What Impact is Brexit likely to have on the UK Economy?
Brexit is an abbreviation used for “Britain Exit,” referring to the decision of the United Kingdom to leave the European Union. Brexit involves negotiating new trade deals, citizen registration rules, borders, etc. The process began on June 23, 2016, after the referendum passed 51.9% to 48.1%.
After 3 long years of discussions and voting, The United Kingdom left the European Union finally on 31 January 2020, after 47 years of EU membership. Britain has been questioning the pros and cons of its membership in a European community from the moment the idea was broached. It conducted its first referendum on membership in what was then called the European Economic Community in 1975, less than three years after it joined. The EU and the UK have jointly agreed on a transition period, which will conclude on 31 December 2020. Till then, it will be as usual for citizens, consumers, businesses, investors, students, and researchers. The EU and the UK will utilize this transition period to negotiate an ambitious and fair partnership for future dealings.
On the day of the referendum result, the pound dropped to a 31-year low rate. This reflected the uncertainty that the investors felt for UK’s future post-Brexit. As investors adapted to the news, the pound strengthened. However, once the Brexit transition plans were released and rejected multiple times, the pound weakened again. With possible delays at the borders and additional requirements for importing components, companies will need to hold more inventory to prevent delays. Honda already closed its plant in Britain, while Nissan decided to make a new model of cars in Japan instead of in Britain.
Coming to the part why it took so long to leave the EU, there was no pre-existing playbook for a country looking to drop out of the EU. Before they could even start planning their subsequent relationship, Britain had to negotiate a withdrawal agreement spelling out the terms of its departure. Britain had voted in favor of Brexit, but it was never completely clear what exactly that meant. Some argued that Britain could pursue a “soft Brexit” and can seek a close relationship similar to Norway, an outsider bound by many EU rules. Others often railed against that course as outside the spirit of Brexit and urged it to be a clean break i.e. a “hard Brexit.”
Talking about the benefits of Brexit, if the United Kingdom goes for a hard Brexit, they would achieve more freedom to create their own trade deals and regulations. A hard Brexit represents a scenario in which the UK gives up access to the single market and customs union. Regaining sovereignty is seen as a win even by those who opted to stay in the EU. However, by being a part of the EU, the United Kingdom benefits from trade deals between the EU and other world powers. As an entity, the EU exerts stronger bargaining power as it is the largest economy as a group. Thus, by leaving, the UK might lose negotiating power and free trade with other European countries. As the UK tries to recreate trade deals with other countries, they may get a less favorable result.
Some of the pro-Brexit voices have argued that short-term economic pain had always been likely, and that benefits will come in time. Many British officials have pointed to the country’s speedy approval of the Pfizer vaccine for COVID-19 as proof of how the country is no longer held back by European bureaucracy. Currently, the leading issue holding up a deal is EU fishing rights in UK waters and maintaining a ‘level playing field” in economic competition. A level playing field refers to having access to the EU single market, the UK will need to abide by the same rules and regulations to ensure that it doesn’t have an unfair advantage over EU businesses. Even though fishing amounts to less than 1% of EU trade, it is valuable to several European countries. Already the U.K. has announced that Royal Navy patrol ships are ready to protect UK fishing grounds in an event of a no-deal Brexit.
While after the exit, the other union members would still continue to manage like in the past accordingly having most of their benefits intact. However, the power structure definitely can’t be expected to be completely smooth after Britain’s exit considering how important they were in terms of the resources they brought in and other aspects like opportunities for other countries for example jobs, etc. Both the sides, in this case, Britain and the remaining part of the EU shall be affected but in front of Britain, there lies a greater risk of high ups and downs both especially now that the catastrophes caused by the pandemic keep on bringing new and more difficult situations for countries all over the globe to respond. Other members of the EU like France, Spain, etc. now also have a good opportunity to exert more influence and to use the vacancy in business created to their benefit due to the exit of Britain.
With only a limited time left to strike a deal, it is likely that even if one is achieved, it will be a ‘thin’ deal. That suggests one that leaves many issues unresolved to be handled in later negotiations, likely creating problems. So what changes on 1 January 2021? Irrespective of whether there is a deal or no deal, the way people live and work will be different.
People who move between the UK and EU to live, work, or retire will no longer be automatically allowed to do the same. The UK will now apply a points-based immigration system to EU citizens. Travel rules are changing, passports, driving licenses, and even insurance might have to be altered. The UK will no longer make such substantial annual payments towards the EU’s budget. Arrivals from the UK will stand in a different queue at passport control in EU countries and businesses trading with the EU will experience a lot more paperwork. British businesses would have to follow WTO tariffs when trading with plenty of other countries in the world too. With less than a week left currently, it is to be seen what comes next in the Brexit Chapter.
Written By- Nikunj Gulati