The negative effects of Brexit

Introduction

The action by Britain to exit the European Union (EU) saw the country divided over those who support the abandonment and the advocatee of staying in the EU. However, the choice of the majority succeeded. The campaigners of Brexit gave optimistic predictions for the UK and its business whereas the doubters saw it as a bug mistake for the UK and it will have strong consequences in the future. Hypothetically, the choice to leave the EU will have negative effects for trade and business in Britain.

Negative Impacts

After exiting the EU, the choice will take effect on the business of exporting goods and services from the UK. Majority of the exporters will be derailed in their endeavors to export products to the European market due to the increase in tariffs. The implication of a decrease in trade volumes with other European countries is that businesses in the United Kingdom will become less competitive in the global markets and Europe. John Springford, an associate economist of Centre for European Reform, (CER) projects that the tariff costs would soar up from 2.2% of the GDP to 9%. Thus, more exports to the European Union would be reduced. Apart from the WTO tariffs which will present a potent threat to the exports from the UK going into the European markets, the EU states will also impose new regulations and non-existent tariffs that would further keep the services from the United Kingdom out of the European market (Ottaviano et al. 2014, p.8).

Loss of Bargaining Power

After the Brexit, Britain ceded the responsibility of negotiating and influencing trade policy to other European countries. With the reliance on domestic actors, the civil service of Britain cannot bargain and strike better trade deals with the speed and convenience expected by the public. David Cameron’s argument of other countries delaying sanctioning of trade until they see the terms of trade that the UK will receive from the EU before settling on their deal will also come into play. The time lost while waiting for the decision of the European Union will result in significant delays in trade. Such delays may impact the prices and the revenue of perishable products such as floriculture as their value depreciates with a forced prolonged shelf life. The ability of the UK to invoke the bargaining powers it had when transacting trade under the EU will no longer exist, and the country will be exposed when it comes negotiating trade deals with big economies such as China, US, and Indian that have prioritized the policy of protectionism.

Loss of Single Market Access

The UK will forfeit entry to the single market. With Britain being a founder member of the European Free Trade Association, (EFTA), it means the UK will have to forego the prestigious position. Economic pundits estimate that the UK will be losing 75 billion pounds when they get excluded from participation in the single market. Despite not paying the annual subscription of £9 billion for the sustainability of the European Union, the losses would be more than the benefits accrued from trade.

Lack of Skilled Labor

An approximately 2.1 million people from other European countries work in Britain in the construction sector, IT and engineering. Shortage of skilled labor and vital skills in the UK has necessitated immigrants from the EU to come and fill the gap. Majority of the unskilled in the UK are from EU. Therefore, Britain’s departure from the union will reduce their ability to attract and recruit international talent. Thus, the service delivery sector will suffer a blow, and that will, in turn, affect business in the country due to the lack of skilled labor. Unavailability of sufficient human resource will affect the ability of the companies to run and make profits (Dolle and Leys 2017, 117).

Decrease in Foreign Investment

There is a probability of a decrease in foreign investment. Half of the Foreign Direct Investment (FDI) in Britain of approximately £1 trillion emanate from the EU. The departure from the EU will result in higher trade tariffs and trade costs. FDI inflows in Britain will reduce by 22%. Many foreign investors got attracted to the UK because of no trade tariffs that discourage investors from investing in countries with trade tariffs (Dhingra et al. 2016, p.26).

Impact on Financial Services

The professional and financial services in the sectors such as accountants, banks, investment managers, and corporate lawyers that significantly contribute to the GDP, will suffer closure or a decline in business. The banks in London will risk the possibility of being denied the lucrative passport that one gets if they are a member of the EU. The “passport” permits the banks to sell their services to other countries in the European Union. Losing the passport will prevent the City from providing advice on huge euro takeovers in Germany or even engage in the trade of euro-dominated goods such as derivatives (Springford and Whyte 2014, p.3).

Impact on Food Industry

More than food consumed in Britain comes from other countries, meaning the fallout from the EU will affect the food industry because of the high possibility of a slide in the pound. The prices of acquiring the food and beverage will be too costly for the suppliers and they will in turn pass the burden to the consumers. When the costs become unbearable even to the suppliers, the amount of food they supply into the country decreases and that may lead to the closure of some businesses that cannot stand the increase in prices (Matthews 2015, p.215).

Positive Implications

Although the decision to leave the EU will have severe impacts on trade and business for the UK, there other positive implications would help the country achieve its targets after the Brexit. 2015 budget analysis showed that the UK had contributed £13 billion to the budget of the EU, with an annual contribution of £8.5 billion. Thus, the departure from the EU will exempt the UK government from making yearly contributions to the European Union. The savings from the subscriptions can be used to empower the UK citizens through improvement in service delivery.

Freedom to Enter into Trade Agreements

The UK will have the freedom to enter into trade agreements. After exiting the EU, the UK now has the opportunity to make trade deals with many countries in the world. Countries like Australia and China are already warming up to the idea of making trade deals with Britain. The UK is already weighing the options of a multibillion-pound trade with China. While China stands to benefit from gaining unfettered access to the manufactured goods and investment in the UK, Brexit will eliminate the barriers in the service industry such as insurance and banking.

Contending with Lesser Obligations and Regulations

Voting to exit the EU will give the UK the opportunity to contend with lesser obligations and regulations. There will be massive prospects of employment outside the EU for the UK citizens. Strict immigration laws will limit the number of immigrants coming into the UK for job opportunities. Thus, the companies in the UK will still employ the local citizens and run their businesses as usual. Moreover, without the membership of the single markets, there will be increased border checks and inspection of goods coming and leaving the UK unlike in the pre-Brexit era where inspection of products at the border was negligible due to the absence of customs and other trade barriers.

Conclusion

The implications of leaving the EU are reliant on the plans that the UK will adopt post-Brexit. Nonetheless, a reduction in trade because of the decreased integration with other countries in the EU will likely cost the economy of the UK more than the money saved from the small contributions to the EU budget. Therefore, the vote to pull out of the EU will negatively influence the ability of the UK to carry out trade and business with other countries.

References

Dhingra, S., Ottaviano, G., Sampson, T. and Van Reenen, J., 2016. The impact of Brexit on foreign investment in the UK. BREXIT 2016, p.26.
Dolle, T., & leys, D. (2017). The trade and customs law consequences of Brexit. Global Trade and Customs Journal. 12, 117-124.
Matthews, A., 2015. Implications of British exit from the EU for the Irish agri-food sector. Trinity Economic Papers, (215).
Ottaviano, G.I.P., Pessoa, J.P., Sampson, T. and Van Reenen, J., 2014. Brexit or Fixit? The trade and welfare effects of leaving the European Union, 7-24
Springford, J. and Whyte, P., 2014. The consequences of Brexit for the City of London. London: Centre for European Reform, p.3-6