Brexit

What Is Brexit?

Brexit is an acronym for two English words: 'Britain' and 'exit,' and it alludes to the United Kingdom's (UK) withdrawal from the European Union (EU).

Britain exiting the European Union was a drastic step from the point of view of international economics. It was a long-due discussion, but it was delayed due to several circumstances. 

But finally, on 1st Feb 2020, the decision was made, and Britain exited the EU after a long association with the body.

The United Kingdom and the European Union signed a temporary free-trade agreement on 24th Dec 2020, ensuring that the two sides can trade products without tariffs or restrictions. 

However, major aspects of the future relationship, such as trade in services, which accounts for 80% of the UK economy, remain unclear. This averted a "no-deal" Brexit, which would have been disastrous for the British economy.

On 1st Jan 2021, the UK parliament accepted a preliminary agreement. On 28th Apr 2021, the European Parliament approved it.

However, while the Trade and Cooperation Agreement (TCA) permits tariff- and quota-free trade in products, U.K.-EU trade is still subject to customs checks, implying that trade is not as seamless as when the UK was a member of the EU.

How Did Brexit Start?

In 1951, European Coal and Steel Community (ECSC) was founded with 6 significant members, France, West Germany, Italy, Belgium, Luxembourg, and the Netherlands. 

Britain was invited, but it declined since it focused more on the economic ties with the imperial countries in the Commonwealth.

In 1960, Britain joined a rival body known as the European Free Trade Association (EFTA), which helped remove trade barriers with the EEC (European Economic Community), but Britain had the option of choosing the EEC or being with the EFTA. 

Its economy was not doing so well, and there was a fear of being left behind since the countries under EEC were thriving and progressing. So, in 1961, British Prime Minister Harold Macmillan applied for the membership, which was vetoed by the French President, Charles De Gaulle, in 1963 due to several reasons:

• The French and US relations were weak during the 1960s, and the French were afraid that upon entry of Britain (since Britain had a good relationship with the US) will affect the way the EEC works.
• The entry of Britain led to weaker ties with the British Commonwealth, which De Gaulle thought was a vital part of containing communism.

Again, in 1967, Britain applied for membership, which French President Charles De Gaulle again vetoed because the British pound was too unstable, and Britain needed to devalue it before entering the EEC.

The year 1972 saw Britain finally entering the EEC. This time it was a result of the collective effort of multiple countries. A few years later, Britain also took an important decision regarding continuing its EEC membership. 

In 1993, the EEC became what we know today as the European Union (EU).

Brexit Impact on UK-EU Relations and Economy

There is a study on how the relationship between the UK and the EU will be affected after Brexit. The report studies the long-term effect on the UK economy (till 2030). 

Many reports have stated that it will leave the UK under the impression of having new trade barriers with different countries, which will lead to deteriorated trade in the UK economy.

But there are also some reports which showcase how it will leave the UK economy to boost the national income by larger than 4% in the coming 15 years if simultaneously it also adopts completely free trade.

On the contrary, several research reports showcase how Brexit may boost the national income of the UK. 

According to one research, the referendum outcome increased UK inflation by 1.7 percentage points in 2017, costing the typical British household £404 per year. In addition, the outcomes of the Brexit referendum lowered British national revenue by 0.6 percent and 1.3 percent, respectively. 

Analysts say that the withdrawal's uncertainty lowered company investment by 6 percentage points and resulted in a 1.5 percentage point loss in employment.

From June 2016 onwards, the withdrawal-induced uncertainty about the UK's future trade policies decreased British overseas commerce.

A trade deal was negotiated between the EU and the UK at the end of the transition period. It resolved several concerns to safeguard commerce between the UK and the EU, which is an important trading partner for the UK but does not provide the same benefits as EU membership to eliminate bureaucracy and facilitate trade.

Benefits to Britain under the European Union (EU)

The European Union offered certain distinct advantages to the UK. Let us discuss some of them to understand UK's implications after further leaving the EU.

• Free trade policy – No tariffs and free trade were some of the many advantages available to the EU members. The problem of imports and exports was less since all countries acted as one union and helped each other grow.
• One currency – EU focused primarily on having one currency followed by all nations to ease the hassle of exchange rates and have fluid trade.
• Job opportunities – EU uplifted the restrictions related to work opportunities. The citizens of the EU are free to travel and work anywhere in any of the member nations.
• Free mobility – there is free mobility of capital and labor across the EU. This helped the labor of one country to work in another and earn good wages.
• Security – the nations under the EU have a sense of security and unity amongst themselves to protect them from the threats of other nations. Increased international peace often results in economic prosperity for such countries. Drawbacks to Britain under the EU:

Britain’s decision to withdraw from the EU was partly because of some of the drawbacks mentioned below:

• High Fee – EU charged a high amount of fees to Britain for being a part of the union, and Britain realized that the advantage derived from being a member was relatively less.
• Immigration Problem – 2015 saw the infamous refugee crisis, which led to the migration of many refugees into European nations, especially the UK. The United Kingdom was unclear regarding the job opportunities they would be able to provide to these immigrants, as they had to cater to their people.

Even though the UK did not see a major job-market crisis because of this event, the people of the UK were vocal in raising their concerns regarding the same. 

• Decision-making – The European Union often commands supreme economic powers when it comes to its member nations. This became problematic for Britain as they wanted to have full authority over their economy.

The Impact of Brexit on UK’s economy

It was also a major event in the history of the UK. The chain of events is expected to slow down the economy as trade will dry up, at least in short to medium term.

However, according to several research organizations, the UK economy might pick up the pace if it follows a well-structured import-substitution policy. This could help the UK soften the blow of dampened trade relations.

The effect on the UK economy has also been analyzed by using the Center for Business Research (CBR) macroeconomic model in which two different scenarios are taken –

1. Milder scenario
2. Severe scenario

If (1) is taken, there is a comparatively lesser permanent loss of GDP (around 1%) till 2025. The GDP per capita will most likely remain unchanged with higher inflation and a better job market.

If scenario (2) is taken, then the permanent loss of GDP is severe (around 4% of GDP), and there is also a significant impact on the GDP per capita, which may dip by 2.5-3%. Along with both inflation and unemployment may rise.

Looking at the different categories of how Brexit will impact the UK economy, we may see it as:

1. Fishing Sector

The government pledged significant measures to assist the business in regaining control of UK waters and increasing quota shares, but the reality is far different. Despite official claims that it will result in hundreds of thousands of tonnes of additional catch for UK fishers, the analysis found that by 2025, the increase will only be 107,000 tonnes per year or 12.4% by value for all species.

2. Aerospace Sector

The advanced sectors such as Aerospace will be hit hard. Their competitiveness in the global market would decline because of the economy’s recession due to Britain leaving the EU and may lower government investment in the defense industry, harming the aerospace industries.

3. Employment

The UK job market will also take a hit. There are few sectors in which the losses of jobs are likely, and some sectors will also see a mild boost in their employment levels. A study by the University of Leuven has predicted that job losses in the UK could be around 140,000 for a soft impact and 526,000 for a complex impact model.

4. Businesses

Around 1 out of 5 businesses are considering moving or relocating their business outside the UK.

5. Public Finances

The UK’s public finances will benefit from this as it no longer has to pay the fees for the EU. This will help the UK save on its current payments to the EU budget. In addition, it will strengthen the UK’s public finances by around £8 billion a year just by cutting the fees given to the EU.

6. Foreign Direct Investment (FDI)

The increase in uncertainty in the short run and the fall in FDI and trade in the long term will dampen investor sentiment in the country.

7. Migration

Examining the recent trends and developments, there is still a strong connection between the EU migrants in the UK and the UK citizens residing in the EU. It will surely have a massive impact on migration, and these uncertainties are dependent on the UK’s future.

8. Labor supply

With the implementation of this strategy, the shortage of unskilled labor workers in the UK will increase.

What was the post-effect on the UK after 2020?

Britain-EU relations have not been at their best recently, especially since the emergence of coronavirus in 2020. So let us look at the recent developments regarding the same.

• The post-relationship between the United Kingdom and the European Union is in serious jeopardy. As a result of the UK’s decisions, new border and immigration procedures between the UK and the continent have disrupted commerce and labor supply.
• Due to new border procedures and red tape, the UK’s exit from the EU’s Single Market and Customs Union has caused significant commercial disruption, notably for UK exports to the EU. It’s been difficult to tell the difference between the impact of withdrawal on shortages and the coronavirus outbreak at times.
• London and Brussels have fought on several topics, including diplomatic representation, exports of coronavirus vaccines, and, most importantly, new arrangements for Northern Ireland, where post-withdrawal negotiations over the divorce deal protocol laying out the rules are still underway.
• After winning a majority of seats in the 2021 elections, separatist parties called for another independence referendum, escalating post-withdrawal tensions in Scotland.

Researched and authored by Ankit Sinha | LinkedIn

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