Brexit 1

Running Head: BREXIT

Bracing for Brexit: The Detrimental Economic Impacts of Great Britain Leaving the

European Union

Allison Courtney

Glen Allen High School

Introduction/Background Information

On June 23rd, 2016, a referendum was held in Great Britain to decide whether the

country would remain a member of the European Union. The final results of the vote were 51.9%

(17,410,742) of people choosing to leave the European Union, while only 48.1% (16,141,241) of

people voted to remain a member (“EU Referendum Results”). The referendum, also known as a

British Exit or “Brexit,” is defined as “the residents decided that the benefits of belonging to the

unified monetary body no longer outweighed the costs of free movement of immigration”

(Amadeo, 2019). On the 29th of May, 2017, the United Kingdom Prime Minister, Theresa May,

submitted the Article 50 withdrawal notification to the European Union. Article 50 of the Treaty

of Lisbon gives any European Union member the right to quit unilaterally, and outlines the

procedure for doing so. It gives the leaving country two years to negotiate an exit deal, and once

it is set in motion, it cannot be stopped except by unanimous consent of all member states (“Key

points from the Article 50 letter”).

The exit deal between the United Kingdom and the European Union states: The UK does

not want to continue allowing unlimited EU immigration, the two sides must guarantee the status

of European Union members living in the United Kingdom, and vice versa, the same applies to

work visas, which are not currently required, the United Kingdom wants to withdraw from the

European Court of Judgement, the United Kingdom wants a “customs union” with the European

Union (which means they will not imposed tariffs on each others’ imports and impose common

tariffs on imports from other countries), both sides want to continue trade, and the European

Union will require a cash settlement from the United Kingdom to meet existing financial

commitments. The withdrawal plan must be approved by the European Council, the 20 European
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Union countries with 65% of the population, and the European Parliament (“Key points from

Article 50 letter”). As it currently stands, Prime Minister Theresa May and the EU Council have

been granted an extension until October 31st, 2019, in order to ensure that there is not a

possibility of Great Britain leaving the EU with no deal.

Many people who decided to leave the European Union voted this way because they

believed it would be the best action in order to regain control of Great Britain's borders and

policies on immigration. In addition, many thought that leaving the European Union would save

taxpayers billions and free Great Britain from an economic burden, as well as give Great Britain

more freedom in regards to trade. However, the vote caused many consequences for Great

Britain and its government. The vote was proposed because people were concerned about

controlling their own borders, government, and economy, something that was limited because of

their membership to the European Union (Allen, Oltermann, Borger, Nelsen, 2015). In spite of

this, the vote caused a major drop in Great Britain’s economy. Immediately after the vote was

finalized, the exchange rate between the pound, their currency, and other currencies in Europe

drastically dropped in the weeks following the vote. These immediate repercussions of the

referendum further indicate that Brexit will have catastrophic impacts on the stability of Great

Britain’s economy for years to come. Although riddled with delays, uncertainty, and

unpredictability, ongoing Brexit negotiations pose a severe detriment to the economic stability ​of

not only the United Kingdom's short and long term trade relations, employment rates, and

economic prosperity, but all global relations, particularly between the United States and Great

Britain.
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Differences in Exit Deals/Negotiations

The severity of the economic consequences of Brexit is vastly dependent on what terms

the United Kingdom leaves the European Union. A soft Brexit means a relatively slow

negotiation designed to “retain as close as possible a relationship with the rest of the EU.” This

entails access to the EU’s market, with as few tariffs as possible (Wintour, 2016). The objective

of a soft Brexit is to “minimize the disruption to trade, to supply chains and to business in

general that would be created by diverging from the EU’s regulations and standards” (J.P.,

2018). In theory, a soft Brexit means staying within both the EU’s single market and its customs

union. This would allow for a longer transition period once an agreement has been made, and

ultimately lower the chances of economic turmoil. Consequently, it would allow for a slow

disassociation from the European Union, allowing Great Britain to adjust gradually to the drastic

economic and trade changes associated with Brexit. Those who support a soft Brexit are

typically “willing to be bound by EU rules and tariffs even though Britain will lose any say in

making them.” Additionally, they also accept “the inevitable consequence that it will be hard,

even impossible, for Britain to do any trade with third countries” (J.P., 2018).

Contrastly, a hard Brexit would likely “see the UK give up full access to the single

market and full access of the customs union along with the EU” (Sims, 2016). Additionally, this

exit strategy would “prioritize giving Britain full control over its borders, making new trade

deals and applying laws within its own territory.” Due to this, in the initial stages, it means the

UK would “likely fall back on World Trade Organization rules for trade with its former EU

partners” (Sims, 2016). This would eliminate the possibility of a lenient transition period,

making the economic consequences more immediate, something Great Britain is not yet
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equipped to handle. If a negotiation deal is passed based on the premises of a “hard Brexit,” the

economic stability of Great Britain will be in greater danger, leading to both more short and

long-term impacts. A hard Brexit is predominantly supported by those who voted to leave the

European Union in the initial referendum, and the opposite is true for those who support a soft

Brexit.

Soft versus hard Brexit is a point of contention amongst British citizens, but also amongst

members of Parliament. The main reason the exit deal has not yet been negotiated, nor passed, is

because MPs cannot agree on which is the better way to leave. Although many citizens feel as

though there should be a moderate plan, one that combines elements of a hard and soft brexit,

many politicians and high ranking officials disagree with that sentiment. In an interview, Markus

Kerber of the German BDI group told BBC Radio 4’s Today programme that it is better to have

either a hard or soft Brexit “that works than to have a fudge in the middle that has to be

renegotiated or doesn’t politically work and you have uncertainty lingering on” (Sims, 2016).

This lack of consensus and compromise has further complicated the options at hand, whilst also

further delaying an already backstopped process of negotiation an exit deal. Additionally, it has

also increased the chance of Great Britain leaving with an exit deal that nobody is happy with,

and leads to the most detrimental economic consequences.

Irish Backstop

A key part of the Brexit negotiations over the past two years revolves around the border

that separates Northern Ireland and the Republic of Ireland. Northern Ireland is a part of the

United Kingdom and is a member of the EU; however, the Republic of Ireland is its own

separate country, has no formal bond to the U.K., and is not a member of the EU. This debate is
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commonly referred to as the Irish Backstop. The backstop is “a position of last resort, to maintain

an open border on the island of Ireland in the event that the UK leaves the EU without securing

an all-encompassing deal” (Campbell, 2019). Presently, goods and services are traded between

the two jurisdictions on the island of Ireland with few restrictions. The United Kingdom and

Ireland are currently “part of the EU single market and customs union, so products do not need to

be inspected for customs and standards” (“What is the Irish backstop?”). However, Brexit would

drastically change this process, as the two parts of Ireland would be in different customs and

regulatory regimes, which could lead to products being checked at the border.

These checkpoints could drastically delay deliveries, exports, imports, and trade deals,

which would inevitably decrease the economic stability and prosperity of Great Britain. Up to

30,000 workers work and live on different sides of the border, and “31% of the exports from the

north have their destination in the south” (Rios, 2019). This makes Ireland the largest

international market for Northern Ireland exports. As a result of this, Northern Ireland will

become “particularly vulnerable due to the loss of EU funding and the potential impact of tariff

and non-tariff barriers for trade between both side of the island” (Rios, 2019). If Northern Ireland

sustains a loss of trade of this proportion, it will begin a tidal wave of economic issues across

Great Britain, ultimately endangering its economic stability.

The UK government does not want this occurring, and neither does the EU; however, the

UK’s “current red lines, which include leaving the customs union and the single market, make

that very difficult” (Campbell, 2019). In order to guarantee the aspiration of a frictionless border,

a safety net would need to be put in place. The backstop is a safety net - “an arrangement that

will apply to the Irish border after Brexit, if a wider deal or technological solution cannot keep it
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as frictionless as it is today” (Campbell, 2019). An agreement on a backstop is crucial, as the EU

won’t agree to a transitional period and substantive trade talks until it is place. However, drafting

the backstop is proving difficult, as there has yet to be a proposal passed through during the past

three years of negotiations. This delay is posing severe economic ramifications to Great Britain,

and those would only be heightened if they were not able to secure a deal on the backstop before

the UK leaves the European Union.

Employment & Business Deals in the United States as a Result of Brexit

Britain’s departure from the European Union could “send shock waves across the global

economy and threaten more than a trillion dollars in investments and trade with the United

States” (Mui, 2016). The decision to leave the European Union carries detrimental consequences

for American businesses, as they employ “more than a million people in Britain” (Mui, 2016). If

Brexit officially happens, these people are at a severe risk of losing their jobs and stable sources

of income. The notion of an isolationist foreign relations viewpoint, and the idea that Brexit does

not impact the United States is entirely false. If Great Britain, one of the United States’ closest

trading allies, leaves the European Union, the economic impacts will reach far greater than the

surrounding countries.

Additionally, the United States is the largest single investor in Britain, and many firms

consider it the “gateway to free trade with the 28 nations that make up the European Union”

(Mui, 2016). Corporate America has been one of the biggest supporters of the campaign to keep

the union together, even several of Wall Street’s biggest names donated substantial sums of

money to the effort. According to Angel Gurria, head of the Organization for Economic

Cooperation and Development, Brexit would be “bad for the U.K., it would be bad for Europe, it
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would be bad for the world, including the United States. You already have enough uncertainty in

the world today. We don’t need more” (Mui, 2016). The sheer uncertainty and unpredictability

of Brexit poses a severe threat to the relationship between the U.K and United States. Emanuel

Adam, head of policy and trade for BritishAmerican Business, which represents companies in

New York and London, expressed “nobody knows at this point how the world would look like

with the UK out of the EU. This alone creates an uncertainty that businesses don’t wish to see”

(Kierzenkowski, Pain, Ruticelli, Zwart, 2016). If Great Britain officially leaves the EU, they will

suffer the blow of a lost ally, detrimentally impacting their trade, business deals, and

employment rates.

Decrease in Economic Productivity & Prosperity

The International Monetary Fund issued a forecast calling the impact of Britain’s

departure from the European Union “negative and substantial.” The fund predicted that Brexit

could reduce growth by up to 5.6 percent over the next three years in its worst-case scenario

(Mui, 2016). These challenges are coming at an already weak moment for Europe’s economy, as

“Europe is still recovering from the series of financial crises that have been roiling countries

such as Greece and Italy along with others across the continent. Waves of refugees from the

Middle East are spurring political and cultural unrest” (Mui, 2016). The economic repercussions

of Brexit in addition to an already wavering economy will prove detrimental to the stability of

their trade, employment, and economic productivity, and will be felt for years to come.

Additionally, there are also worries about the strength of the economies of Europe’s major

trading partners, most notably the United States and China. Without the support of these
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countries, and especially if Great Britain leaves the customs union in a hard Brexit, Britain’s

economy will begin to feel the severe, impending consequences.

According to the Harvard Business Review, “Brexit is likely to reduce future UK

productivity by around half a percentage point via a batting average effect of output being

reallocated away from higher productivity firms toward lower productivity ones. The majority of

businesses anticipate that Brexit will eventually reduce sales and increase costs” (Bloom, Bunn,

Chen, Mizen, Smietanka, Thwaites, 2019). In the two years since the referendum was held, the

UK has reduced productivity by roughly one percent, the equivalent of going backwards a year.

If this trend continues, by the time the current extension to reach an exit deal is expired, Great

Britain will have reduced productivity by 0.5%, the equivalent of moving backwards for half of a

year. Additionally, the expected impacts of Brexit on UK business are: -3.6% impact on sales,

-2.8% impact on exports, 5.2% impact on unit costs, 3.3% impact on labor costs, 0.3% impact on

financing costs (Bloom, Bunn, Chen, Mizen, Smietanka, Thwaites, 2019). These predictions are

moderate based on several compilations of data; however, the worst case scenario, entailing a

hard Brexit without a link to the customs union, could produce a much more dire situation than

these numbers present.

Trade Regulations & Impact

One of the biggest indicators of economic success and growth is a country’s trade, both in

relation to imports and exports. However, Brexit poses an impending threat to most of the

strongest trade alliances to Great Britain, further contributing to the instability of their economy

post-Brexit. The EU is the main trading partner for the British economy, as it is the destination

for roughly 45 percent of all British exports and goods, and around 38 percent of total exported
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UK services. Dependent on the institutional arrangement decided between the UK and the EU, “a

Brexit would imply higher EU trade barriers” (​Busch, Berthold; Matthes, Jurgen, 2016). Trade

barriers and their corresponding trade transaction costs would rise customs clearance

requirements that would lead to delays for British firms exporting to the EU. Moreover, “the UK

would partially lose access to the EU Internal Market which would particularly affect the

freedom to provide services and the right of establishment in the EU” (Busch, Berthold; Matthes,

Jurgen, 2016).

In regards to trade alliances with other countries, those remaining in the European Union

and otherwise, the Centre for European Reform warns that trade costs would “rise after a Brexit

and the United Kingdom would have less bargaining power for trade agreements than it does as a

part of a bigger entity, the European Union” (Allen, Oltermann, Borger, Nelsen, 2014). A

smaller voice in the world of trade will prove detrimental to the economy of Great Britain, as a

majority of their wealth and success is in part due to their strong trade relations. According to the

Business for New Europe, a coalition of business leaders pushing for the United Kingdom to stay

in a reformed European Union, “there are a number of free trade agreements currently being

negotiated by the European Union, including with the United States and Japan” (Amadeo, 2019).

They went on further to explain that, “The United Kingdom with 65 million consumers would

not have anywhere near the negotiating power that the European Union, with its 500 million

consumers, would have” (Amadeo, 2019). The United Kingdom, currently considered to be a

strong world power, specifically in the area of trade, will experience a drastic shift in negotiation

abilities, access, and trade allies, all proving to be a detriment to their economic stability.
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In addition to a decline of pre-existing strong trade allies, Great Britain will struggle to

find new allies to the scale and caliber of the European Union and its trade benefits. The

Confederation of British Industry (CBI) foresees tricky negotiations if the UK wants to keep its

current trading conditions after an EU exit. The business group’s deputy direction general, Katja

Hall, explained: “while we could navigate trade deals with the rest of the world, we would have

to agree deals with over 50 countries from scratch just to get back to where we are now, and to

do so with the clout of a market of 60 million, not 500 million” (Allen, Oltermann, Borger,

Nelsen, 2015). This size difference is astounding, and will greatly limit Great Britain’s outreach

and accessibility to other countries with successful and thriving trade agreements. The limitation

of trade, both with countries in and outside of the European Union, is at a great detriment to the

economic stability of GB, as their access and bargaining power will be greatly diminished.

Conclusion

On the 23rd of June, 2016, Great Britain held a vote that will continue to implement

consequences on the United Kingdom for years to come. The decision to leave the European

Union sent shockwaves throughout both the United Kingdom and the rest of Europe. Coinciding

with Great Britain’s decision to remove its membership from the European Union, the United

Kingdom’s status as an economic power is now unstable, tariff-free trade and negotiations

between Great Britain and other European Union members will greatly diminish, there is a

heightened chance of a drastic deduction in employment, and standing relationships with other

world powers is now extremely uncertain. The referendum has often been referred to as, “the

largest immediate risk facing United Kingdom financial markets, and possibly also global

financial markets” (Mui, 2016). These consequences are coming at an already weak moment for
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Europe’s economy, and the decision to leave the European Union will only further these

repercussions.
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