Essay: Economic consequences of Brexit for the UK trade

Base on The United Kingdom European Union membership referendum on 23 June 2016, 51.89% of voters supports the UK to leave from the EU. The result has shocked the world, the impacts of Brexit is not only between the UK and the EU economies but also the world. The reasons of why British wants to leave from the EU and the advantages from that could be many, the following reasons are the highlight of why Brexit will happen. Firstly, Brexit can save money for the UK state budgetfrom the membership cost of the EU and increase its public expenditure likes NHS. Secondly, from the view of the economy, the UK will no longer to restrict by the law of EU and the agreements of free trade by the EU. This means the UK can have trade agreements with the non-EU member which gives higher flexibility to the UK economy. Thirdly, Brexit could ease the issues of immigration and refugee. Indeed, Brexit will also bring impacts to the UK economy. The original date of the Brexit was 29th March 2019 but now the new Brexit date has accepted to 31st October.
At this moment, the priority for the UK government is to get ready for the economic consequences by Brexit. In this paper, I will analysis the current economic consequences of Brexit for the UK trade, the possible impacts on the UK manufacturing industry and the UK trade scenarios when UK exits from the EU. After the result of the EU referendum, since British is not exiting the EU immediately which means the economic consequences may to exist so quickin the market until the government has more details about if the UK has an economic deal to the EU. However, there is an obvious economic consequence that shows in the market after the result comes up which is a deeply fall in pounds. The following graph shows the exchange rate between the British sterling and US dollar. The source is from Thomson Reuters Datastream. This shows the British sterling has a massive drop after Brexit by about 10%. There could be many reasons that cause depreciation in pounds. For the main reason, there are many investors around the world and have investments in the UK as housings, stocks, and shares. They are willing to keep their investment in the UK when the UK is politically and economically stable, but Brexit becomes upa lot of uncertainties to the UK economy. Investor leaves to UK market for lowest their risk, they sell their investments to pound and sell pounds to invest in other countries or save their money in the bank. At that specific time, too many people sell British sterling and lead to a high supply in the currency and people are afraid to keep British sterling which results in a massive drop in pounds. This is based on a simple economic theory, supply and demand. So, what is the economic consequences in trade could be when there is a fall in British pound to the UK. Currency has an important role in trade, medium of exchange, or we normally called as payment. The depreciation in British could improve the balance of trade as the side effect of Brexit. Firstly, the import would decrease. For the companies which rely on imported goods and sell in the UK, their profits would fall. It is because when they import goods from aboard, they need to exchange the currency from British sterling to the foreign currency and make the payment aboard.
When there is a fall in British pound which means the value of pounds is being less than before. They would need to a higher amount of pound to buy the same amount of goods aboard or they would purchase less, and the competitiveness of the import goods would be lower since the cost of goods increase. On the other side, exports would increase. For the companies which export goods and services, they can enjoy a higher profit when British sterling falls. It is because the foreign currency that receives from the exported goods can exchange in a higher amount of pound which means their profit increases. Also, some companies might lower the price of their goods for higher their competitiveness. Moreover, the depreciation in British sterling can lower the costs of the UK travel cost which means the UK becomes more attractive to foreign travelers. This means the tourism industry could be better off from Brexit and obdurate travelers would be more willing to spend money in the UK. The source of the chart above is from National Statistics chat shows the UK balance of trade from the first quarter of 2015 to the first quarter of 2018. The UK referendum is done on June which is the third quarter 2016, the chat shows the UK balance of trade have improved by about 15000 million pounds in 2 quarters after Brexit and this is the best evidence to prove the trade deficit of the UK improves after Brexit. An improve in the trade deficit is better the UK economy which is because the trade deficit indicates that the UK buys a higher value of products than it sells to foreign countries. A serious trade deficit is unhealthy to the UK even though the UK is a country that relies on imports for decades. So, a balanced balance of trade is healthy to the UK economy grow and it can higher the external monetary reserve for the UK.Brexit brings up a lot of questions to the UK and the world economy. Base on the unforeseen economic circumstances, many industries put a hold on their investments in the UK and consider evacuating some a part of their investments from the UK. The manufacturing industry would take the brunt of the economic consequence. Following the ‘no deal’ Brexit is possible to happen, the increase in production costs, the supply chain, and the market shrink, those risks are too over to take for the UK manufacturing industry.
The bar chart above shows the UK’s top 10 trading partners under 2016 and it shows the EU countries have a high ratio in both imports and exports. The reason for that is because the EU membership can enjoy the trade agreements between the member countries. The very first difficulty for the UK manufacturing industry is the increase in production costs. Brexit changes the relationships between the UK and EU countries straightforward. The agreements that signed by the UK and the EU will no longer be valid. If the UK is not able to make a trade agreement to the EU, this means the UK manufacturing industry is facing a risk of the increase in the production cost because of the new tariffs when they export goods to the EU countries in the future. Also, manufacturing industry might need to import components for their productions, the deprecation in British sterling leads them to produce at a higher cost. Both cases will lead to a higher production cost tothe manufacturing industry, the companies under the manufacturing industry could either to take the external costs and lower their profits or share the external costs to the consumers which really depends on their elasticity of demand. Secondly, the supply chain could be the next difficulty in the manufacturing industry.
The UK manufacturing industry has a close relationship with the EU for a long time which is because the supply from the EU countries are stable and the speedy border control which is convenient to the UK manufacturing industry. For the car manufacturing industry as an example, they are often to import components from the EU countries. If the UK government is not able to make a trade agreement with the EU before the UK exits from the EU, theinterrelated imports and exports could face a longer period for border control. The delay of the imports and exports could lead to a serious loss for the UK car manufacturing industry. Since the UK car manufacturing industry has been cooperating with the EU countries for a long time, it is a difficulty for them to seek for a new supply chain. The third difficulty for the UK manufacturing industry is their market might shrink in the future. According to the bar chat, the EU is an important export market forthe UK. Since the UK is leaving from the EU and there has no trade agreement has confirmed between the UK and the EU, the trading costs might increase in the future which leads to the EU countries could seek for the substitutions in the long run and reduce the purchase from the UK. Also, if the UK government decides to carry out some policies of protectionism, this could be further damage to the UK manufacturing industry. So, this is a difficulty for the UK manufacturing industry to cover the EU market shrink.
Compare to the EU market, there will be a challenge for the UK manufacturing industry to explore the other market because of the many issues like law, culture, and language. Even though the UK manufacturing takes advantage from the depreciation of sterling to boost their exports which is good to them in the short run, the difficulties could affect their sustainable developability to continue their business in the UK for the long run. Following the Brexit schedule, the updated date of Brexit is 31st October 2019. There have two scenarios are likely to happen for Brexit, ‘no deal’ Brexit and ‘Brexit with deal’. Since the UK government is not yet to reach a consensus with the EU, the worst scenario of ‘no deal’ Brexit is possible to happen. Before the analysis of the UK trade scenario when post-Brexit, I also discover the current situation of the UK preparations for Brexits.
After the UK referendum, the UK government starts the negotiation with the EU for trade and have established EUXT(P) to a specific focus on the issues of Brexit in order to ensure the UK can exit the EU orderly and stable. If ‘no deal’ Brexit finally happens, the UK government has raised a continuity approach to stabilize the UK economy in the short run, the continuity does not mean everything will stay the same but for some specific areas in the economy to minimize the loss of the economy and provide a stable trade environment. For the continuity approach, this measure is to keep the continuity of the UK economy for the UK unilateral inthe short run. For some examples, under the ‘no deal’ Brexit scenario, the current licenses of EU road transport industry will still valid and the UK government will accept the drug test result which carries out in the EU for medicines used by the human body. Indeed, if the UK government could negotiate the trade agreement with EU before the Brexit would be the best scenario for the UK trade which is because of the EU the biggest imports and exports market to the UK. However, what if the UK trade scenario is possibly become under ‘no deal’ Brexit? The very first issue is the border issue. After Brexit, the UK is leaving the EU single market and customs union.
The UK will become the third country to the EU, it will bring impacts to both imports and exports. Under the ‘no deal’ Brexit, the trade between the UK and the EU will process as the third country, the customs clearance inspection is required, and the businesses will need to pay for the value-added Tax and is required to follow the interrelated regulations which lead to an extra cost and burden for the trade between the UK and EU. Even though the Entry Summary Declarations (ESD) and the Transitional Simplified Procedures of the UK government are progressing underway, some UK industries may have an impact by the new border control policies, the EU member countries have the right to detain the import goods if the good does not cleanly finish the customs declaration. Hence, this brings a strong impact on the trade of the UK in the initial stage of Brexit. The second issue is tariffs. Almost all the industries in the UK will need to pay different tariffs to the EU for export goods and services. For examples, the EU requires the customs duty on beef at 70%, lambs at 45% and finished cars at 10%. Based on the impacts for Brexit is wide and complicated, it is hard to precisely predict the adaptability for different industries and the real impacts on the UK trade.
Let take a look into the case studies of the car industry and the chemical for further explain the possible UK trade scenario under the ‘no deal’ Brexit since the two industry are two of the largest export industries of the UK. For the car industry, the UK car exports hold about 80% of the whole production and about 40% is exported to the 27 countries of EU in 2018. Since the ‘no deal’ Brexit will lead the businesses inside the car industry facing the external tariffs in imported car at 10% and 2.5-4% for the automobile parts, the businesses can only pass the extra costs to the consumers which might bring an impact on the sales of the car market in the EU and therefore it might result in a reduce volume of the UK exported cars. Then, for the chemical industry. Inside the chemical industry, there was more than half of the production is exported to the EU in 2017. The existing regulation for this industry is the businesses need to register the chemical products from the European Chemical Agency (ECHA) to produce chemicals and exports to the EU.
Under the ‘no deal’ Brexit, the registered businesses in the UK are required to change their license to the EU recognized agency for export chemicals to the EU. ECHA takes the cost of transfer the license at £1500 which costs the businesses the external fees for register and administrative burden. Moreover, the 5% tariffis also to be applicable. In the final analysis, Brexit can eliminate the budget of the EU membership cost, the UK government revenue will be increased because of the tariff revenue on the imported goods from the EU and limited the people from the EU countries to work in the UK. However, Brexit also brings a lot of negatives to the UK economy, especially on trade. In the early analysis, it has mentioned the depreciation in British sterling helps the UK export. Nonetheless, this would boost UK export in the short run only. It is because Brexit means the UK is leaving the customs union of the EU, the UK will no longer to enjoy the free trade, the free flow of goods and services with no limitation and tariff to the other 27 EU member countries.
Many industries would have contracts in trade and the UK is not yet to really exit the EU, the EU member countries will keep trading with the UK in the short run and the UK export benefits from the depreciation of British sterling. In the long run, the EU member countries might seek for the new cooperate businesses inside the EU and not reduce the trading amount with the UK which damages the UK economy since the EU is one of the largest exports markets for the UK. Furthermore, Brexit also means the UK is leaving from the European single market. The UK will be treated like other non-EU countries, the exported goods to the EU requires a certain amount of tariff which depends on the different goods and services and have trade limitations. After Brexit, the UK manufacturing industry will not have the trade preferential and the EU is difficult to give the UK a favorite in trade. Base on the regulation of WTO, the same imported tariff is required to be the same to all WTO member countries which means if the EU and the UK have signed the trade agreement, the reduction in tariff needs to be applicable to all WTO member countries. So, the goods which export to the EU will have the tariff fees after Brexit. This makes the UK goods and services less attractive to the EU market. The UK export would have a serious hit after Brexit since the EU market is so important to the UK exported products. In the end, the UK government should keep trying to negotiate with the EU for a new trade agreement and have more preparations for the ‘no deal’ Brexit. At the point, it is really close to the date of Brexit and it is a difficulty to the UK government to lower the economic impacts of Brexit in a single hand.
2.5.2019