Should the UK have remained a member of the EU, or not?

The EU and Its Evolution

The EU is a political and economic alliance made up of 28 nations. It was founded after World War II to promote economic cooperation on the premise that people who trade together are less likely to fight each other (Hunt and Wheeler 2017). It has evolved through time into a single market with unrestricted mobility of people and things. It has been operating as a single member state. They all use the same currency, the euro. Also, there is an EU parliament that comes up with the rules to govern several aspects including transport, environment, and consumer rights among many other elements. The EU allows its members to exit it through the provisions availed by Article 50, which provides a formal method for leaving (Hunt and Wheeler 2017). By invoking it, the UK chose to exit, which will be finalized in March 2019. In so doing, the two sides were given two years to allow for an agreement concerning how the split would happen. Through a careful assessment of the consequences of the Brexit vote, it becomes clear that the UK should have remained in the EU.

The Impact of Brexit on Trade

There were many campaigns before the 2016 referendum held in the UK concerning the membership of the nation in the EU. Those against such a move argued on the basis of uncertainty in the economy and security sectors (Mason 2016). Conversely, those supporting the decision stated that the country would fare well even when it was not a part of the EU. One of the firm advocates for the move is Boris Johnson who termed critics as pessimists in addition to using Canada as a case study to indicate that the UK would continue prospering. Canada has managed to maintain optimal control of its borders while having deals revolving around free trade with other nations (Mason 2016). The Canadian model was used to discredit the notion of becoming like Norway. David Cameron used the Norwegian model to show that the UK may eventually realize the privileges of the single market, but it will not have any say in how decisions are made. This idea of enjoying the benefits of being an EU member while avoiding the trade-offs of such membership was seen to be risky towards the livelihoods of so many (Watt and Mason 2015). Nevertheless, those that were for the UK leaving won this vote. Strategies are already in place to facilitate this exit by 2019.

The Future of Trade Agreements and Foreign Direct Investment

The decision to leave the EU will have a long-lasting effect on the relationship between the two with the latter having made up the UK’s biggest trade partner. By virtue of being an EU member, the UK had received lower trade costs while transacting with other European nations (Dhingra Ottaviano Sampson and Reenen 2016, p. 2). Among the EU members, tariff barriers are usually done away with to allow for free movement of goods and services. Trade is also usually hampered by non-tariff restrictions, which are measures that amplify the expenses of conducting trade including rules of origin checks, border controls, and cross-country dissimilarities in guidelines over matters such as product standards (Dhingra Ottaviano Sampson and Reenen 2016, p. 2). They have also been diminished in the attempt of coming up with a single market. The removal of trade barriers has been instrumental in facilitating more trade between the UK and other EU members thus making significant contributions to the nation’s economy. For instance, 2014 saw the country’s exports to other EU members being at least 45 percent while the nation’s imports from the latter accounting for 53 percent (Dhingra Ottaviano Sampson and Reenen 2016, p. 2). Exports to the EU make up over thirteen percent of the national income of the UK (Dhingra Ottaviano Sampson and Reenen 2016, p. 2). Also, consumers in the UK tend to enjoy lower prices and higher access to a broad array of quality goods and services. Concurrently, UK’s producers can take advantage of the export opportunities at their disposal that allow for higher sales and returns in addition to allowing them to only specialize in sectors where a comparative advantage is evident. In this way, more trade avenues amplify output, earnings, and standards of living.

Potential Scenarios and Consequences

However, leaving the EU will lead to less trade occurring thus diminishing the standards of living in the UK. The claim of doing away with the trade-offs of being an EU member are also discredited in that the decline in income per capita that will be brought about by reduced trade will supersede any savings that will occur owing to the lack of making contributions to the EU budget (Dhingra Ottaviano Sampson and Reenen 2016, p. 2). An estimation of the likely situation even after considering fiscal savings that would be achieved show that UK income will experience a fall of between 1.3 to 2.6 percent (Dhingra Ottaviano Sampson and Reenen 2016, p. 2). Such estimates are arrived at with the help of a trade model that is modern and quantitative that looks at the global economy. Such models work by including the channels through which trade impacts customers, businesses, and workers, and avail a representation from trade data to welfare. The numbers that it outputs show the effect on real incomes by various trade policies.

Trade Models and the Implications for UK

Also, some assumptions must be made since there is no telling how the UK will relate with the EU after finalizing the exit. Nonetheless, two scenarios may occur. To start with, there is the optimistic stance whereby the Norwegian model is used to state that the increase in trade costs is bound to be small. Norway belongs to the European Economic Area, an aspect that has allowed it to enjoy a free trade arrangement with the EU. It is also in the EU single market besides its institution of policies that are meant to diminish non-tariff barriers (Dhingra Ottaviano Sampson and Reenen 2016, p. 3). However, it is not associated with the customs union of the EU, which means that it experiences some non-tariff barriers that EU members are exempted from including anti-dumping responsibilities and rules of origin necessities. The productivity growth that Norway has would have been higher if it fully participated in the market integration initiatives of the EU market. Therefore, the UK would also experience a lower productivity growth even if it managed to emulate the Norwegian model.

Secondly, there is the pessimistic scenario that accepts that trade costs are bound to increase significantly. This situation is based on the assumption that the UK fails in negotiating a new trade agreement with EU members thereby leading its trade with these nations being regulated by rules stipulated by the World Trade Organization (Dhingra Ottaviano Sampson and Reenen 2016, p. 3). In this case, trade costs would rise since the latter body has not made as much progress as the EU to diminish tariff barriers. This amplification of trade costs can be categorized into three. The first classification is that of higher tariffs being imposed on imports. The second one is the enforcement of higher non-tariff barriers due to having to deal with different laws and border controls among many other requirements. Lastly, the UK may not be part of instituting deeper integration and reduction of non-tariff barriers that will be implemented in the future by the EU thus losing out on enhancing their trade capacity.

An additional optimistic alternative is that of modeling Switzerland. The Swiss enjoy many bilateral agreements their nation and the EU, which has allowed them some right of entry into the single market. Similar to Norway, it has to institute all regulations concerning the areas of the single market it has access to in addition to permitting unrestricted movement of labor (Dhingra Ottaviano Sampson and Reenen 2016, p. 6). Also, it has lower monetary contributions to the EU. Conversely, there is no free trade in services between Switzerland and the EU. Such a scenario would be disadvantageous for the UK economy since it enjoys a comparative advantage in services. With this model, the loss of income would also be quite significant.

The Impact on Future Trade Agreements and Foreign Direct Investment

Additionally, the UK would cease to be compelled to abide by the common external tariff imposed by the EU on imports. The former could institute a unilateral eradication of all duties on imports into the country, which would be instrumental in diminishing the prices of imported goods (Dhingra Ottaviano Sampson and Reenen 2016, p. 7). Moreover, UK is not the only country that will be affected by this exit. All EU members will be affected. Ireland will be the most affected followed by the Netherlands and Belgium. Those that will become the biggest losers are the nations that are significantly trading with the UK (Dhingra Ottaviano Sampson and Reenen 2016, p. 5). Nevertheless, other countries such as Russia and Turkey will benefit from this move. The reason is that trade will now be diverted away from the EU with it being diverted towards their markets.

Future trade agreements will also be hugely affected. Being an EU member, the UK enjoys the privilege of there being a standard trade policy in addition to having representation in all trade negotiations (Dhingra Ottaviano Sampson and Reenen 2016, p. 8). The exit would allow the UK to seek out any trade agreements independently besides choosing the nations with which to engage with including the United States, India, and China. Even though trade with such countries will increase, it may not be enough to offset the reduced trade that it will experience. Being an EU member in no way limits UK businesses from trading with other nations, but with EU being its nearest neighbor and most significant market, the EU is a better trade partner for the country (Dhingra Ottaviano Sampson and Reenen 2016, p. 8). Also, when negotiating any deals, the UK would be forced to cover the expenses of hiring individuals and tasking them with rebuilding the capacity of engaging in trade negotiations. Furthermore, the fact that its market is smaller than that of the EU, it would experience a less bargaining power than if such agreements are facilitated by the EU (Dhingra Ottaviano Sampson and Reenen 2016, p. 8). Currently, the EU is negotiating trade agreements with the US and Japan. The UK will forfeit the benefits of such agreements by not being an EU member.

Impact on Foreign Direct Investment and Labor Force

The foreign direct investment that the UK receives will also fall owing to its becoming less attractive. As an EU member, it has been the most attractive place for FDI, in part due to the access to the internal market promoted by the EU (Kierzenkowski Pain Rusticelli and Zwart 2016, p. 24). Investors from the EU and those from outside the jurisdiction of this body have always cited the single market as a critical factor in looking at the advantages that they expect in investing in the UK. As the UK has increasingly engaged in trade integration with the EU, the more attractive it had grown for investors. By ceasing to be an EU member, the UK would be giving up its right of entry to the single market thus experiencing lower FDI inflows, which would translate to fewer introductions of new ideas into the country (Kierzenkowski Pain Rusticelli and Zwart 2016, p. 25). Over time, there will be a weakening of fixed investment, export capacity, and innovation. Most of these investments would be diverted to other EU members since they could avail their products to the single market and other non-EU markets.

Consequently, a lower growth of the labor force is bound to happen due to immigration declining. As of 2006, the number of immigrants entering the UK has been approximately 500,000 every year (Kierzenkowski Pain Rusticelli and Zwart 2016, p. 25). These inflows of workers have been significant in the GDP growth the UK has been undergoing. The reason is that EU immigrants have been found to have higher rates of employment in comparison with natives and nearly all other migrant groupings (Kierzenkowski Pain Rusticelli and Zwart 2016, p. 25). Immigration has thus been a significant factor in there being a healthy labor market. For instance, the period between 2005 and 2015 saw about 2.5 million jobs being created and immigrants were responsible for filling 2.2 million vacancies with a majority of them being from the EU (Kierzenkowski Pain Rusticelli and Zwart 2016, p. 25). Therefore, immigrants have brought about an approximate 0.7 percent to the GDP in every year, which accounts for almost half of the GDP growth. Also, immigrants have been instrumental in offsetting the costs of an aging population. Hence, with the UK leaving the EU, it may institute more restrictions regarding the flow of people, which will deny it the benefits it has been enjoying from EU immigrants.

Conclusion

In conclusion, a careful evaluation of the implications that are bound to emerge as a result of the UK exiting the EU has been instrumental in demonstrating the reasons this nation should not have revoked its membership. The campaigns concerning the 2016 referendum relative to the EU exit were intense, but in the end, those that were for leaving the union won the vote leading to the commencement of initiatives to facilitate this decision by 2019. The choice of leaving the EU will have a long-lasting impact on the correlation between the UK and the EU since the latter has been the biggest trader for the former. Also, it will no longer enjoy lower trade costs that come with being an EU member. The country will also experience less trade thereby diminishing the standards of living in the UK. Future trade agreements will also be affected since the nation will have to represent itself in any negotiations besides having a lower bargaining power. The inflows of foreign direct investment will also diminish owing to the UK reducing its attractiveness, which has always been promoted by its entry into the single market created by the EU. Moreover, the labor force will experience a lower growth since immigration is deemed to decline. The UK will no longer enjoy the immense economic benefits it has been getting from EU immigrants.

Reference

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

Hunt, A., and Wheeler, B. (2017). Brexit: All you need to know about the UK leaving the EU. Retrieved October 24, 2017, from http://www.bbc.com/news/uk-politics-32810887

Kierzenkowski, R., Pain, N., Rusticelli, E. and Zwart, S., 2016. THE ECONOMIC CONSEQUENCES OF BREXIT: A TAXING DECISION. POLICY, (16).

Mason, R. (2016). Boris Johnson on Brexit: ’We can be like Canada’. Retrieved October 24, 2017, from https://www.theguardian.com/politics/2016/mar/11/boris-johnson-on-brexit-we-can-be-like-canada

Watt, N., and Mason, R. (2015). Cameron tells anti-EU campaigners: ’Norway option’ won’t work for Britain. Retrieved October 24, 2017, from https://www.theguardian.com/politics/2015/oct/28/cameron-to-confront-norway-option-anti-eu-campaigners