BREXIT – not a good deal? Not an easy deal.

“It took Britain 12 years to get in and I think it would take six to 12 to get out,” said Peter Ludlow, a Brussels-based historian and chairman of the Euro Comment research firm. “And it won’t be a nice getting-out.”

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A heated debate keeps going on about BREXIT these days. Trade is very important to the European Union. Supporters of Brexit claim that Brexit would not affect trade for a long run because Britain, the Europe’s second-biggest economy, will negotiate new “free-trade” deals with the EU anyway. Brexiteers claim that Britain’s market is very important to the EU because it has a large trade deficit with the rest of Europe. Thus, Britain could rely on World Trade Organization (WTO) rules or try to get free-trade deals between Britain and EU, just like Canada’s.

Yet, the anti-Brexiteers argue that if Britain does exit from the EU, it will be hard for Britain to negotiate any good trade deals. The opponents for Brexit are worried that if Britain leaves the EU, the EU may fear that other countries will copy this action, and thus the EU won’t be friendly to Britain. Moreover, the history shows that EU is better at dealing with smaller countries but not efficient to deal with bigger ones. This might due to the resistance from Europe protectionists when dealing with bigger economy markets. To explain more, if Britain wants to achieve trade deals with EU after leaving, it needs the approval of the European Parliament and all the other 27 member countries.

Britain has benefited a lot from joining the EU. See the chart below as one evidence.  And currently, 45% of British exports goes to other EU countries, while only 7% of their exports comes to Britain. Thus, EU countries, considering trade deficit, could see few benefits or no interest in making a trade deal.  Furthermore, the WTO option or trade offer like Canada’s deal would not remove non-tariff barriers or the terms will not cover all goods.

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In addition to obstacles of getting a new deal after Brexit, many scenarios are made to analyze the economic consequences of Brexit.

The best outcome is that Brexit undergoes an orderly process which avoids short-term turmoil and brings greater prosperity in the long run to Britain. However, most economists question the underlying assumptions in this scenario. In this scenario, four assumptions should be met: 1) Britain repeals EU regulation to reduce the regulatory burden; 2) a new immigration policy is set to restore control over its borders; 3) Britain needs around £13bn a year in budget to cut down on the cost of membership; 4) Britain needs to negotiate agreements with not only the EU but also non-EU countries, such as the US, China, Japan, India, and Australia. However, in reality, as we discussed above, it’s hard for Britain to meet all of these requirements. Thus, the best outcome is not promising.

Another scenario may be that Britain’s economy suffers after Brexit. Trading relationship with Europe becomes worse than before. Benefits could not offset the loss and Britain’s economy begins to fall behind the country’s European partners. This scenario is consistent with the logic, to some extent. Acrimonious negotiations could drain confidence from the British economy. Movement of labor is curtailed, even Britain obtains a looser trade deal with EU, the price becomes weaker. Britain loses competitiveness to the EU market for goods and particularly services. And Britain will find it difficult to sign beneficial trade deals with other countries. Less foreign direct investment will flow into Britain, and fewer immigrants and unsure impact of changing regulation will harm the economy.

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So far, most economists think that practical problems and uncertainty over future trade will make Brexit not an easy deal.

References

Chris Giles, “What are the economic consequences of Brexit?”, Financial Times, February 22,2016,_accessed March 24, 2016  https://next.ft.com/content/70d0bfd8-d1b3-11e5-831d-09f7778e7377

James G Neuger, “Hangover at Teatime: Why ‘Brexit’ Breakup Is So Very Hard to Do”, Bloomberg, February 29, 2016_accessed April 7, 2016 http://www.bloomberg.com/news/articles/2016-02-28/hangover-at-teatime-why-brexit-breakup-is-so-very-hard-to-do

“Unfavourable trade winds”, Economists, March 26, 2016, _ accessed April 12, 2016 http://www.economist.com/news/britain/21695544-it-would-be-hard-britain-negotiate-good-trade-deals-post-brexit-unfavourable-trade-winds

William Schomberg, “Brexit and Britain – what would it mean for UK trade?”, Reuters, March 15,2016, _accessed April 4, 2016 http://uk.reuters.com/article/uk-britain-eu-trade-idUKKCN0WG16R

 

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One Response to BREXIT – not a good deal? Not an easy deal.

  1. Lujia Xie says:

    This is an informative article about whether Britain’s exiting EU is a good deal or not. The supporters of Brexit hold the opinion that Brexit would not affect trade for a long run since British market is very important to the EU and that Britain will negotiate new free-trade with the EU anyway. However, the anti-Brexiteers argue that Brexit will harm Britain’s economy and that the EU will not be friendly to Britain anymore.

    To say it’s a good deal, the best outcome is that Brexit undergoes an orderly process which avoids short-term turmoil and brings greater prosperity in the long run to Britain. However, the best outcome is not promising thus brings about the not-a-good-deal viewpoint. This scenario argues that Britain’s economy will suffer if Britain exits EU from the aspects of movement of labor, prices, and thus competitiveness. Overall, it’s still waited to be seen whether Britain will exit the EU and the outcome still depends.

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