An Introduction To Brexit

January 4th, 2021

By: Eliz So


Brexit, a word heard so often nowadays, is a combined word of Britain and exit. It refers to the United Kingdom exiting the European Union. If we look at Brexit’s cost and compare it to coronavirus, the price of Brexit is even higher than coronavirus. So what is Brexit? Why does it cost so much damage to the economics of the United Kingdom? And most importantly, how does it affect you?

What is Brexit?

You may have heard this term a lot, but what is the story behind it? Brexit is not a recent issue; the U.K. has been debating this topic since it was first mentioned. Formed in 1957, the European Union (EU) was called the European Economic Community, and the U.K. had to wait 16 years to join. Less than three years later, the U.K. held its first referendum on membership in 1975. At that time, 67 percent of the voters supported staying in the bloc. Forty years later, the U.K. decided to hold the referendum on their European Union membership once again. This time, 52% voted to leave, and 48% voted to remain. Most of the voters who voted to leave lived in Southern England, while the “remain” voters were mainly from Northern England, Northern Ireland and Scotland. It is believed that this issue has led Britain to be more politically divided than ever. Some may even say that they regret voting for leave.

There were various reasons why 52% of the U.K. citizens had voted to leave the European Union (EU), and they all had different expectations of the result of Brexit. One of the significant reasons is economics. The EU failed to address the economic problems that had been developing since 2008. For example, the debt crisis in 2008, which collapsed Iceland’s banking system, then spread to Portugal, Italy, Ireland, Greece, and Spain in 2009; Which caused a loss of confidence in European businesses and economics. Brexit’s supporters are afraid that Britain would follow Europe’s lead in turning Britain into an economic disaster. However, the supporters, for this reason, didn’t foresee that Europe would create trade barriers against Britain. In 2018, the U.K. was 6.21% of Germany’s export, 6.76% of France’s export and 6.84% of Spain’s export. Imposing tariffs towards the U.K. would affect the economies of these EU countries, especially if it isn’t a small portion at all. So, it is reasonable not to have anticipated this result as the U.K. is a lot of European countries’ most important export targets. To add on, most supporters believe that even though the cost of Brexit is expensive, it will still be lower than the total net contribution to the European Union over 47 years. As the U.K. is a more developed and well-off country, they would have to pay more fees to offset some other European countries’ losses. Supporters of Brexit think that these European countries are dragging their country down with this enormous fee. So far, the U.K.’s net contribution to the EU was £216 billion. A more detailed explanation of whether the cost of Brexit had exceeded this amount is written below.

Other than that, there has been an inflow of immigrants throughout these 47 years. As the EU also allows citizens of countries in the European Union to study or work in other countries, the U.K. has been a hot spot for job opportunities or better education. Supporters believe that is the reason for tougher competition in the job market (mostly low-level or labour oriented jobs). Hence, supporters wouldn’t want immigrants in their country to “steal” their jobs. Although this may seem to be a reasonable point, there isn’t enough evidence to support this claim, and in fact, this argument has been oversimplified. The opposite side states that even though migrants enter the labour market, they don’t just increase the demand for labour. With their jobs, they use their wages to rent apartments, buy food and necessities, wants, and consume products or services. That would mean more jobs on the market, building apartments, selling food and necessities, wants, products and services.

On the political side, some “leave” voters rejected both the Conservative and Labour parties, in which both parties had supported remaining with the EU. Since the two parties wanted to remain in the EU, people in the third group, who disagree with both parties, saw this as an opportunity to vote against the British elites (politicians, business leaders, intellectuals, etc.). From Brexit, these supporters expect the British elites to lose their power to control the system, hoping for a new change.

What are the outcomes?

Often, we can hear “Deal” or “No Deal” and Brexit in the same sentence. But what does it mean? If there are no deals between the U.K. and the European Union (EU), the U.K. will automatically drop out of the EU's trading arrangements, the single market, and the customs union. The single market is that countries that share the same rules on product standards and access to services while customs union is the agreement between EU countries not to impose tariffs on each other’s goods. So, if there isn’t a deal by the 1st January 2021, England would have to trade with countries under the EU with standard World Trade Organisation regulations, which means taxes will be in place and border checks will be applied to U.K. goods going to the EU. Of course, this goes both ways, and the U.K. also gets to decide what tariffs and checks to impose on EU goods. However, tariffs and taxes will cause U.K. goods to be more expensive which will be harder to sell in the EU, and full border checks would cause long delays at ports. Having no deals won’t only affect businesses but everyone no matter what job you have, as the price of products would certainly go up for both sides.

If everyone is hoping for a free-trade deal between the EU and U.K., it seems that it is a much better option than no deal, which would cancel out all taxes and border checks, right? Unfortunately, no. Having a deal does not eliminate all the tariffs and border checks. One example is that the EU requires food from non-EU countries to be checked, so no matter what deal the U.K. has with the EU, this check will still stand. However, it does reduce the number of them. A free-trade deal encourages trade by making it cheaper, which is done by reducing or eliminating tariffs or charges by governments for trading across borders, and to remove quotas (limits on the number of goods that can be traded). Initially, Boris Johnson, U.K. Prime Minister, insisted that a deal should be worked out by the 15th of October, but an agreement has still not been reached. So far, the agreements that both the U.K. and the EU share are workers’ rights, competition, and environmental policy.

Other than trade deals between the EU and the U.K., the U.K. was part of about 40 trade deals as an EU member. So, not only are there trade deal talks between the EU and the U.K., there’s still a lot to do with other countries, such as Japan, Australia, the US, etc.

Are the expectations met?

By looking at the current situation, it seems that the expectations of the supporters were too optimistic. According to Bloomberg economics research, they estimate that the economic cost of Brexit has already hit £130 billion, with a further £70 billion by the end of 2020. The causes of a huge economic cost are the following. Firstly, the uncertainty since the 2016 referendum, causing business investments to be held back, which halved the economic growth to 1%. Secondly, the relationship between the U.K. and Group of Seven countries (including the United States, Germany, Japan, Italy, France, Canada and the United Kingdom). Their relationship has been diverging since the vote to leave the EU, which led to having the British economy 3% smaller than what it could have been with a better relationship. The research also mentioned that the estimated economic cost by the end of this year would hit £200 billion since the uncertainty continues to take a toll on companies and consumers. By this trend, especially when there is still no agreement on a free-trade deal, it seems that the economic cost will soon exceed £216 billion, U.K.’s net contribution to the EU throughout these 47 years.

Many Brexit supporters voted to hope for less competition in the job market, ironically, Brexit would cause job losses instead. According to a study done by the University of Leuven, they predicted that job losses in the U.K. could be around 140,000 for a soft Brexit (meaning there would be free-trade deals) and 526,000 for a hard Brexit (meaning there would be no trade deals). If there are fewer immigrants, there should be fewer foreigners “stealing” their jobs. However, that’s not the case. These job losses are caused by companies relocating outside of the U.K. due to Brexit. Referring to research done by CIPD, 1 in 5 organizations say that they are considering relocating all or part of their business outside the U.K. or will focus on future growth outside the U.K. This is concerning as the numbers aren’t small at all. The major reasons corporations are deciding to relocate somewhere in the European Union are that businesses in the U.K. would be impacted by taxes and duty, safety standards, personal data, and movement of people and goods. If there aren’t any new regulations between the EU and the U.K., the U.K. will no longer recognize institutions that oversee some areas or will no longer be a part of the EU free trade area. For example, transfer of personal data between the EU and U.K., mutual recognition of qualifications and relevant licenses (including audit, banking and insurance licences), copyright, trademarks and patents, etc. If the corporation has frequent deals with the EU, they might relocate their businesses within the EU such as Germany or France. An example would be that JPMorgan Chase & Co. is moving about 200 billion euros from the U.K. to Frankfurt, making it one of Germany’s largest banks. But JPMorgan isn’t the only bank doing this. According to Fortune, Financial service firms in the U.K. have shifted about 7500 employees and more than 1.2 trillion pounds of assets to the EU, with Dublin, Luxembourg and Frankfurt seeing the biggest gains. So, we can foresee more business relocation or shifting their focus to other places than the U.K., causing job losses in the country. Suppose you’re thinking about internships in the U.K. In that case, you should know that now the competition may be tougher than before with more corporations leaving the U.K. and hence, with fewer opportunities within the country.

Conclusion

With the EU members and the U.K. having no conclusion after this long, it’s better to prepare for the worst as the talks between the U.K. and other countries are likely to be the same. After 1st January 2021, it’s reasonable to foresee many companies relocating their resources to other places; products from the U.K. may have a significant price change. Especially if you are considering having a small business, follow up the new deals and agreements. It’s possible to see a lot of changes, and we need to know them.

References

The Roots of Brexit

Do you think the UK should stay in the European Community?

European Sovereign Debt Crisis

The Observatory of Economic Complexity

Has the “cost of Brexit” amounted to more than the UK’s total net contributions over 47 years?

Debunking the Myth of the Job-Stealing Immigrant

Banks are moving $1.6 trillion in assets out of the U.K. ahead of Brexit cutoff

The cost of Brexit

How does Brexit affect trade and how will Brexit affect my business?

Tackling post-Brexit labour and skills shortages

Analysis of the Impact of Brexit

Brexit: What trade deals has the UK done so far?

3 Reasons Brits Voted For Brexit

JPMorgan to Move $230 Billion Assets to Germany Under Brexit

Deal or No deal