Economic Analysis of the Brexit

1. Introduction

The Brexit was a decision by the United Kingdom to stop being a member of the European Union. This was decided by the country through a referendum held on 23^rd June 2016. Those supporting the exit won by 52% and 48% were favor of the country to remain an EU member.  This decision has led to significant consequences including political & economic. The exit from the European Union leads to the reshaping of the country’s relationship with its largest trade partner. This paper will conduct an economic analysis of Britain’s exit from the EU. It will look deeper into how the Brexit has affected the trade volume and trade agreements with the European Union.

The first part of this thesis will seek to gather facts and figures with regard the UK and EU trade behavior. It will deal with the UK and EU trade agreements where the European Economic Community (EEC, the removal of NTB and EU single market will analyzed. The other facts and figures to be analyzed include the UK trade patterns where the evolution of UK’s Trade volumes, trading with EU as the main partners and the key sectors of trade with the EU will be analyzed. The analysis will involve the analysis of the customs union and non-tariff barriers. After the Brexit, the move form customs Union to Free Trade Area will be analyzed as well as no trade agreements

2.0 Facts and Figures

2.1 UK’s Trade Patterns

2.1.1Evolution of UK’s trade volume

It has been observed that over the last one decade, the goods and services from the UK have experience an average growth of 2.8% and 7.5% respectively. The share of the global services exports in the UK to be 6.2%in 2010 which was took the third position after US and Germany. The exports of goods however during this period declined to 2.7%.  UK has trade clients have mainly been on the services fields indicating the specialization of the country across the markets and the sectors. On big example of this has been the in the global communication exports where the country holds a 8.3% share as compared to the 1.7% held for the office and telecommunications equipment. (BIS, 2012).

The UK exports in the last quarters of 2007 were: 33.4 billion exports & 44.5 imports withy they European market. The trade with the non-European market was 24.6 for the exports and 36.7 for the imports. In 2008, there was a decline to 33.2 billion for the exports and 42.5 for the imports with the European Union. By the end of the last quarter of 2009, the trade volumes stood at a 33.1 billion for the export and 44.8 for the imports. The trend increased all the way to the last quarter of 2011 where it stood at 41.0 and 51.9 for the imports in the European market. There was a slight decline up to 36.7 for exports but an improvement in the imports for the EU imports. In the last quarter of 2013, the EU exports stood at 36.2 with the EU imports being 56.0. The same stood at 35.4 and 56.9 for the EU exports and imports respectively at 2014. In 2015, the trade volumes stood at 32.7 and 55.7 for the EU exports and imports respectively.

Source: Office of National Statistics

2.1.2 EU as the Main Trading Partner

The European Union happens to be the UK major trading partner accounting for trade volume over 400 pounds annually who represents 52% of the total trade in the goods and services. The trade between UK and EU is mainly dominated by goods. This occurs irrespective that both economies are more service oriented. The imports are lean more towards the goods at 78% as compared to the exports which accounts for 68%. The trade between the two economies sees UK have a large deficit in the trade of goods but a surplus in terms of services which when combined lead to a quite a sizeable deficit overall. The UK’s trade in goods in 2014 faced a deficit of 77.0 billion pounds as compared to the   surplus in the trade of the surplus at 15.4 billion pounds by the same year.

Source: Office of National Statistics

2.1.3 Key sectors of Trade with EU

Services Trade

The UK and EU trades heavily in terms of financial and business as compared to other types of services offered. In this connection, the United Kingdom’s exports most of its financial services and the business services to the EU as compared to trade with the rest of the world. Other major services that UK exports to the EU include the travels, transport, and the telecommunication and IT services as well as the insurance operations.

Source: Office of the National Statistics

The largest import service by the UK from the EU is the travel services. The imports of the services by the UK from the EU are dominated mainly by travel, transport and business services which when combined accounts for approximately 80% of the service imports from the European Union market.

Source: Office of the National Statistics

Goods

The ten major exports from the United Kingdom to the European market include the chemicals, machinery, oil, food, medicine, cars, other, clothing, aircraft, and scientific. Oil still remains quite an important export from UK after chemicals and machines. The continued decline in the oil prices affects the value of goods exports thereby the continued trade deficit on the average value of goods.

Source: Office of National Statistics

The imports into UK from EU on the other hand are mainly comprised on machinery, chemicals, capital goods, food & beverages, tobacco, cars, pharmaceutical, plastics, cloths, aircraft, scientific equipment.

Source: Office of National Statistics

2.2 UK and Europe: Trade Agreements

2.2.1 Single market

The continued efforts of EU of developing a single market in Europe facilitated the reduction in the non-tariff barriers. Such barriers included the variety of measure that would otherwise raise the costs of trade. These include the issues of border control, rules of origin regulations, cross-countries variations in terms of product standards, safety and anti-dumping measures. A single market, the EU offered a wide spectrum for the UK’s goods and services and also provided a platform for negotiating important trade elements with the rest of the world. The single market of EU is based on four main freedoms dealing with the free movement of goods, services, capital, and people. in this single market, trade is made easier as the non-tariff barriers are eliminated including the different and diverse technical specifications and labeling rules.  The single market also applies to the gods and services but this has been adopted at a slower pace as compared to the trade of goods. The membership to this single market means the removal of tariffs and quota between the members as well as the reduction of non-tariff barrier. The members are also required to accept free movement of people, meet financial obligation to the UE and adopt the EU laws on single market (Webb, 2017).

Source: open Europe

2.2.2 The European Economic Community

The European Economic Community (EEC), which UK became a member in 1973, offered an opportunity to enhance the trade volumes with member states. Prior to joining this customs union, the one third of the total trade was being conducted with the members of the EEC. Statistic in 2014 indicated that the trade with other EU members accounted for over 45% in the total value of the UK’s export and 53% of the imports. This has been due to the benefits accrued from the trade agreement as customs union that ensured a reduction in trade barriers and enforcing common tariffs (Dhingra et al, 2016). The main feature of the customs union is the common tariff with other non-member countries. All members of the union are supposed to apply the same set of standards for goods imported from outside the EU. In 2014, some examples of the average tariffs for some products include; 2.3% for non-agricultural goods, 10% for cars, and 20% for sugar, confectionary, beverages and tobacco (Webb, 2017)

Source:USDA, Economic Research Service.

3.0 Analysis

3.1. Pre-Brexit

            The tariffs on trade within the European Union were removed decades ago. Despite this, there still exists significant trade barriers that creates technical barriers to trade. the European integration started in 1960s with the establishment of the customs unions that provides that internal tariffs and trade quotas be removed. The customs union enhanced its integration more with the establishment of the common Eurpoean currency-the Euro. This was beneficial in helping remove exchange rate uncertainity, enhance transparency as awell as increase competition across the markets. The non-tariff trade barriers associated with European Union include the inevitable transport costs, and the technical barrier. The presence of physical border controls represents another important NTB.

3.2. Post-Brexit

The Brexit meant that the UK was no longer bound by the UE trading agreements of customs union and the single market. This however implies that the country would be subjected to tariffs and non-tariff barriers that the EU imposes on trade with other non-members. The loss of the trade benefits implies that trade between the UK and EU would decrease as a result of higher tariffs and non-tariff barriers to trade  (Hatzigeorgiu & Lodefalk, 2016). With the withdrawal of membership from the EU, three options remain viable to influence trade between the two economies: the WTO rules, Free trade agreement with EU, or the EEA (Norway model).

Under the WTO rules, there would exist no preferential trade agreement between the UK and EU. Trade here follows the WTO rules. This works as default option that is too applied in a situation where there is no special agreement between the UK and EU. This option allows the enacting of tariffs on trade between these two economies. The UK exports to the EU faces the EU’s tariffs and imports form EU would have a tariff decided by UK.  The WTO rules are applied in line of principle of non-discrimination which is essential in ensuring that neither the UK nor the EU puts discriminatory or punitive tariffs. The UK exports in this case become less competitive in terms of price. This has been offset to some extent by the reduction on the value of the pound due to the Brexit (Webb, 2017).

UK and the EU may enter into free trade agreements with each other. This would require the negotiation and implementation of bilateral agreements between the United Kingdom and the European Union. The scope of the Free Trade Agreement is determined by what the EU and UK decide to agree upon. The FTA implies a reduced access to the single market as compared to membership with EU or EEA. Under the FTA, the UK would not be required to make contributions to the EU nor allow free movement of people. The Brexit does not change the fact that UK is an important market for EU. EU had a trade surplus with UK of 61 billion pounds in 2015. Of the 27 EU member states, 21 had trade surplus with the UK. These points to an incentive for pushing for a UK-EU trade agreement (Webb, 2017).

Source: Office of National statistics

UK may also enter in an EEA (European Economic Area) agreement. This would grant it access to the single market with exceptions in agriculture and fisheries. Such an agreement would imply the extended free movement of goods, services, capital, and laws in competition, state aid, consumer protection and environment. UK would have then to make its own trade deals with other nations. It would also be required to make some financial contributions to the EU.

Conclusion

The exit of the United Kingdom from the European Union upset the trade relations between the two economies. EU still remains the largest trade partner for United Kingdom. The trade agreements as guaranteed by the membership to the EU meant reduction of tariffs and non-tariff barriers thereby prompting larger volume of trade. The referendum on 23 June 2016 brought an end to this. UK would have to make adjustments in its dealing with the members of the EU. While it has to the power to make its own bilateral agreement with other nations outside the EU, it goods and services would be subjected to the EU laws on trade with non-members. This may be solved by following the WTO rules, entering a FTA agreement or an EEA pact.

References

BIS. (2012). UK Trade Performance Across Markets and Sectors. Paper No. 17.

Dhingra, S., Ottaviano, G., Sampson, T., & Reenen, J. (2016). The Consequences of Breixit fro UK Trade and Living Standards. The London School of Economics & Political Science.

Hatzigeorgiu, A., & Lodefalk, M. (2016). The Brexit Trade Disruption Revisited. The Journal of International Law and Trade Policy, 41-58.

Office for National Statistics. (2016). UK Trade: December 2016. Retrieved from https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/dec2016

Webb, D. (2017). Brexit: Trade Aspects. House of Commons Library, Number 7694.