (both probable ones as well as the ones which have already started occurring in the speculation of the same), which the materialization of the Brexit, if implemented, can bring in the coming years, particularly in the economic, political and cultural aspects of both the international business scenarios of the European Union and the United Kingdom.

European Union and United Kingdom

To understand the implications of Brexit, it is crucial to know about the European Union, which, in the contemporary period, is a conglomeration of 28 countries of Europe (of which one of the significant member countries is the UK) and is one of the most significant and dominating political and economic partnerships and free trade agreements in the recent times. The EU also has a common currency zone, consisting of 19 of the 28 members where Euro is used as the common currency for all economic and commercial transactions (Nugent 2017). The primary objectives behind the formation of the EU were that of facilitation of trade and commerce among the member countries by building a business zone with little or no trade barriers, uniform regulations and proper infrastructures so as to develop the economic and commercial aspects as well as to facilitate political and cultural amalgamation among the member countries. 

One of the most significant and economically developed member nations of the EU as well as one of the biggest contributors to the EU budget, since the initiation of the European Union is that of the United Kingdom, as can be seen from the following figure:

Figure 1: Share of contributions of different member countries in the EU budget

(Source: Geostata.com 2018)

From the above figure, it can be seen that the UK contributes nearly 10% share of the total budget of EU, thereby making it the fourth largest contributor, just after Germany, France and Italy. The country also contributes significantly in the trade and commercial scenario of the European Union. In general, nearly 6.6% of the total exports of the EU goes to the UK and nearly 51.4% of the total export volumes of the UK is absorbed by the other member countries of the European Union (Hobolt 2016). However, in spite of such a robust bilateral relation between the UK and the EU, the decision of Brexit was taken and is soon about to be implemented. 

Brexit: Meaning and Reasons behind it

The term “Brexit”, as discussed above, refers to the decision of UK to exit from the European Union, taken through a referendum (in 2016), which with signature from thirty million people, acquired 52% votes in favour of the exit against 48% in opposition to the decision. The decision is expected to come into operation from March 29, 2019, with UK officially exiting from the European Union (Dorling 2016). This, if implemented, will give the UK sovereignty and the rights to take its own social, economic, political and commercial decisions and laying its own rule and regulations. The primary reasons behind such a decision on part of the UK government are as follows:

Trade with Non-EU countries- In the increasingly integrating global commercial framework, with more flexibilities and freedoms in doing trade, the possibilities for the UK to expand their trade relations with other parts of the world and earning positive trade balance, especially with the Non-EU countries have been expanding as can be seen from the following figure:

Figure 2: Trade Balance of the UK with EU and Non-Eu countries over the years

(Source: Theguardian.com 2018)

However, in the presence of strict and rigid regulations under the framework of the EU, the expansion of the UK and Non-EU trade relationships has been arguably hampered, thereby having long-term negative consequences for the economy of the country (Dhingra et al. 2016).

Economic losses- Another argument in favour of the Brexit is that the UK is one of the major contributors of the EU (with the bill increasing from nearly 2.7 billion in 2008 to 17.4 billion pounds by 2013). The mandatory regulations of contributions of the EU are proved to be considerably taxing for the economic growth of the UK as the money is mostly used for the development of the economically backward member countries of the EU (Harvey and Hubbard 2016).

Migration- Another political and economic reason behind Brexit is the excessive burden of immigrants which the UK faces in the current period, due to liberal migration rules of the EU.

Figure 3: Net Migration in the UK over the years

(Source: Fairpay.org.uk 2018)

This heavy inflow of immigrants, has arguable hampered the economic welfare and threatened the cultural sovereignty of the population of the UK (Dorling 2016).

Hard Brexit: Meaning

All these reasons have cumulatively led to the possibility of a Hard Brexit to be occurring in near future. The notion of Hard Brexit implies the surrender of the full access to the EU single market by the UK and in return the country gaining autonomy and full control of its own economy, trade dynamics and border, thereby making the government of the country sovereign (Harvey and Hubbard 2016).

Hard Brexit: Implications on international businesses of the UK and the EU

Hard Brexit, which is in all probability, about to happen in 2019, can already be seen to be having its implications on the international business scenarios of the UK as well as the EU, especially in terms of economic, political and cultural aspects.

Implications for the international business scenario of the United Kingdom

The primary changes which can be already seen to be happening in this context, is that of the changes in the trade volume and dynamics of the United Kingdom, with the member countries of EU vis-à-vis with the Non-EU countries, as can be seen from the following figure: 

Figure 4: Changes in the trade dynamics and volumes of the UK with different countries, 2017

(Source: Researchbriefings.parliament.uk 2018)

The above figure, showing the trade dynamics of the UK in 2017, indicates toward a major change in the import and export patterns in the commercial domains of the country. While the export volume of the UK to the other member countries of the European Union is seen to be lower than the import volume of the UK from these countries, the trend can be seen to be opposite in that of the scenario of import and export dynamics between the UK and the Non-EU countries, with the export volume of the UK being considerably higher than the import volume of the same (Latorre, Olekseyuk and Yonezawa 2017). Thus, the UK can be seen to be experiencing a trade deficit of nearly 67 billion pounds in their commercial relation with the member countries of the EU, while the country can be seen to be enjoying a trade surplus of as high as 41 billion pounds in its trade relations with the different Non-EU countries in the recent times.

Figure 5: Trade dynamics of the UK with the European Union over the years

(Source: Researchbriefings.parliament.uk 2018)

The above figure, showing the import export dynamics of the United Kingdom with that of the European Union, over the years, show considerable shares in both the US’s export and import volumes to be related to the commercial transactions of the country with that of the other member countries of the EU (Ciuriak, Dadkhah and Xiao 2017). However, both the shares of imports and exports of the UK can be seen to be showing declining trends to some extent over the last few years and since the announcement of the possibility of Brexit, the export volumes of the country can be seen to be declining considerably. The imports, on the other hand, has not been affected to that extent in the recent periods.

In this context, if a Hard Brexit happens in 2019, then the international business scenario of the United Kingdom is expected to be affected considerably, the potential effects being both positive as well as negative.

In the recent period, a significant share of the total export volume of the United Kingdom is directed to the other member countries of the European Union, as can be seen from the following figure:

Figure 6: Shares of export volumes of the UK by regions

(Source: Fullfact.org 2018)

As is evident from the above figure, the UK exports nearly 44% of its export volume to the member countries of the European Union, being one of the primary member countries of the EU itself. The country enjoys the advantage of the huge single market under the operational framework of the EU (Ciuriak, Dadkhah and Xiao 2017). Thus, with the Hard Brexit and with the country surrendering its full access to the single market of the EU and the low trade barriers and flexible tariff structures, this export volume of the country is supposed to be hampered considerably, the trends being already observable with the speculations of Brexit in existence. On the other hand, UK being one of the significant importers of commodities and services from the member countries, the implementation of Hard Brexit can expose the country to stricter trade regulations and tariff trades in the aspects of trading with these countries in future, thereby hampering the importers in the country significantly (Holscher 2017).

There can also be positive implications of Brexit on the international business scenarios of the UK in the coming years, especially in the aspects of increasing opportunities for the country to set up and expand its businesses and building up robust commercial as well as socio-political relationships with other Non-EU countries.

Figure 7: Trends in UK export volumes over the years

(Source: Gov.uk 2018)

As is evident from above, the trend of UK exports to the Non-EUU countries has already been increasing while that of the exports of the country to the EU member countries have been declining. With the implementation of Brexit and with the UK exploring the increased trade opportunities with other Non-EU countries, the export volumes of the country to the Non-EU countries are expected to increase to a considerable extent (Chang 2017).

Implications for the international business scenario of the EU

UK, in the present scenario, is one of the primary single markets for the goods and services produced by different member countries of the EU, as can be seen from the following figure:

Figure 8: Single export markets for the EU countries

(Source: Fullfact.org 2018)

Thus, with the occurrence of a Hard Brexit and UK leaving the EU, the other member countries are expected to experience a significant fall in their export volumes to the UK, which can have immensely negative implications on their business scenarios. However, on the positive side, with UK exiting from the EU, the other countries also have the chance to capture the export market in the EU which the UK experiences now, thereby having the chance of positive commercial dynamics (Holscher 2017).

Legal Implications

The implications of a Hard Brexit are expected to be more than economic or commercial. In the current scenario, the operations of EU and its dominance on its member countries come from its regulatory framework which is formed of complex set of legislations. The EU, in the last decade itself, has imposed nearly 52,000 legislations on its member countries and their operations. If Hard Brexit happens, then it will give the UK the right to choose from these legislations, especially in the aspects of trading with the Non-EU countries, thereby having immense implications on the trade dynamics of not only the country itself but also on that of the member countries of the EU (Emerson 2016).

Political and Cultural Implications

A Hard Brexit can have immense political and cultural implications on the country and the EU as well. The political relationship between the UK and different member countries of the EU has the threat to be negatively affected with the implementation of Hard Brexit, while there lies the possibility of strengthening of the political relationship of the UK with other Non-EU countries (Emerson 2016). On the other hand, with Hard Brexit, the UK also has the chance to experience more cultural amalgamation with its trade relations strengthening with different countries outside the EU.

Conclusion

The above discussion highlights the possibilities of mixed implications of a Hard Brexit, if implemented, on both the international business scenarios of the UK and the EU in economic, legal, commercial and political scenarios. On one hand, while the UK has the positive opportunity of getting rid of the bureaucratic inefficiencies in the framework of the EU, while on the other hand, its businesses also face the threat of the consequences of leaving the single market and flexible trade domains of the European Union. The member countries of the EU also face the threats of losing the lucrative markets for their products in the UK and also expect the opportunity to capture the export market which UK enjoys now in the European Union.

References

Chang, W.W., 2017. Brexit and Its Economic Consequences.

Ciuriak, D., Dadkhah, A. and Xiao, J., 2017. Brexit Trade Impacts: Alternative Scenarios.

Dhingra, S., Ottaviano, G.I., Sampson, T. and Reenen, J.V., 2016. The consequences of Brexit for UK trade and living standards.

Dorling, D., 2016. Brexit: the decision of a divided country.

Emerson, M., 2016. Which model for Brexit?.

Fairpay.org.uk (2018). Are There too Many Immigrants in the UK? The Facts and Figures on Immigration. [online] Fairpay.org.uk. Available at: https://fairpay.org.uk/129/Are_There_too_Many_Immigrants_in_the_UK__The_Facts_and_Figures_on_Immigration_-_Fair_Pay129_1.html [Accessed 7 Aug. 2018].

Fullfact.org (2018). Everything you might want to know about the UK's trade with the EU. [online] Full Fact. Available at: https://fullfact.org/europe/uk-eu-trade/ [Accessed 7 Aug. 2018].

Fullfact.org (2018). Where does the EU export to?. [online] Full Fact. Available at: https://fullfact.org/europe/where-does-eu-export/ [Accessed 7Aug. 2018].

Geostata.com (2018). EU budget contribution per member state. [online] Geostata.com. Available at: https://geostata.com/eu-budget-contribution-per-member-state/ [Accessed 7 Aug. 2018].

Goodwin, M.J. and Heath, O., 2016. The 2016 referendum, Brexit and the left behind: An aggregate?level analysis of the result. The Political Quarterly, 87(3), pp.323-332.

Gov.uk (2018). Preparing for our future UK trade policy. [online] GOV.UK. Available at: https://www.gov.uk/government/publications/preparing-for-our-future-uk-trade-policy/preparing-for-our-future-uk-trade-policy [Accessed 7 Aug. 2018].

Harvey, D. and Hubbard, C., 2016. Why Brexit. Centre for Rural Economy Discussion Paper Series, (35).

Hobolt, S.B., 2016. The Brexit vote: a divided nation, a divided continent. Journal of European Public Policy, 23(9), pp.1259-1277.

Holscher, J., 2017. The effects of Brexit on the EU, the UK and Dorset–a migrant’s account. BAFES Working Papers, pp.1-11.

Latorre, M.C., Olekseyuk, Z. and Yonezawa, H., 2017, June. Trade and FDI-Related Impacts of Brexit: A World-wide Perspective. In Trabajo presentado en la 20th Annual Conference on Global Economic Analysis, West Lafayette, USA, junio (pp. 7-9).

Nugent, N., 2017. The government and politics of the European Union. Palgrave.

Popescu, G.H., 2013. Macroeconomics, effective leadership, and the global business environment. Contemporary Readings in Law and Social Justice, 5(2), p.170.

Theguardian.com (2018). Brexit – what would happen if Britain left the EU?. [online] The Guardian. Available at: https://www.theguardian.com/politics/2015/may/14/brexit-what-would-happen-if-britain-left-eu-european-union-referendum-uk [Accessed 7 Aug. 2018].