How Brexit will harm UK’s trade profit and domestic economy?

Brexit has been a very frequently mentioned topic lately. UK is very likely to exit EU in the next few years as long as Cameron keeps staying strong in British political circle. It is very controversial that should UK insist to leave EU. But according to most of the people, this is not a smart move. UK might suffer from significant reduction in incomes, major slump in trade and investment. Brexit will also hurt other EU countries, which have close tourism and financial links with UK such as France, Germany, Italy, Malta, Cyprus and Luxembourg.

It is concerned that UK will experience a sudden outflow of money after Brexit. This will raise UK’s current account deficit of 5% of national income hard to finance. In that case, it requires a higher risk premium on the tremendous capital inflows to finance the deficit, which will result in an immediate fall in sterling and the price of UK assets.

Other economists have totally opposite ideas. They believe that investment will fall in the wake of a bumpy exit from EU. This will result in continuous slow growth and further affects GDP and this dampening effect on investment will last for couple years.

Brexit will also cause a big clampdown on immigration from EU and cut and already limited supply of skilled labor, which will lead to lower potential growth, lower consumer spending, and weaker investment growth. This will further affect government budget, and result in higher taxes or lower public spending.

Currently, 90% of UK’s trade with Europe is in goods and both UK and EU benefit from the free-trade agreement within EU countries. Brexit will bring harmful effects to both parties with higher tariff and trade barriers. What is more, EU and UK will become competitor instead of partners when it comes to priority of trade deals with other countries. Not even mention the time that they will spend on reaching all of the new trade agreements and the adjustment period follow after. It is obvious that, in short term, Brexit will bring only a whole lot of mess to British economy.

Brexit-Infographic-791x1024.jpg

To be more precise, economists divide Brexit to three scenarios: soft exit, deep cut, and isolation. In soft exit scenario, UK remains European free trade association, non-tariff barriers, and tariff-free trade with EU. In the second scenarios, UK will remain the bilateral trade with US, tariff and non-tariff barriers. This will retain some access to the European single market, which is similar to Norway and Switzerland. In the third scenario, UK will lose privileges arising from EU’s 38 existing agreements with other countries as well as negotiations and loses in barrier-free access to continental trade and to countries with that EU has ratified free-trade agreements. However, both UK and EU will experience from various extent of economic damage even in the best case.

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Hence, Brexit is not a good solution for UK to improve its current economic situation. It will hurt both UK and other EU countries in trade profit and domestic economy even UK applies a soft exit. The damage will persist in long term as well as short term.

 

 

References:

http://www.bloomberg.com/news/articles/2016-02-19/here-are-the-numbers-that-show-who-brexit-would-hurt-most?bcomANews=true

http://www.ft.com/intl/cms/s/2/70d0bfd8-d1b3-11e5-831d-09f7778e7377.html#axzz426k1K4ah

http://www.valuewalk.com/2016/02/brexit-dangers-populist/

http://metro.co.uk/2016/02/28/eu-pulls-plan-to-ban-super-strength-kettles-out-of-fear-it-could-cause-brexit-5722005/

 

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2 Responses to How Brexit will harm UK’s trade profit and domestic economy?

  1. dingyaoxi says:

    We need to admit that Britain has significant commercial relations with EU countries. Half of UK’s exports go to the rest of the EU, which accounts for about 14% of the British GDP. Leaving the EU means that Britain has to give up benefits from non-tariff barriers, and tariff-free trade within EU and free trade agreements with more than sixty countries outside EU, which may result in significant reduction in incomes as well as major slump in trade and investment.
    However, we can’t neglect the benefit Britain may gain from leaving the EU. First of all, leaving the EU would result in an immediate cost saving, as British government would no longer need to contribute about £10bn per year to the EU budget, which is about 7 per cent of what the government spends on the NHS each year. Secondly, recent years, Britain suffered a huge increase in immigration, which has led to some difficulties with housing and service provision. Leaving the EU can help Britain cut immigration dramatically and regain control of borders. Thirdly, leaving the EU will allow Britain to re-establish itself as a truly independent nation with connections to the rest of the world.

  2. dingyaoxi says:

    We need to admit that Britain has significant commercial relations with EU countries. Half of UK’s exports go to the rest of the EU, which accounts for about 14% of the British GDP. Leaving EU means that Britain has to give up benefits from non-tariff barriers, and tariff-free trade within EU and free trade agreements with more than sixty countries outside EU, which may result in significant reduction in incomes as well as major slump in trade and investment.

    However, we can’t neglect the benefit Britain may gain from leaving EU. First of all, leaving the EU would result in an immediate cost saving, as British government would no longer need to contribute about £10bn per year to the EU budget, which is about 7 per cent of what the Government spends on the NHS each year. Secondly, recent years, Britain suffered a huge increase in immigration, which has led to some difficulties with housing and service provision. Leaving the EU can help Britain cut immigration dramatically and regain control of borders. Thirdly, leaving the EU will allow Britain to re-establish itself as a truly independent nation with connections to the rest of the world.

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