Brexit’s Impact on International Trade

Breaking Down the Brexit Vote.

Brexit, cleverly combining the words Britain and exit, was a movement that started in the UK that was lobbying for Great Britain to separate itself from the E.U. The vote took place on June 23rd, 2016 where Britain voted to leave the European Union. The result of the Brexit vote was close with 51.9% of the people (17,410,742) voting in favor of leaving the EU against 48.1% of the voters (16,141,241) that were against leaving the EU. England was the main protagonist of the Brexit vote with 53.4% of its voters voting to leave the EU against a 44.6% voter population who preferred for the UK to stay. They were followed closely by Wales who voted 52.5% Leave versus 47.5% Remain. Scotland (62%) and Northern Ireland (56%) voted against Brexit; they wished to remain part of the E.U. This means that Britain will no longer be part of the 27 nations bloc. Therefore, the UK will no longer be involved in the EU’s decision-making process nor will it be covered by any of the E.U treaties. However, the UK will now be free to govern its own country when it comes to trade agreements and immigration laws. Immigration law being among the dominant factors behind the Brexit movement, from the beginning.

brexit

The Birth of Brexit

Brexit has been a long time coming. Britain has wanted to leave the EU because it felt that its concerns were not being addressed adequately. It expected the EU to implement and hold a tough stance on immigration. Instead it advocated for the exact opposite; “friendlier” immigration laws.  The UK natives felt that because anyone from the EU was able to settle there, people with nothing were coming to the UK and reaping the benefits of their free housing. Another concern was the influx of working class EU citizens, making the job market extremely competitive. Britain took this as a political weakness on the part of the EU, thus the Brexit movement was born!

Other circumstances that gave birth to the Brexit movement was to escape the trade and product regulations put in place by the EU. Britain felt that the EU regulations were too strict, for example products being produced in the UK had to uphold the regulations put in place by the European Union if the country wanted to engage in free trade.

Lastly, Great Britain felt that it was contributing more to the European Union than it was receiving. Residents of the UK didn’t like the idea that they were paying for other countries social services and business; they felt that money should be going back into their country. Ads started popping up on buses claiming that: “the UK is sending 350 million pound a week to the EU, let’s fund our NHS (their health care system) instead.” Though that seems like a lot of money, what residents didn’t understand was that the UK was receiving a rebate and other money from the EU, making that number closer to 190 million pounds a week. Money it would have to spend anyways in tariffs and taxes if it wanted to engage in trade with the EU after the separation.

Brexit Source: http://nottstv.com/boris-johnson-visits-nottingham-to-back-brexit/

 

The disdain for the EU’s lax immigration laws and tough regulations gave birth to Ukip, a political movement devoted to making a “Brexit” from the European Union. To them, the Brexit movement was as much about pride and sovereignty, as it was about the rules and regulations. Sustained lobbying from Ukip in the EU to have these laws changed proved futile. It was at this point that they decided it was time to break away from the EU. Plans were therefore put in place to facilitate the “Brexit” which culminated in the recently concluded vote. Unfortunately, experts warned that a separation from the EU could badly damage the UKs economy.

The Consequences of the Brexit Vote on International Trade

The European Union is one of the world’s largest trading blocs. If it breaks, it could lead to a lot of global uncertainty and many trade deals would need to be restructured.

By separating from the EU, Britain will now have to enter into trade agreements on its own. Initially the EU would sign treaties on behalf of all the countries involved with other development and business partners. In these treaties they signed agreements for fair trade and set the rules for negotiations creating safety limits that protected foreign investors from being exploited. With Brexit winning the popular vote, such treaties and safety nets will not be applicable when doing business in the UK. This could make Britain a less attractive destination for some investors because the UK is free to make any trade laws it wants.

However, Britain can go the other route and make the UK an even more attractive place for foreign investment by coming up with their own free trade agreement with other super powers like the US and china. The Full Consequences of Brexit on foreign trade can only really be evaluated once the UK puts in place these treaties with other countries.

The country’s “Brexit” could cause a decrease in American and other foreign businesses in Britain due to the fear of unfair trade agreements and that the economic climate in Europe is now unstable. Investors don’t like uncertainty when it comes to their money. This uncertainty will have US and other foreign businesses think twice about doing business with the UK. This uncertainty can even have an impact on trade with Europe as whole. If the UK can leave, what can stop other countries from making their own “Brexit” from the EU. There is also a fear that Ireland and Scotland will now look to leave the UK and join the EU as independent countries, in virtue of the fact that they voted to remain in the EU. A politically unstable country is a red flags when it comes to investing!

Brexit will greatly affect the ability of Britain to do business with other international partners. The US is one of the largest commercial partners in the world and losing such a partner will hurt the UK. Therefore it is crucial the two countries come to a trade agreement! In the long term, who knows what agreements may come out of Brexit, but it’s clear that the two countries will continue to do business as Obama stated that they “respect their decision,” and that “the special relationship between the United States and the United Kingdom is enduring.”

The Weakened dollar is GOOD for tourists but BAD for business

The choice to “Brexit” from the European Union saw the pound weakened against the American dollar.  A strong American dollar is BAD for business. It makes US products more expensive, therefore becoming less attractive to foreign buyers. This can really hurt American born companies like Apple, Caterpillar, Nike and Coco-Cola.

Experts believe that a big part of the American earnings recession is because of the strong American Dollar. A strong dollar lowers US exports, which in turn causes a decline in profits. Brexit, has caused the US dollar to appreciate against the British pound, sighting problems for US exports. Being one of the Unites States biggest trading partners……this is not so good for business.

However, A strong American Dollar is not all bad news. A stronger dollar could make imported items cheaper for U.S. consumers, which could make business in the UK very inviting.

Why did Brexit have such an effect on the stock market?

One word….Fear! But  before we get into the why let’s get into what happened when the market closed Friday afternoon after Brexit had come to pass.

According to the Washington post, “The Dow Jones industrial average dropped more than 500 points within minutes. By the afternoon it dropped again by losing 609 points at close, down 3.4 percent. The broader Standard & Poor’s 500-stock index closed down 3.6 percent, and the tech-heavy Nasdaq composite index suffered a 200-point loss, closing down more than 4 percent.”

Not such a good day for global markets (the Japanese and European markets also took a serious hit). However, gold and government bonds saw an influx of investors’ money; gold prices hit a two-year high! This is because when investors sense instability in the market they panic and move their money into safer investments.

Investors sense instability in the market and they panic and start selling off stocks in favor of government bonds and commodities. In the long run, international banks and market analyst are confident that this was a fear driven reaction and that once the dust settles the global market will stabilize. However, it’s on the UK to ensure that it puts in place trade agreements with the US, EU and china, in order to ensure a smooth transition over its two-year Brexit plan.

Do you think there will be other Brexit Consequences?  To learn more about the EU check out our course World Economics

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