BREXIT: Implications on UK’s global trade

 

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Angela Merkel, Chancellor of Germany, and David Cameron, Prime Minister of the United Kingdom

Thursday June 23rd can mark the beginning of a set of successive and profound reforms for the economies of the United Kingdom and continental Europe. UK Prime Minister, David Cameron, has finally been able to set up a June 23 referendum on whether the UK should leave the European Union.

Some of Eurosceptics’ arguments for a EU withdrawal are the obligation for every EU member to observe EU laws and regulations, disagreements with some EU’s policies, and lack of own British representation on international councils. Moreover, worries over Europe’s current economic situation and its migration crisis have added to pro-leave reasons. However, the UK’s status of one of the biggest and richest economies of the EU and its considerable trade links with the Bloc through the European Economic Area membership – which provides for the free movement of goods, services, capital and people – make the exit a critical decision.

Almost half of UK’s exports go to the rest of the EU; they account for about 14% of the British GDP, meaning that the UK is an important source of goods and services to the internal market of the EU. On the other side, the UK imports one-tenth of EU exports, which represent one sixth of the EU economy. However, UK’s exports to the EU have been declining over the last fifteen years, leading to a growth in the current account deficit, especially with some of the largest individual EU economies, with the exception of Germany.

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In addition to the significant commercial relations with EU countries, the EU membership also provides trade bonds with third party countries. Given that free trade agreements with more than sixty countries have been carried out through the EU, only a EU membership can maintain freedom of trade with these countries. Once the UK leaves the EU, it will no longer be part of such treaties. In case of a EU departure, the UK should try to replicate free trade agreements with these countries, given that they currently account for 63% of UK’s good exports.

A Brexit, as the possible British exit from the EU is referred to, might result in a broad range of trade scenarios that would vary depending on the post-Brexit circumstances, such as the terms of departure with the EU, the new trade agreements with non-EU members and the existing economic situation.

One possibility of a post-Brexit EU membership would be for the UK to remain as part of the European Economic Area, as do the non-EU countries of Norway, Liechtenstein and Iceland. A second option is to emulate Switzerland and join the European Free Trade Association, through which it could sign bilateral agreements on specific sectors with the EU. Yet, neither option seems desirable in the event of Brexit. The amount of EU legislation to observe and requirements to fulfill do not align with UK’s purpose of gaining autonomy. A third alternative is the negotiation of a comprehensive free-trade agreement between the UK and the EU, but it would imply being subject to non-tariff barriers and to EU’s common external tariff. The fourth option would be to access the EU market under World Trade Organization rules.

“The economic impact of Brexit”, published by Capital Economics for Woodford Investment Management, states that factors such as the recent drop in tariff barriers, a decline in UK’s manufacturing as a share of GDP and decreasing UK exports to the EU make much less costly a Brexit with no successful EU trade deal. It is due to note, however, that the UK’s most important market is still the EU, and that under EU association, only the Union as a whole can reach trade agreements with third party countries, meaning that the UK could not pursue free trade accords with individual EU countries, such as the neighboring Ireland.

On the non-EU members’ side, Britain could open up to faster growing foreign markets. Nevertheless, the UK alone becomes a weaker entity when compared to the world biggest market of the EU. A Brexit would imply loss of influence and bargaining power during trade negotiations.

In summary, the implications of a British exit for the UK economy are uncertain and difficult to foresee. UK’s post-Brexit negotiation abilities with the EU and other countries with interesting growing prospects, as well as success in replicating free trade agreements with current EU partners, are the most important factors in determining the Brexit outcome.

 

References:

http://www.ft.com/intl/cms/s/2/70d0bfd8-d1b3-11e5-831d-09f7778e7377.html#axzz41LBgO7pO

http://www.economist.com/news/briefing/21693568-david-cameron-will-struggle-win-referendum-britains-eu-membership-if-he-loses

http://www.theguardian.com/politics/2015/may/14/brexit-what-would-happen-if-britain-left-eu-european-union-referendum-uk

https://woodfordfunds.com/economic-impact-brexit-report/#trade-and-the-manufacturing-industry

http://www.global-counsel.co.uk/system/files/publications/Global_Counsel_Impact_of_Brexit_June_2015.pdf

http://www.ft.com/intl/cms/s/0/7e0bce28-dbda-11e5-a72f-1e7744c66818.html#axzz41LBgO7pO

http://www.ft.com/intl/cms/s/0/a23ce766-d0ed-11e5-831d-09f7778e7377.html?ftcamp=crm/email//nbe/WorldNews/product#axzz41LBgO7pO

 

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2 Responses to BREXIT: Implications on UK’s global trade

  1. cherylxing says:

    I agree that EU had a positive effect on the economy of UK, but side effects cannot be neglected. The EU has negotiated a free trade deal with India for more than 8 years, but they never reached an agreement. With 27 member countries, EU has too many interest groups to balance, which makes it nearly impossible to agree on anything. Also, the immigration problem has been increasingly important. The UK government has placed a limit on the number of immigrants allowed in the UK from outside the EU. Many talents cannot work in UK because of this. This is a discrimination against non-EU residents. With the bankruptcy of Greece, the negative sides of EU has appeared, and whether to stay remains a question.

  2. yichunliu says:

    Very interesting article! Both sides have solid reasons to support their stands. On the other hand, according to the FT’s poll, most leading economists/thinkers in the world overwhelmingly believe that leaving the EU is bad for UK’s economic prospects. It is true that there is uncertainty in regard to the implications of Brexit for the UK’s economy. However, it is such uncertainty that would substantially leave negative impacts on business confidence, business investment, FDI, and possibly trade and migration over the medium term. Besides, exiting the EU opens up the possibility of profound change in the UK’s legal, regulatory, trading and fiscal arrangements. Therefore, the period of uncertainty could last for a very long time, which, i believe, would dampen the economic outlook even in the long run.

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