The Impact of Brexit

The UK Government formally announced the withdrawal of the United Kingdom (UK) from the European Union (EU) in March 2017 which was followed by a referendum that took place on 23rd June 2016 in which 52% casted their vote to leave and 48% casted their vote to stay. With this the beginning of the Brexit process started; meaning “British” and “exit” (Emerson et al., 2017).

However, the Brexit negotiations period was extended until 31st January 2020. The transition period has started on 31 January 2020, when the United Kingdom is no longer European Union member and its planned to finish until 31 December 2020. During this period, both parties will negotiate a good partnership for the future, in this period business will continue as usual for individuals, consumers, students, in Europe and the United Kingdom. However the UK will not participate in decision-making in Europe Union, but some processes will remain as agreed in the single market with all policies applied; also the United Kingdom must continuing contributing to the Unions budget covering this period (Transition period, 2020).

Overall economic and business implications of Brexit for EU trade as a whole

Brexit is likely to impact British and European firms organizationally which will affect many decisions, investments in the UK and their structures. There might be many unsettling after-effects of Brexit resulting in difficulties in adapting their organizational structure including business areas and business units. Brexit will create barriers to trade which will result both British and European firms to find coordination costs increase between their headquarters and local branches, and between units in the UK and the EU.

UK multinationals, like Vodafone, BAE, BT, Rio Tinto and Shell, after estimating advantages and disadvantages of the uncertainty it would cause did not support the UK to leave EU. In addition to it, 60% of the Institute of Directors and EEF memberships supported the staying of UK with EU. The most defender for the withdrawal of Brexit was the banking sector. Banks like The Royal Bank of Scotland Group plc, HSBC, JP Morgan and Deutsche were aware of the potential damage that Brexit can cause to the economy which might end up being a threat in the banks’ domicile.

To stimulate the impact of Brexit on both the UK and the 27 European Union countries (EU27) there have been a number of model-based attempts from official sources like Netherlands Central Planning Bureau, OECD, UK Treasury and from few independent academic institutions such as Open Europe in London, London School of Economics, IFO in Munich. The economic impacts are much higher for the UK as compared to the EU27 since the UK trade with the EU27 is a much bigger fraction of the UK’s GDP than that of the EU27. It does not mean that there will be no economic impacts of Brexit on the EU27.

These model-based simulations have quite similar hypothesis in that they have simulated 3 range of scenarios. The first one being called as optimistic which means that there is a small increase in trade barriers between the UK and the EU27, the second one being called as pessimistic which means that is a large increase in trade barriers between the two parties and the third one being called as central between the polar cases. In several cases the optimistic scenario assumes that the UK would enjoy a government close to that as member of the European Economic Area like Norway. It is usually assumed by the pessimistic scenario that the trading relationship between the EU27 and UK is reduced to the terms of their World Trade Organization (WTO) membership, with tariffs introduced at Most Favoured Nation (m.n.f.) rates.

The focus of most models is the impact of Brexit on GDP and trade flows. For instance, a fall of the EU27’s export to the UK of 30% and for UK’s export to the EU27 of 22% is estimated by Lawless and Morgenroth (2016) considering only the introduction of WTO m.f.n. tariffs. Ireland and Belgium are estimated to have a much larger impact of Brexit. As per the results combined over the whole decade until 2030, for the optimistic and pessimistic scenarios on average there are losses of 0.11 to 0.52% respectively on GDP for the EU27. This means that the impacts would be insignificant and hardly noticeable for the whole EU27 economy if they were spread evenly over these years (Europarl.europa.eu,2020).

Trade-in goods and services

A trade deal is scheduled by the end of 2020, deciding the future relationship with the UK. This deal must be fair to both parties once a considerable number in trade business every year.

In 2018 the EU exported 54% of all the UK imports, trade goods and services were valued £357 billion, 48% of services of The UK were imported from EU27.

The major products exported to Great Britain include medicinal and pharmaceutical products worth £18 billion at and electrical machinery valued at £11 billion (UK trade in numbers, 2020).

Related to services exported; travel has the most significant participation during this period, this kind of services include, restaurants, hotels, travel agencies, tour operations and airline companies. Spain was the largest source of travel services, followed by France (UK trade in numbers, 2020).

Services exports to the United Kingdom, 2018

EU budget contributions

The UK contribution to the 2019 EU budget has been estimated by € 7,95 billion, to fill the gap, the European Commission is planning to reduce regional spending of up to 30% (Henden, 2019).

In the speech of 17th January Prime Minister May said that the UK will not have to contribute huge sums to the EU market as it will be no longer members of the single market. The EU is likely to face a €9 billion ‘hole’ in its annual budget with UK’s withdrawal, being the estimated amount of the UK’s net contributions at the present time. The contribution that Norway makes would be one reference amount if the EU demands a contribution as a condition for a CFTA (Continental free trade agreement). This gives about €3.5 billion since UK will not be a member of the single market like Norway in the European Economic Area and this might be considered the outer limit or beyond for the UK. If on the other hand the UK has simply a WTO (World Trade Organization)-based relationship with EU and there is no CFTA, then with an estimation of roughly €4.5 billion of the EU budget would receive additional tariff revenues. Interestingly this amount is almost similar to the above mentioned ‘Norway-based’ calculation. Hence, the EU would recuperate, in both cases, around a third to half of its loss of UK contributions. But there also emerges the issue of ‘legacy costs’ of the divorce. Including the European Commission, there has been considerable mention of this by the public, with figures in the range of €20-40 billion sometimes cited. However, there has been no definition so far of what such costs would consist of, beyond for example remarks about the payment only after its withdrawal which were commitments made before the UK’s withdrawal, and about pension liabilities for retired EU staff. There has been so far no listing of the EU’s assets and liabilities, including contingent liabilities such as loan guarantees, nor explanation of the legal basis for this or that claim that the EU might make.

Fisheries

The Withdrawal Agreement states Great Britain become an independent coastal state and takes total control of fish stocks, also prohibiting access to fish and boats will not have the automatic right to enter in the UK zone. The EU members most impacted are Ireland, Germany, Belgium, Spain, Sweden, Denmark, France and the Netherlands. A legal agreement is being put in place to allow both parties to have access to each other’s vessels (Department of Agriculture, 2019).

Other services

Across the Irish-UK market there is a very close integration of business and enterprises commercially. This is leading Ireland’s unique exposure to Brexit which is impacting on EU business. Countries like Ireland depends highly on exports to the UK. In addition to it, following the end of the Brexit transition period, US business should consider the potential for double tariffs on the products that are exported to the UK and then re-exported to the EU27 as US business maintains a European distribution centre in the UK. Such products on entry into UK are likely to face tariffs and then under the EU customs union further tariffs on re-export to the EU27. After the end of the Brexit transition period, in relation to services, non-EU business who for the purpose of EU Single market rules used to take advantage of UK subsidiaries or establishment will no longer be able to rely on a UK regulatory authorisation as a basis for passporting of such services into the EU27. The flow of goods into and out of the UK will be affected due to the blockages at EU ports after the Brexit transition period, with 50% to 85% of HGVs likely to be not ready for requirements as per French customs. For goods leaving the UK there can be a delay of up to two-and-a-half days could occur.

Economic implications of Brexit for the UK

One of the uncertainties expected for the coming years with the Brexit agreement is the damage that could be caused to the UK’s economic growth.

Data from 2015 show that the UK grew 2.4% and in 2018 only 1.5% already with the issue of Brexit close to the agreement. There is an estimated growth margin of 6.7% for the next 15 years, depending on how the trade agreement between the European Union will be.

In the last few months the pound has been falling, today (02/29/2020) quoted $ 1.28 against the dollar, on the day of the referendum it was quoted at $ 1.48, both exports and imports may be hindered in the future.

Economic modelling studies show that the more barriers to trade with the European Union, the greater the impact on the UK economy. Exports would have a high cost, products would become more expensive in the European Union, hurting UK exporters. In the case of imports would also suffer increases to the United Kingdom, one-third of its products are imported from the European Union, this can cause inflation in its economy.

A very important point to be considered may be the disadvantage of not having the cutting-edge technologies granted by the European Union, which has a very strong work for research and development of energy and help in the environment.

Questions yet to be decided about the agreement are how would the procurement contracts in Europe be, companies in the United Kingdom may lose these disputes and a big loss would be in the banking sector where it has a strong presence, mainly for London.

An important fact that may change in the future is about the entry of international companies in Europe through London, since London is considered to be their gateway to the English language, these companies could use Dublin for example, to do their business on the Europe

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