The Ultimate Effects Of Brexit For The UK

Britain’s decision to ultimately leave the European Union after a lengthy period of discussion and debate has officially been dubbed ‘Brexit’ by headlines meaning “Britain’s exit”. On Friday, March twenty-ninth, Britain publicly announced their decision and proposed a two-year transition to facilitate their plans. This is intended to provide businesses time to adjust to the changes in Britain trade policy and adapt 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 will resonate 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 prove be a failure with unintended effects on the British economy. Firstly, regardless of potential beneficial 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 might not be 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. 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 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 definitely increases 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. Finally, there will obviously be long term effects and consequences which arise from Brexit. 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. 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 UK economy must greatly outweigh the impact of the negative. In retrospect, analysis predicts the optimal scenario of Brexit is quite unlikely to happen. In the long term, the economic consequences of Brexit will be entirely dependent on the policies which the UK chooses to adopt. Although lower trade from abandonment of integration with the EU is highly predicted to exceed the wealth provided from lower contribution to the EU budget. 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.

10 October 2020
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