brexit uk economy

Written by Huda Raza, Manal Shah, Shanza Rehan and Shiza Safdar 12:19 pm Current Affairs, International Relations, Published Content, Research Papers

The Impact of Brexit on the UK Economy

This research aims to explore the impact of Brexit, the most historic event to occur on the European continent since the fall of the Berlin wall. The findings prove that while Brexit has given substance to factors (like taking back control of immigration and regaining sovereignty and national identity), it was not a rational economic decision. The brits realized their mistake in the face of the severe economic hardships that the UK had to face post-Brexit.
About the Author(s)
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Ms Huda Raza is studying International Relations at National Defense University, Islamabad.

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Ms Manal Shah is currently a bachelor’s student at the Department of International Relations, National Defence University, Islamabad.

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Ms Shanza Rehan is currently a bachelor’s student at the Department of International Relations, National Defence University, Islamabad.

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Ms Shiza Safdar is currently studying IR at National Defence University, Islamabad.

Introduction

The United Kingdom formally announced its intention of leaving the EU by revoking Article 50 of the Lisbon Treaty, which permits a state to withdraw from the EU and is followed by withdrawal negotiations over a period of two years. The Brexit negotiations covered various aspects of economy, border management, citizen rights both of EU and UK citizens, future trade with the EU, and financial liabilities of the UK to the EU.

Negotiations were to conclude in three possible ways. Like Iceland and Norway, the UK could have continued to be a member of the EU’s single market. This scenario is often referred to as soft Brexit, that the trade costs don’t significantly increase post-Brexit. The single market lowers trade costs by reducing tariff and non-tariff barriers.

Under hard Brexit, Britain could leave the European Economic Area and work under the WTO regulations, which would result in increased trading costs for Britain. Under this scenario, that’s now applicable since the end of the transition period, both tariff and non-tariff barriers have increased for Britain. Outside the single market, the UK wouldn’t have to abide by EU economic regulations.1 

Keeping in view the trade volumes between the UK and the EU, the United Kingdom runs a trade deficit compared to EU member states and is more likely to be significantly impacted by withdrawal than the EU. The EU accounted for 44% of UK exports and 53% of its imports. Exports to the EU account for 12% of the UK’s GDP, whereas imports from the UK account for only 3% of the EU’s GDP. Brexit will certainly lead to a reduction in trade between the parties.2

So far, post-Brexit reports indicate that the losses that the UK economy will suffer from higher trade barriers outweigh the fiscal savings. The single market enabled Britain to be the financial hub for serving EU markets. Post-Brexit, firms are not finding commercial logic to invest in the UK as evidenced by a number of companies pulling out from the UK. Hence, a reduction in FDI is seen post-Brexit.

While Brexit voters might be cheering the regaining of ‘supposedly’ lost sovereignty, the economic challenges facing Britain ahead would make many realize that they didn’t rationally assess the costs and benefits of Brexit.

Neo-liberalism

This study’s theoretical framework is based on the theory of neo-liberalism, which draws its basic roots from the liberal theory that proposes more freedoms for individuals and fewer state interventions. It is basically centered on the idea of laissez-faire, a basic tenet of Anglo-American capitalism that calls for less interference in the economic affairs of society and the pursuit of more liberal policies that ultimately improve economic efficiency and more competition and hence promote human well-being.

Therefore, it requires a reduction in trade barriers and the promotion of a conducive environment for free trade. It is charged with the promotion of good relations with countries and flexible labor market policies that would ultimately promote economic independence. The watchwords of economic neo-liberalists are privatization and deregulation. 

Brexit and Neo-liberalism

Brexit used the neoliberal intellectual argument to advance its cause and justification, that the EU is a regionally hegemonic and protectionist federal institution that impedes free trade by imposing unnecessary regulations. Therefore, leaving the single market would enable it to escape the EU regulations and make trade deals and impose regulations of its choice and preferences without having to bring the consensus of 27 other member states.

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Moreover, the supporters of Brexit believed that the EU wasn’t economically liberal enough and that leaving it was the only way to seek the desired liberalization for the UK economy.3 The UK had problems with the common agricultural policy and labor laws under EU regulations, considering them protectionist in nature. The desired model of the UK economy is far more liberal than its European counterparts, and therefore, Brexit was necessary to achieve that.

According to neo-liberalist interpretation, the EU is viewed by pro-Brexiters as the elephant in the room as it prioritizes intra-EU trade being part of the Customs Union. Other than the economic perspective, the EU is seen as a supra-nationalist entity putting constraints on national sovereignty, freedom, and democracy, and the EU’s precedence over the UK’s parliament and courts.

As the populist narrative during the referendum was to ‘take back control’ post-Brexit, the UK is implementing deregulations, reducing taxes and tariffs, and its own sanction policy that resonates with the neoliberal agenda. While the UK can substantially exercise more freedom in trade deals, it has made trade more expensive by non-tariff barriers and has lost commercial logic for investors as a financial hub for EU markets.

Britain’s Role in the EU

The United Kingdom, as we all know, has been a prominent and important member of the European Union. As one of the largest member states, the UK has contributed a lot to shaping European integration since 1973 in two ways. First, it constrained EU initiatives; the UK sought to limit EU initiatives and veto them frequently. Maastricht Treaty stands as an example of such an act.

Second, it supported only those EU initiatives which filled up its interests. The UK stimulated a variety of initiatives as part of its support role, from introducing a regional and cohesion policy shaped in the 1970s to the relaunch of the internal/single market in the 1980s. It also advocated in favor of broadening the EU to include the new member states. Thus, UK governments have had some success in modifying EU projects to suit their own objectives.

The EU-UK Free Trade Agreement

Following France, Germany, and Italy, the United Kingdom ranked fourth among the EU’s biggest contributors in 2014. To a budget totalling 116.53 billion euros, it contributed 11.34 billion euros ($12.24 billion). This contribution increased to 18.20 billion euros in 2015, with a total amount of 118.60 billion euros.4

The Trade and Cooperation Agreement comprises not just trade in Intellectual property rights (IPR), investments, commodities, services, and public tender but also covers a large variety of other crucial sectors that are in the best interests of the EU, including government assistance, taxation efficiency, air and road transportation, power and sustainability, etcetera.

The Agreement enables EU stockholders to set up their businesses in the UK without any restrictions and guarantees safeguards against discrimination when it comes to public tendering. The agreement ensures sustained and sustainable connectivity for the transportation sectors of air, road, rail, and maritime. Thus, the agreement permits the UK to continue taking part in various EU programs for the period 2021-2027.5

Post-Brexit Economy of the UK

Before Brexit, the economy of the UK was quite dependent on the European Union market for prosperity and sustainability. Since the 2016 referendum, a great deal of change has been witnessed for the UK and the EU. The negotiations for the withdrawal of the British from the EU under Article 5 started in March 2017. Finally, after the referendum on 31st January 2020, the UK exited the European Union. Thus, it is the only sovereign state to have left the EU.6

Membership of the EU has provided spectacular trade benefits which have helped in removing the “red tape” also known as the non-tariff barriers. This includes documentation, inspection, product standards, and imports/exports declaration. European Union, to all its members, has been successfully providing benefits since its establishment, contributing to its major success.

Since the UK has left the EU’s single market and customs union, the “red tape” has exponentially increased with the introduction of a hard border between the UK and the EU. When change comes in any process, institution, or system, complications make way. The same is the issue for EU-UK relations in recent times because of which there are clearance issues and border crossing problems at both parties’ end.

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With Brexit and its influence being accepted and worked upon, more disruptions at the borders are foreseen. Institutions and businesses are trying to cope with the post-Brexit life because the goods delay poses a major threat to the business sector of the United Kingdom. The delays come at a heavy cost, and now there is an understanding that goods delays and border issues of no tariff barrier have the same impact as tariffs would have had under the no-Brexit deal.7

Economic Arguments in Favor of Britain post-Brexit

A number of factors can be cited as the reasons for British people voting for leave. The main basis for concluding that it was in the best interest of Britain was cost-benefit calculations; that is the notion by pro-Brexit supporters that Britain received less than it contributed to the EU. Other reasons would be the sense of values and identity as well as the anti-immigration/anti-globalization rhetoric presented to the voters. 

All these influenced the outcome of the referendum. The pro-Brexit parties advocated that the sharing of political power with the EU was a needless limitation to British sovereignty. Moreover, the UK will need to bear the cost of hiring a large number of civil servants to regain its capacity in trade negotiations. As Britain’s GDP is less than one-fifth of the EU’s GDP, it’ll have less advantage in trade negotiations.8

Regulatory Freedoms

Economic arguments disseminated by pro-Brexit politicians center around the idea that Britain is now free to strike trade agreements with countries on its own terms. Pro-Brexiters promise better and free regulations that the UK designed and focus on growth and innovation by limiting burdens on businesses. However, even when it was a member of the EU, the UK had fewer regulations than most EU countries.

Ease in Reaching New Agreements

Not having to compromise with 27 other countries or taking long rounds of negotiations to finalize an agreement gave Brexit substance. However, this advantage can’t be weighed against the fact that post-Brexit, the EU will have an upper hand in the terms of negotiating preferences.

Independent Sanction Policy

Post-Brexit, the UK can use sanctions according to its national interests to promote its values and combat terrorism or other threats. The UK is eager to project itself as a significant player in world politics. The UK sanction regime is not completely synonymous with those in retained EU law. For instance, in July 2020, the UK adopted the Global Human Rights Sanctions Regulations, which gives it the authority to freeze assets and impose travel bans on persons involved in violation of human rights.

Establishing Strategic Partnership Via AUKUS

This new partnership will promote strategic relationships and coordination between the UK, Australia, and the US in the Pacific region. Its first initiative is collaboration on nuclear-powered submarines. London’s role in the deal was opportunistic, as France lost the contract that would have provided Australia with subsidiary defense capabilities.

A New Point-Based Immigration System

One of the grave reasons that drove Britain to exit from the EU was the increasing flux of immigration in the UK. During the Brexit campaign, the UK government promised to end free movement. Post-Brexit has materialized into a point–based immigration system that treats EU migrants in the same way as non-EU migrants. The purpose of the new system is not to restrict immigration, but to make it more diverse and selective in terms of allowing skilled people who fall on merit to work in Britain.

Free movement to Britain from the EU ended on 31 December and a new point-based immigration system was put in place from 1st January 2021, which is applicable to all those coming to work in the UK apart from Irish citizens. The estimates of reduced immigration from the EEA can, however, reduce UK’s GDP significantly.

Brexit and the Future of European Integration

Before explaining the repercussions that Brexit will have on the future of UK-EU relations and the EU’s integration itself, we briefly explain the history of this bitter-sweet relationship. The United Kingdom became a member of the EU in 1973. The most logical reason behind British membership was to avoid the reoccurrence of another war or alliance against Britain in the post-Cold war period.9

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Another reason was the growing size of the EU market; therefore, it was in the best interests of Britain to join the European project. Even as part of the EU, Britain opposed the political deepening of the union, for it always saw it as economic integration. Britain had a significant influence as a member of the EU, by either providing opposition to the commission or pushing for various rules and agreements that still benefit the union.

Moreover, Britain had a conflict over the federalist approach of the union and its intervention in the country such as the strict EU agricultural and fisheries laws that often proved tough for the local businesses. The UK runs a significant trade deficit with the European Union. Following the exit, the UK will lose its position in the negotiation process in terms of agreements and deals.

Brexit is more of a political defeat for the EU than an economic one as it’ll change the balance of power in the EU. The process is definitely a test of European integration as expressed by various officers and officials of the EU. Britain undoubtedly had an important financial and military position and also a soft power influence in the rest of the world.

The future relationship depends upon the attitude of both parties. The economic consequences are harsh for Britain, the cost of living would rise, and the sterling would fall. However, for the EU, the economic consequences could be mildly negative while political consequences could be far-reaching.

Conclusion

Our findings and analysis conclude that the neoliberal agenda related to Brexit works mostly in rhetoric by providing substance to pro-Brexit leaders in their electorates back home, but it is not evident in outcomes or in the reality of implementation. The promises of the UK taking back control and improving the economy post-Brexit turned out to be hollow as it increased the trade costs for Britain.

Endnotes

1 Carmen and Cristina Cîrlig, “Article 50 TEU in Practice – How the EU Has Applied the ‘Exit’ Clause,” European Parliament , November 2020, https://www.europarl.europa.eu/cmsdata/227556/EPRS_IDA(2020)659349_EN.pdf

2 Matthew Ward, “Statistics on UK-EU Trade” (House of Commons Library, December 3, 2021), https://researchbriefings.files.parliament.uk/documents/CBP-7851/CBP-7851.pdf

3 Colin Hay, “Brexit and the (Multiple) Paradoxes of Neoliberalism,” http://sase.org/wp-content/uploads/2018/04/1-Hay-final.pdf

4 Silvia Amaro, “Here’s How Important the UK Is to the European Union,” CNBC, March 27, 2017, https://www.cnbc.com/2017/03/27/cctv-script-070217.html

5 “EU Trade Relations with the United Kingdom,” European Commission, accessed August 17, 2022, https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/united-kingdom_en

6 Gemma Tetlow and Alex Stojanovic, “Understanding the Economic Impact of Brexit,” Institute for Government, November 2018, https://www.instituteforgovernment.org.uk/

7 “Post-Brexit Trade,” KPMG, accessed August 17, 2022, https://home.kpmg/uk/en/home/insights/2021/03/post-brexit-trade.html

8 Swati Dhingra et al., “Costs and Benefits of Leaving the EU: Trade Effects,” OUP Academic (Oxford University Press, October 12, 2017), https://academic.oup.com/economicpolicy/article-abstract/32/92/651/4459728?redirectedFrom=fulltext

9 Bruno Dallago, “The Future of European Integration and Brexit: Is Brexit Only Brexit?” December 9, 2016, http://real.mtak.hu/43078/

Bibliography


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