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Brexit Negotiations Impact on the UK

The Opportunities And Threats That May Arise From UK Firms Being No Longer Able To Access The European Single Market As A Possible Result Of The Brexit Negotiations

 

 

 

Introduction

The European Union was established with the purpose of unlocking the member states’ economic performance through an effective trade policy. According to Rueda-Cantuche et al. (2013), ‘the European Commission is of the view that open economies tend to grow faster than closed economies’ (p.931). Subsequently, the EU established a single market in an effort to stimulate efficiency and innovation. According to the European Commission (2016), a single market entails ‘one territory without any internal borders or other regulatory obstacles to the free movement of goods and services’ (para.1). The European Single Market is founded on the Single Market Act. Under the single market system, goods, people, money and services move freely across the member states (European Union 2016).  Egan (2005) accentuates that a single market system is effective in stimulating competition and trade, reducing product prices, and improving efficiency.  Since its inception, the European Union single market has significantly enhanced the economic growth of the respective member states amongst them the United Kingdom. The gains have emanated from widening and deepening of the European Union internal market (Pelkmans 2012). The net effect is that businesses operating in the EU have benefited significantly.

In spite of the benefits achieved, the EU single market is not free from challenges. Amongst the notable challenges entail prevalence of discriminatory treatment by some countries on goods originating from other member states on the premise of technical regulation goods. Thus, some of the EU countries have restricted entry of exports from other EU member states (Messerlin 2011).  Thus, the EU single market system is yet to achieve its full potential. In spite of the benefits gained, the United Kingdom citizens voted in favour of the UK exiting the European Union, which is generally referred to Brexit. In light of the vote to exit the EU, this paper assesses the opportunities and threats that may arise from the UK no longer being able to access the European single market if the proposed Brexit is actualised.    

Analysis

Possible threats associated with Brexit

The UK vote to exit the European Union single market may present the country with a number of opportunities and threats as evaluated herein. As one of the EU member states, the UK has full access to the region’s single market. Subsequently, the UK is guaranteed free movement of goods, labour, capital and services within the European Economic Area (EEA) (Miethe & Pothier 2016). The UK may lose the benefits inherent under the single market system.

Despite the fact that the UK’s vote to leave the EU was spurred by the need to protect the citizens’ interest such as employment by regulating immigration of citizens from the European Union, exiting the EU single market will have a negative impact on different economic sector in the UK. One of the sectors that will be adversely affected entails the banking sector, which plays a fundamental role in the country’s economic growth. The banking sector has extensively benefited from the single market system, which is evidenced by the sector’s global market position. Miethe and Pothier (2016) accentuates that ‘the UK currently boasts one of the largest and most internationally active banking sectors in the world, accounting for 20% of the global banking activity’ (p. 364). The volume of asset held by firms in the banking sector has increased from 100% of the country’s Gross Domestic Product in 1973 to 450% of the UK’s GDP in 2013 (Miethe & Pothier 2016).

 One of the factors that have contributed to this growth entails financial ‘passport rights’ provided under the EEA. The ‘passport rights’ accord businesses in the financial sector to offer different financial services across the EU while they are still regulated by the United Kingdom authorities (Shenkar, Luo & Chi 2014). Thus, the financial organisations are not subjected to new legal requirements. The ‘passport rights’ have made the UK a financial port.  By exiting the EU, the UK will affect the EEA and hence the ‘passport rights’. Subsequently, banks as one of the players in the UK financial sector will face new regulations in offering financial services to other European countries.  Brexit will cause fragmentation of the financial services market (Barker & Binham 2016). The ultimate effect is that the UK will lose its competitiveness as a net exporter of financial services and its market position as the leading intermediary with reference to transfer of funds in the EU (Miethe & Pothier 2016).  In spite of the fact that the UK will retain a strong capital market, it will be substantially difficult for the UK to attract foreign direct investment.

Technical regulations undertaken by governmental and non-governmental entities with reference to international trade contribute to increase in trade costs and are a source of non-tariff barrier. Shenkar, Luo and Chi (2014) assert that technical standards, which include ‘provisions made by government agencies in various countries that pertain to different areas such as safety, pollution, and technical performance’ (p. 66).  In enacting the technical standards, the UK goods may be subject to higher tax rate compared to other goods originating from other countries. Thus, the competitiveness of imports from the UK in the EU market will be reduced substantially.   Messerlin (2011) stipulates that the cost of testing compliance with standards is estimated to account for 2% to 10% of the overall cost (p. 411).  If the UK exits the EU without entering into an alternative trade deal with the EU, the country’s economy would be negatively impacted. For example, Peyper (2016) emphasises that 90% of the UK exports into the EU are likely to face new tariffs, with the transport equipment and textile industries being the hardest hit.

Falvey, Greenway and Kreickemeier (2013) emphasise that ‘each country located in a country has to pay a fixed trade cost, whatever its volume of sales to the country is’ (p. 142). As a result of leaving the EU, financial firm’s offering financial services in other EU countries may be required to establish offices in other EU countries, hence creating sunk costs, which increase the overall transaction costs (United Nations 2003). High sunk costs represent a significant non-tariff barrier (Emmerson, John & Mitchell 2016). This means that the efficiency with which financial institutions operating in the UK contribute to the country’s economic growth will be adversely affected (Jovanovic 2005). The decision to leave the EU has created uncertainty on the country’s economic prospects hence negatively affecting economic development (Fichtner et al. 2016).

Apart from losing the ‘passport rights’, Brexit will increase the tariff and non-tariffs trade barriers faced by the UK.  Exports originating from the UK into other EU countries will be subjected to new regulations.  This will arise from the fact that the EU member states will enact protectionist policies aimed at protecting domestic manufacturers from imports from the UK (Falvey, Greenway & Kreickemeier 2013; Ross 2016). Similarly, the UK may raise tariffs applicable to imports from other EU countries. Setting high tariffs will affect the applicability of the optimal tariff theory, which according to Shenkar, Luo and Chi (2014) assumes that ‘by imposing a tariff, governments can capture a significant portion of the manufacturer’s profit margin’ (p. 55).  Therefore, assuming that exporters will not raise the price f their products, domestic consumers will not incur high product prices while the government will accrue higher proceeds. Application of the optimal tariff theory between the UK and the other European countries will be affected by Brexit. For example, in its pursuit to apply protectionist measures the UK may set high tariffs.   Brexit will lead to creation of regulatory divergence between the UK and the EU hence increasing the cost of trade and supply chains in the UK. Shenkar, Luo and Chi (2014) asserts that high trade tariffs are likely to increase incidence of smuggling goods into the UK. Occurrence of smuggling may cause the UK to lose revenue as manufactures try to circumvent paying the high tariffs.

Leaving the EU would result into trade disputes between the UK and EU companies that are based in the UK.  To overcome the trade disputes, the UK will be required to formulate new laws covering different aspects such as competition policy, environmental standards, fishing, and farming in order to avoid creating a regulatory vacuum. Exiting the EU will further mean that the UK citizens will not benefit from the EU Regulation 261/2004.  According to Kim (2016), the regulation stipulates that ‘British travellers are entitled to compensation in the event of flight cancellations, delays and denied boarding’ (para. 1).It is estimated that compensation paid to British citizens arising from enactment of   EU Regulation 261/2004 have totalled £2.7 billion since 2011.  Actualisation of Brexit will lead to British citizens’ ability to claim for compensation (Kim 2016).              

Opportunities

In spite of the above threats, there are a number of opportunities associated with Brexit.  Leaving the European Union will save the UK approximately £5 and £8 billion annually, which represents its annual membership contribution in the European Union (Emmerson, John & Mitchell 2016).   According to Global Counsel (2015), the UK incurred £27.4 billion annually in the quest to comply with the EU regulations. This indicates that complying with some EU regulations is particularly costly for the UK such as the cost of complying with the Agency Workers Directive, which costs the UK £500 million annually (Global Counsel 2015).  Brexit will free the UK from red tape and need to comply with extensive regulations.  As a non-member to the EU, the UK will have an opportunity to negotiate and enter into bilateral and multilateral trade deals with other countries without being restrained to appease the other EU member states (Global Counsel 2015).  In the process of establishing trade deals with individual EU countries, the UK will be in a position to negotiate trade regulations and standards applicable with the specific economic sectors.  Additionally as a non-member to the EU, the UK will be able to enter into trade relations with other countries in line with the trade regulations set by the World Trade Organisations (European Union 2016).  One of the bilateral trade agreements that the bilateral trade agreements that the UK is consideration with the EU entail the Swiss-style bilateral accords. According to Global Counsel (2015), ‘the UK and the EU agrees a set of bilateral accords which govern UK access to the single market in specific sectors’ (p. 6). Despite the fact that the UK will be subjected to tight trade policies with the EU, the country will access some of the EU market sectors. Pro-‘Brexit’ economists are of the view that the UK economy will grow by 2% by 2020 it exits the EU trade block and by 4% after ten years (Douglas 2016). 

One of the major reasons that motivated the UK’s vote to leave the European Union entails the need to limit immigration of EU nationals into the UK. Leaving the EU will enhance the UK’s effectiveness in dealing with the refugee crisis. The net annual immigration into the UK was estimated to be 330,000, of which 184,000 immigrants originated from the EU because of the free movement agreement. Michael Gove, a British cabinet minister is of the view that leaving the EU will reduce the number of refugees entering the UK by 100,000 annually (Peyper 2015).  Subsequently, the UK will succeed in controlling influx of immigrants unlike Germany and Italy (Peyper 2015).

Conclusion

The analysis indicates that actualisation of Brexit negotiations will have a significant impact on the UK. According to the review, the threats of Brexit greatly outweigh the benefits. Amongst the benefits of Brexit is that the UK will be free from the high cost of compliance with the EU regulations and reduce the rate of immigration. Nevertheless, Brexit will present significant threats to the UK economy. Brexit will lead to loss of trade opportunities inherent under the EU single market.  Brexit will severe trade relations between the UK and EU member states. For example, imposition of protectionist trade policies, and establishment of tariff and non-tariff barriers will negatively affect the efficiency and cost of trade. This will affect the rate of economic growth across different economic sectors and hence the overall economic performance.  

 

 

Reference List

 

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Kim, S 2016, Brexit could cost travellers £300 million a year in flight delay compensation. [Online]. Available at: http://www.telegraph.co.uk/travel/news/brexit-could-cost-british-travellers-300m-a-year-in-flight-delay-compensation/  (Accessed January 17, 2017)

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Peyper, L 2016, The pros and cons; argument in favour and against Brexit. [Online]. Available at:  www.fin24.com/finweek (Accessed January 18, 2017)

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