Essay: The impact of Brexit on businesses and the economy

Brexit could simply be defined as the United Kingdom (UK) departing from the European Union (EU) as the final result from the referendum that took place in June 2016, with 71.8 percent referendum turnout and over 30 million people voted (Hunt, 2019). The following outcome from the referendum was Remain 48.1% and Leave won by 51.9%. The Brexit deal could be suggested as an unarguably predetermined event that the EU red tape was too much, which held back Great Britain when UK joined the EU (The Guardian, 2013). The EU implemented monumental and complex rules and regulations on the UK, whilst also having legal forces in the UK such as the European Union court of justice which will stay in place until the outcome of Brexit has been agreed by the UK and the EU. According to Michael Gove, the justice secretary staying within EU costs the UK economy £600 million whilst also paying the EU £350 million every week which therefore accumulates into a large amount end of the year (The Guardian, 2016).
Nevertheless, the negotiations are still in process and the UK and EU have not agreed terms yet but already Brexit is affecting the businesses and economy this has already started with nearly 20 banks ready to migrate and establish in Frankfurt after the vote (Independent, 2018), according to Richard Branson the UK will suffer because of Foreign Direct Investment (FDI) which will increase the percent of thousands of jobs becoming redundant as the Chinese withdraw their investments (Davies, 2016). Brexit is affecting the businesses because the supply chain will increase the cost of trade whilst affecting exports due to the UK not being part of the EU. The analysis of how Brexit has impacted the economy, Brexit has already taken effect on the UK whilst evidence shows in just as early as 24hrs after the referendum with Brexit wiping off $2 trillion dollars of the global market (Fletcher, 2016), thus being the sterling currency nosedive seeing the UK dramatically decline to a whopping 31 year low rate whilst dropping by 10 percent against its fellow US dollar at the rate of $1.33 (Independent, 2018). Nevertheless, with the currency inflating this will lead to the increase in price of goods such as petrol and clothes as this will also increase the cost of living, foods like Marmite and Persil also demanded a 10 percent increase in prices (Butler, 2016) Given the view of Brexit’s ongoing process, it can be suggested that the outcome for Brexit will be the UK trying to negotiate a deal or leaving EU with no deal therefore Theresa May stated that a Bad deal is no better than a No deal nevertheless, the UK is trying to negotiate a soft deal that allows free movement of trade but this would also allow free movement of labour which is her opposition, this deal may be legally impossible to achieve without the consequences of leaving the EU being met (LSE,2019). The potential of the UK and USA striking a deal could be reduced if the UK strikes a soft Brexit which Donald Trump has stated that the soft Brexit will reduce UK’s chances and USA would rather make a deal with the EU than the UK (Walker, 2018).
In regard to the drivers of Brexit which are a key role to the departure from the EU, the customs union, single market and the common policies such as regional regulation. Sovereignty is “The power or national governments to make decisions independently of those made by other governments” according to LSE (2019). In regards to Brexit and how negative it impacts the economy and business, sovereignty was one of the issues that fuelled the EU referendum campaign as the British government wanted to reclaim sovereignty because the EU currently has a full effect on UK sovereignty, therefore that came in place in 1972 Act which allowed the EU law to override the UK law thus allowing the UK very limited ability to make its own decisions as stated by the Telegraph (Foster, 2016). Nevertheless, the Brexit referendum and debate suggested that one of the main drivers for Brexit was immigration therefore this making it a cultural aspect affecting the society, with the UK gaining back control over its borders it will limit the movement for people to enter the UK whilst talented, skilled people from overseas will be lost (Ramsey, 2017). Although the Brexit deal is still in the process of negotiating with the EU the UK will only lose its skilled cultural workers which will result in the decline of productivity in the workplace.
Brexit can simply be clarified as the departure from the single market, customs union and common policies. Customs union is whereby the EU facilitates the free movement of trade by eliminating the barriers of exports and imports whilst applying the same rate of duties on goods that enter or are in the EU (Chapman, 2018). The departure from customs union will impact the businesses that trade in the UK, as this will restrict the free movement of trade that may affect the exporting and importing of goods due to the increase in duty tariffs and paperwork for each goods exported or imported, this will highly affect mass producers that had a huge market in the UK and EU unless Brexit negotiates a deal that allows them to stay in the customs union like Turkey who are part of the customs union but not part of the single market with an agreement on certain goods allowed for imports and exports (Chapman, 2018). Trade Creation is the removal of barriers between partnering members through the process of integrating the increase in exports and imports whilst Trade Diversion is the removal of barriers in cooperation with the creation of common external barriers which therefore leads to the increase in trade between members at the expense of trading with non-members of the club according to Viner (1950, G. Plummer et al., cited in 2005). Brexit means the loss of trade creation as research from the Parliament states that the UK was the largest trading partner within the EU, let alone in 2017 the UK exports were £274 billion to the EU which that is 44% of all UK exports, therefore the imports from the EU to the UK were £341 billion with 53% of all imports from the UK (Parliament, 2018). As this research shows that the UK massively depends on its enormous foreign trading partners as well as the EU depends on the exports such as fuel and food. Brexit places the UK on the non-beneficial side of the trade diversion with regard to the EU because it will no longer be part of the EU therefore restricting its access in the trading sector which does not abide by the EU regulations, although the EU could offer the UK a satellite status if they agree to continuously pay up which will allow them access to the common market (LSE, 2016).
Given the Brexit situation where no deal has been agreed that would allow the UK to access the single market, this will massively impact UK’s business theme of Foreign Direct Investment (FDI). This will increase the trade therefore attracting less FDI due to the increase in tariffs which will impact returns on investments made, the supply chains that multinationals have will therefore be affected due to too many tariffs and more difficult migration controls and according to Dhingra the losses of investment will affect the productivity in the UK and may lower real incomes by 3.4% (2016, Dhingra et al., cited in 2016 ). The FDI and OLI have a parallel correspondence to the Ownership, Location, Internalisation that offer multinational businesses space to operate overseas or in the same sectors. This theory by John, Dunning focuses on the advantages of these three sectors ownership, location and internationalism on businesses deciding why multinationals would conduct business (Fu, 2012). The OLI determines to keep a good relationship with their customers whilst attracting more firms in a larger market as it allocates investment. The ownership advantages are the strengths in the home country of the multinational i.e. marketing advantages, greater finances but with Brexit, the main aspects that will be affected are the location and the internalisation. Brexit will affect the location strengths on the UK because the access of the single market will be terminated thus causing damage directly with firms such as Nissan and Toyota as their invested heavily without predicting the departure of Brexit. The Japanese have heavily invested in the UK with £46 billion in total from companies such as Honda, Nissan, Mitsubishi and Toyota therefore the tariffs will rise up to 10% including customs delays and a lot of paperwork for exports and imports on cars or components of parts that their also import (BBC, 2018). The Japanese threatened to withdraw if their demands are not met of free movement of trade from the UK (Merrick, 2019). The UK will have to divert trading routes to affordable countries such as the USA. Brexit will impact the movement of trade and labour whilst affecting and reducing labour skilled workers, but with the UK economy experiencing a negative impact in the business industry if they leave with no deal is it possible to negotiate a deal that would benefit the UK massively by agreeing a deal similar to the Norway deal that allows them to access the single market which is based on an agreement to trade on certain goods (LSE, 2018). The Brexit deadline is approaching in March 2019 whereas the outcome or the deal that is going to be negotiated is still unheard of since the referendum in 2016. The Centre for Economic Performance Brexit Analysis (CEP) research suggested that the UK has an estimate of over £1 trillion stock value of FDI which almost half of it is from their fellow members in the EU, nevertheless this vast FDI investment in the UK only saw two other countries receive more which are the USA and China (LSE , 2019). After the referendum of Brexit Richard Branson’s Virgin Media lost a value of its third whilst he stated that the outcome of a no deal or hard Brexit will therefore impact some businesses in the UK to close down completely giving the example of, if the sterling declines and becomes 1:1 with USD it will therefore mean the prices of holiday packages that virgin holiday sell would increase therefore a lot of people won’t afford this (BBC, 2016).
Regarding Brexit one of the government issues that will massively affect the UK is the reduction of the worker’s movement. Brexit is arguably causing distress to the UK workers as the EU law currently protects them but the UK government refuses to rule out stripping employment protection as the UK harshly deemed that it’s not a priority (Stone, 2016). Although the UK and EU agreed that their home national residents that are both abroad can reside in either host’s country (Europa, 2019). The UK’s population is 63.7 million, non-British is 5.3 million and 2.9 million are from Europe whilst the UK nationals that are overbroad in the EU are 1.2 million according to statistics provided by BBC (BBC, 2016). Therefore, with the departure of Small Medium sized Enterprises (SME) and the free labour movement is restricted due to Brexit this will affect the economy and lead to the increase in high taxes, as it is found that an EU migrant worker pays £2300 more per year than the British average worker according to Independent (Merrick, 2018). The urban areas in the UK are the ones which have a vast number of migrates, places like London which have roughly 3.4 million migrates (Migration, 2018), although this is due to the tourist attraction, business investments and higher salaries. The amount of Eastern European workers that offer their set of skills and obdurate determination towards working and helping the economy in the UK will be reduced due to Brexit affecting the labour movement, although arguably without migrates the UK could experience low birth rate which therefore the dependency ratio goes up meaning that they are fewer workers to take care of the elders which will lead to fewer people working in hospitals because the wage will be low and the taxes will be high which therefore lowers the spending money levels which will be bad for the UK economy (O’Grady, 2018).
Alternatively, the UK is currently abiding by all laws and regulations in the EU this would consist of common policies although after Brexit the UK will no longer abide by these policies which will make things a bit harder considering the barriers of free movement of trade will no longer be effective therefore businesses will find I difficult to operate because of longer checkpoints and affecting the import and export due to using new routes. The EU Environmental policy ensures the protection of the members of the EU environment that will help overcome the climate changes. The EU Environmental policy provided red tape that would safeguard and enhance the environment within its borders to reduce waste, ensure safe water to drink and bath, better quality of air whilst reducing chemicals that are harmful (Europa, 2019). The environmental policy as it stands whilst the UK are part of the EU it strives to maintain the high standards of environmental by providing a safe place and help bolster the economy. It could be arguable that some common policies such as the environmental policy which make it better for the UK because of less red tape or regulations and some departures may mean reduced support such as the agriculture policy. Common Agriculture Policy (CAP) is common policy that the EU supports its farmers to ensure that there is a stable chain of supply for affordable food, ensure a fair living, the assistance of overcoming climate change whilst managing the sustainability of natural resources and creating jobs in rural areas by promoting jobs in farming (Europa, 2019). Nevertheless, Brexit will mean that this CAP policy will mean reduced income support from the EU which was currently providing £4 billion yearly to support the UK farmers (Parliament, 2018), although this could be beneficial to the farmers as they can now make new trade deals with countries that are not within the EU. It is unknown with no proven evidence whether the UK will be capable to support its farmers and protect the UK environment from potential risks after Brexit.
As Brexit’s uncertainty of destination in regard to the final result that has caused a sequel stir with some beneficial and problematic aspects of Brexit. The severity of Brexit could be chaotic if there’s a no deal Brexit as the Ireland prime minister states that their country is preparing for a no deal Brexit but this will hugely affect Ireland as the UK are its biggest trading’s partner, although Theresa May agreed a “backstop” deal that still allows the free movement of people and trade it could be put at risk after Brexit (New York Times, 2019). Since a no deal Brexit would massively affect the UK in short term there could be a suggestion that it would try applying the Norway Model. Norway which is in the European Economic Area has full access to the EU single market that allows the free movement of people, goods, capital and services. Although Norway doesn’t have decision making power whilst also contributing to the EU budget, a deal like Norway would not solve the Ireland boarder issue unless the UK additionally adds a customs union deal too (Morris, 2018). Nevertheless, with the possibility of Brexit in name only (BINO) whereby the UK still give full power to the EU thus still being a member of the EU whilst having access to the single market and customs union, this will cause anger the people who voted to leave (Rayner, 2018). If the UK fails to agree on a deal it could counter offer a deal with the USA which would be massively beneficial because the USA and the UK are the largest exporting and importing countries with the statistics stating that the UK earned £100 billion from exports to the USA, with £66 billion imports from the USA according to National Statistics (National, 2018). A deal like this would bolster the UK economy, Trump wants the UK and USA free trade deal before 2020 but also warns Theresa May that this may be affected if Brexit agrees on a soft deal as this deal will expand the UK and USA relationship (Riley-Smith, 2018). This USA and UK trade deal would be beneficial to the UK in terms of FDI as the USA is the largest single country source with FDI in the UK but in comparison to the EU if being measured as a whole the EU could be a larger source of FDI (Walker, 2018). A no deal Brexit would mean the UK can divert to finding new trading partners such as India, Australia, America New Zealand and Africa that could help the exports, imports and give the UK a location advantage on FDI. Although the USA has proposed to increase import tariffs by 220% which will affect UK trading and Bombardier the Aerospace company. Bombardier Aerospace company currently employs 4100 people in Northern Ireland which will be put at risk because of the allegations of price dumping whereby Bombardier sold aircraft wings worth £14 million for £10 million below the actual price so Donald Trump infused the increase of traffics which will therefore affect the UK as Bombardier will close down in Belfast (Campbell, 2017).
To conclude, Brexit can arguably be considered from the evaluation of points that it was highly influenced by both cultural and political drivers as the UK struggled to have a steady understanding bond with the EU ever since they joined in 1973 due to the UK not being able to control its population due to no control over its borders, not being entitled to its own markets and the EU overriding the UK law which the people voted because they want to gain sovereignty powers back over the EU that is strongly against the idea of removing free access borders to its EU members. Although a no deal Brexit will severely affect the business and economy because businesses will be affected by the FDI, trades and exports and imports barriers. Although for it to be a less severe Brexit the UK will try reach an agreement with the EU such as a Norway deal which allows them access to the single market in which the UK will still be able to do their trade and still attractive for the FDI which would still mean the UK will have to contribute to the EU market. A Norway deal means access to the single market but not the customs union which will also affect the UK in increased duty tariffs, longer checkpoints and more paperwork which some companies like Nissan will hugely be affected to exports and imports.
17.1.2019