Brexit is a term used to refer to the United Kingdom’s intentions to withdraw from the European Union – the main economic bloc in Europe. The European Union comprises of twenty-eight member states, and its main objective is to guarantee the free flow of goods and services among the trading partners. To enhance efficiency in its rate of service delivery, the European Union comprises of various bodies such as the European Parliament, the Court of Justice of the European Union, and the European Central Bank. Even though the European Union has been identified as one of the best trading blocs on the globe, it is currently facing a major shakeup as a result of the United Kingdom’s proclamation that it will withdraw from the union. On 23rd June 2016, the United Kingdom’s citizens supported the idea of their nation withdrawing from the European Union through a referendum. During the referendum, the total voters’ turnout was 71.8 percent of which 51.9 percent voted in support of Brexit. In 2017 – on 29th
March – the nation stated the formal withdrawal process and is expected to cease being a member of the EU in April 2019. It is important to note that, the United Kingdom was admitted as a member of the EU in the year 1975 through a referendum vote. There have also been concerns that the Referendum Party – the UK independence Party (UKIP) – has initiated the withdrawal from the union as it has been calling for the withdrawal for quite a long time. Even though the United Kingdom has been ranked as one of the best performing economies over the years, there is a high probability that its economic welfare mighty be adversely affected after Brexit. As illustrated in this paper, some of the main occurrences that may take place in the nation include; decreased investment levels, reduced cash flows for the businesses, loss of the business and consumer confidence, and an incline in the production of substandard products.
The UK’s Economy
The United Kingdom is considered as one of the super economic powers on the globe, which is justified by its high level of the gross domestic product (GDP). As illustrated in the figure below, the nation’s GDP has been on an upward trend for quite a long time, which is a sign of the nation’s continuous growth. For instance, in 1948, U.K’s GDP was estimated to be about 0.3 trillion dollars whereas its level was approximated to be 1.5 trillion dollars in the year 2012.
Figure 1: The GDP of the UK since 1948. Image location: The National Archives. “Long-Term Profile Of Gross Domestic Product (GDP) In The UK.” Office of the National Statistics, 2013, http://webarchive.nationalarchives.gov.uk/20160105160709/http://www.ons.gov.uk/ons/rel/elmr/explaining-economic-statistics/long-term-profile-of-gdp-in-the-uk/sty-long-term-profile-of-gdp.html. Accessed 28 Feb. 2018
The continuous increment in the nation’s GDP levels is a key manifestation of the improvement of the citizen’s living standards and the national income as well, which are key factors that boost the aggregate demand. As a way of justifying its economic strength, the United Kingdom has successfully managed to retain its inflation rate at 2.58% while the unemployment rate is at 5.5 percent (Timpson). Besides, the United Kingdom has laid down effective strategies of catering for the welfare of its residents for example by creating Jobcentre Plus departments that are obligated to connect qualified job seekers with employers (Sky News). Also, those seeking for employment opportunities are offered an allowance – the claimant counts – that is aimed at enabling them to cater for their day to day costs before they get employed.
Reasons for the United Kingdom’s Withdrawal from the European Union
The withdrawal of any member from the EU is guaranteed by Article 50, commonly referred to as the Treaty of Lisbon, of the union’s constitution. Before the enactment of the treaty, there was no any formal process that a state would undertake whenever it intended to cease being a member of the European Union. One of the main reasons that have been proposed as a factor behind the Brexit push is the immigration issues. The United Kingdom feels that it does not have control over the number of immigrants within it whereas it is being used to incur a lot of costs while catering for their welfare. Therefore, there has been an opinion that after withdrawal from the union, U.K. would be in a position to formulate effective policies that will enable it to take charge of its borders and regulate the number of immigrants getting into the nation. Additionally, there have been concerns that a great number of the immigrants in the U.K. have been coming from its trading partners in the E.U. Hence, the nation feels that the dictates of the European Court of Justice has denied it its sovereignty by hindering it (U.K.) from taking control of its borders (Mauldin). By successfully controlling the number of immigrants in it, the U.K. hopes to save a lot of finances that would be used to initiate other development programs that would significantly improve the welfare of its residents.
The United Kingdom’s Independent Part has also pointed out that EU has been a major force behind the slow economic progress in the nation. According to the party, the United Nation contributes a large share of the funds in the EU while the amount of the development programs initiated by the trading bloc has not been in equal proportion.
Theories of International Trade
Some of the theories that explain why nations form trading pacts include the mercantilism theory and the Heckscher-Ohlin theory.
The Mercantilism Theory
The theory was formulated by Adam Smith who pointed out that a nation’s wealth can be significantly increased by the number of goods it exports to other nations (Terzea 245). However, the theory postulates that a country should ensure that it restricts the value of its imports to make sure that it is in a position of amassing more wealth. According to this theory, the United Kingdom should use the E.U. as a platform for increasing its wealth levels by making sure that it offers more goods and services to its trading partners. Since the trading bloc dictates that there should be a free flow of goods and services among the nations, U.K. should take advantage of this rule to produce more commodities that would be exported later. However, Brexit might lead to a situation whereby some trade restrictions will be imposed on the nation, hence, inhibiting its potential to import most of its commodities. In such a scenario, the overall aggregate demand within the nation will significantly decline, which might lead to the closure of some of the enterprises in the United Kingdom.
The Heckscher-Ohlin Theory
Bertil Ohlin and Heckscher Ohlin are the proponents of the theory. The scholars pointed out that nations engage in mass production of the commodities that they can easily produce due to the abundance of the raw materials (Terzea 246). Therefore, according to this theory, nations should only produce the commodities, which it has enough raw materials to do so. The United Kingdom is renowned for production of products like organic chemicals, gems, pharmaceuticals among other. However, the production of these commodities is likely to decline in future due to trade restrictions that might be imposed on the nation by the other member states within the European Union. As illustrated by the figure below, most of the United Kingdom’s products are sold to its trading partners in the European Union.
Figure 2: A graph illustrating the top ten U.K.’s import destinations. Image Location: Walker, Andrew. “Countdown to Brexit: UK Imports and Exports in Six Charts.” BBC, 2017, http://www.bbc.com/news/business-41413558. Accessed 28 Feb. 2018
Impacts of Brexit on United Kingdom’s Economy
It is estimated that Brexit will result in far-reaching consequences on the United Kingdom’s economy key among them being; the emergence of a recession, reduced revenues for enterprises, a significant rise in the unemployment level, and a decreased foreign direct investment (FDI).
Occurrence of a Recession
A recession refers to a period that is characterized by a decline in the level of a nation’s economic activities. Concerns have been raised that the United Kingdom is likely to experience a recession in the case as a result of Brexit. Some months before the referendum, the overall growth in the nation’s economy was approximated to be at 0.6 percent. Unfortunately, there was a significant drop in the in the rate of economic growth to 0.2% soon after the referendum vote supported Brexit (Edwards). Some of the notable events that took place immediately after the referendum include; the value of the pound against the dollar decreased and a decline in house prices as well. Such occurrences are not favorable for an economy as they depict that the level of aggregate demand is continuously shrinking and proprietors are not willing to invest in it as they are not certain whether they will get the value of their money in good time. The figure below demonstrates how the pound faired against the dollar during the period before and after the referendum.
Figure 3: A graphical representation of how the pound performed against the dollar before and after the referendum. Image Location: http://static1.businessinsider.com/image/57ab16b7dd08955a1e8b45f7-960/screen%20shot%202016-08-10%20at%2011.49.59.png. Accessed 28 Feb. 2018.
Reduced Income for U.K.’s Enterprises
According to Edward, the recession will adversely affect the businesses within the nation to the extent that some of them might be forced to exit the market. It is paramount to note that most enterprises operate within a restricted budget, hence, the reason why proprietors are always seeking effective measures of reducing their (businesses) costs of operation. Besides, a significant number of the businesses within the United Kingdom gain a lot of income from the products that are exported to some of the member states within the European Union. Assuming that the other states – U.K.’s trading partners within the E.U. – impose some tariffs on the products coming from the United Kingdom, the costs of the nation’s exports will be relatively higher. Therefore, the overall amounts of the exports would decrease since its aggregate demand will decline. Ultimately, the enterprises will be forced to cut down their overall productivity levels due to reduced demand. Besides, the businesses will be forced to lay off some of their employees as a strategy of cutting down their costs of operation, which will also lead to a decrease in the output productivity levels. Due to such factors, the proprietors would be reluctant to plough back their profits as a means of expanding their businesses due to reduced income from the low sale volumes. Some businessmen get most of the finances used in expanding their premises as a result of taking loans from financial institutions. However, due to the anticipated recession, the commercial banks would be unwilling to offer them – entrepreneurs – loans due to fears that the proprietors might not be in a position to pay back the funds within the expected time.
Decreased Investment Levels
By withdrawing from the European Union, the United Kingdom hopes to be an independent market. Unfortunately, it will end up losing some of its privileges like transacting its products freely within the EU markets as it might be forced to pay some tariffs by the other member states within the union. Due to reduced trade levels, most foreign investors will also be unwilling to invest in the United Kingdom. Instead, they – foreign investors - will prefer launching projects in other cities like Paris, where the movement of commodities within the European Union market will be still free. Additionally, most of the foreign investors who have already established premises in the United Kingdom may opt to relocate their firms to other cities outside the nation. In fact, a good number of the American firms in the U.K. have expressed their desires to relocate to other states as soon as the nation formalizes the Brexit process (Rodionova) Losing such development partners will affect the nation in some other ways key among them being having a limited scope of advanced technology. As one of the most preferred investment destinations within Europe, the United Kingdom had another advantage over the other nations as it was in a position to acquire the advanced technology with ease. Whenever foreign investors decide to establish an organization within a respective nation, they usually come up with unique technologies that will enable them to carry out their day to day options. Ultimately, the host country ends up benefiting as a result of transfer technology, hence, enabling its local industries to adopt the modern technology in their production processes.
Decrease in the Level of Business and Consumer Confidence
The consumer confidence can be defined as the society members’ perception towards the performance of their economy. It is the main factor that enhances the consumers to make critical decisions on whether they should presently save a lot of their income or borrow take a loan to cater for some of their day to day costs. Some of the major factors that determine the level of consumers’ confidence include the inflation rate and the rate of economic growth as well. The figure below indicates the level of the United Kingdom’s consumers’ confidence over the years.
Figure 4: United Kingdom’s consumer confidence from the year 2010 to 2017. Image Location https://static.independent.co.uk/s3fspublic/styles/story_medium/public/thumbnails/image/2017/02/27/13/gfk.jpg
The graph above depicts that the United Kingdom’s consumers had lost confidence in their economy just before the referendum. As soon as the pound lost its strength against the dollar, the consumers may have lost their confidence in the overall performance of the economy. Due to fears that they would be experiencing a financial crisis, most of them became concerned about their financial welfare. Thus, they may have opted to spend less of their incomes and save more. Eventually, the businesses would get affected since the consumers would be unwilling to purchase their products as expected. The decreased sales volume experienced in most enterprises would eventually lead to a decrease in the level of the business confidence. Business confidence refers to the potential of the businessmen to have confidence in the economy, hence, prompting them to start more enterprises. However, whenever the level of business confidence drops, investors will be reluctant to implement more projects. A survey conducted by Lloyds Bank revealed that 41% of the enterprises in the United Kingdom experienced a decrease in their overall performance after the referendum was conducted (Wallace). Besides, the weakening of the pound was a significant sign to most entrepreneurs that they would not earn the anticipated benefits within the preferred deadlines, hence, they decided to save their income.
An Increase in the Production of Substandard Goods
Competition is one of the integral factors that lead to the production of high-quality products within an economy. In a scenario where countries are members of the same trading bloc, the competition level is significantly higher since there are no barriers to the entry of a market within a respective nation. As a result, the consumers have a range of products to choose their preferred commodities from, which implies that manufacturers have to come up with high-quality products that meet the preferences and tastes of the clients. With the exit of most foreign firms from the United Kingdom, the competition levels will significantly decline, hence, implying that the local industries might end up producing products whose quality is relatively low. Additionally, the need for the enterprises to cut down their costs of operations would be another key factor behind the production of substandard goods.
Conclusion
The United Kingdom hopes that it will be in a better position to take charge of its economy after Brexit. Those who support the Brexit claim that the nation has been using a large proportion of its income to make contributions to the European Union even though the number of development projects initiated in the country by the union is quite low. Nevertheless, there are those who are of the opinion that the nation’s move to withdraw from the trading bloc is a political agenda initiated by the Referendum Party. There is the likelihood that the United Kingdom’s economy will be adversely affected after Brexit is formalized due to some factors. First, the nation might experience a financial crisis as already depicted by the weakening of the pound against the dollar. The consumers’ confidence level will also decrease, which will lead to a significant decline in the level of business confidence. Ultimately, most of the foreign investors will opt to initiate development projects in the other members of the European Union, thus, leading to a case whereby the local industries might start producing substandard commodities due to lack of stiff competition.
Works Cited
Edwards, Jim. “The Economic Damage from Brexit Has Been Fast and Widespread.” Business Insider, 2016, http://www.businessinsider.com/economic-effect-brexit-article-50-reecssion-2016-8?IR=T. Accessed 28 Feb. 2018.
Mauldin, John. “3 Reasons Brits Voted for Brexit.” Forbes, 2016, https://www.forbes.com/sites/johnmauldin/2016/07/05/3-reasons-brits-voted-for-brexit/#5a95d0591f9d. Accessed 28 Feb. 2018.
Rodionova, Zlata. “Brexit Recession ‘Could Increase Unemployment Rate to Equivalent of 500000 Lost Jobs.’ Independent, 2016, http://www.independent.co.uk/news/business/news/brexit-impact-recession-eu-referendum-credit-suisse-employment-job-hiring-a7136541.html. Accessed 28 Feb. 2018.
Sky News. “Employment Falls for First Time in a Year Amid Brexit Impact Fears.” Sky News, 2016, https://news.sky.com/story/employment-falls-for-first-time-in-a-year-amid-brexit-impact-fears-10695496. Accessed 28 Feb. 2018.
Terzea, Elena R. “The Concept of International Trade and Main Classic Theories.” Practical Application of Science, vol. IV, is. 2, 2016, pp. 243- 247.
Timpson, James. “Barclays Equity Gilts Study 2014.” Courtiers, 2014, http://www.courtiers.co.uk/news/research-note. Accessed 28 Feb. 2018.
Wallace, Tim. “Business Confidence Dives to Five-Year Low After Brexit Vote.” Telegraph, 2016, https://www.telegraph.co.uk/business/2016/08/30/business-confidence-dives-to-five-year-low-after-brexit-vote/. Accessed 28 Feb. 2018.
