Brexit and the Potential Economic Impacts

Brexit: the solution to cope with the potential economic impacts if no deal were made

Introduction

British people had voted for a leave in the Brexit referendum back in 2016. As time pass by, now in 2018, the deadline of the EU withdrawal is about to come. The UK government is made clear that the country will be leaving EU on 29 March 2019.

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And by now, UK and EU were not reaching any agreements on the arrangements for the UK’s withdrawal from the EU. (House of Lords, 2017) The UK is facing a situation that the country may leave the EU without any deal made, as a result, UK’s economy may be greatly undermined. Hence this paper will discuss two probable solutions to address the problem, which would be establishing a backstop in short and negotiating bilateral Free Trade Agreements (FTAs) with EU in the future.

The Problem

The UK’s economy is largely depended on EU, if no agreements were being made before the deadline, the country’s economy will be greatly deteriorated as a consequence, and will be forced to trade with other countries under WTO rules. However, every country has some kind of trade deal being established with its trading partner, and is not solely trade under WTO rules. (House of Lords, 2017) And the HM Treasury had predicted a GDP decrease of -3.8% to -7.4% after UK left the EU for 15 years. (2016) One of the cause that led to this GDP decreases is because of the UK’s economy make-up is largely consist of goods and services that being exported to EU. From a study conducted by The House of Commons Library, 44% of the UK’s exports were exported to EU, with services accounted for 40% of the total exports. (2017) Moreover, 80% of UK’s jobs and GDP is based in the services sector, over 75,000 jobs will be at risk, and the government would lost up to ?8–10 billion in tax revenues. (House of Lords, 2017) Since trading within the European Single Market eliminated cross-border tariffs, custom clearing and taxes for goods and services, (Sampson, 2017) UK will lose free access to the much-depended European market after Brexit. And extra costs and time will be needed for UK companies to provide goods and services to EU. (House of Lords, 2017)

Another cause for the dive of GDP is that migrant workers from EU is accounted for a significant portion of labour in UK. From a study conducted by the Office for National Statistics, currently over 253,000 EU citizens migrated into UK due to work-related reasons, and working is the main reason for EU citizens to migrate into UK. (2018) Moreover, these EU immigrants was contributing for large portion of GDP growth in UK, the growth in services exports to the EU grew by around 57%. If the immigration flow no-longer exist, the growth rate would be halved at only 28%. (Ottaviano et al., 2018, Chang, 2017) Compounding the above factors, the tightening of immigration policies promised by the government would likely reduce the net migration from EU. (Portes, & Forte, 2017)

The consequences for the decision to leave EU with no deal would hit UK immediately. Over 44% of goods and services would be subjected to the importation policies of EU and have to pay heavy tariffs and taxes to the EU immediately after the date of withdrawal, which will drastically increase the costs of UK businesses and lower their competitiveness and revenue in European market. And the long term damage to UK’s GDP would arise years after the withdrawal because of the lack of positive migration flow to support the growth of UK’s economy and labour demand. Shortage of worker would be expected in various industries, especially in services industries such as finance and accounting industry. (House of Lords, 2017)

The Solution

To prevent a sudden break-down of the much EU-depended economy, two solutions can be applied by the UK government. A backstop can be made in place as temporarily safe-net in order to prevent a total economic fall-out when no trade agreement were being made with EU on 29 March 2019. In the TEU Article 50, there is a built in mechanism for extending the period of withdrawal negotiation if no consensus were being established between the two parties, and the negotiation will fall into the backstop in order to keep the stability of the two parties. (House of Lords, 2017) During the extended negotiation period, the UK will continue to be subjected to EU regulations and legislations, and businesses will be able to operate without tariffs and taxes until specific agreements are made between UK and EU. The UK would like to have a backstop that cover the whole UK to maintain its sovereignty. However, the EU is resisting on the proposed solution and suggesting only Northern Ireland would be covered in the backstop. More negotiation between UK and EU would be needed before reaching an agreement on the backstop solution.

In the long run, the UK should consider establishing bilateral Free Trade Agreements (FTAs) with EU. Under The General Agreement on Tariffs and Trade, 1986:

UK can negotiate a lower or even free tariffs for it exports by dealing FTAs with EU. The two parties can also negotiate agreements on the movement of workers, hence allowing EU workers to migrate into UK in order to cope with the potential labour issue after the divorce of two parties.

The bilateral FTAs between The UK and EU would be tailor-made to best suit the UK’s current situation and expectation. These agreements would allow the UK to have free access to the European market and reduce the cost of trading with EU. However, the process of dealing such agreements with EU will be time-consuming. The possibility of EU accepting the offer which best suit the UK is slim since the perks and benefits of such terms and conditions is one-side towards UK. Hence the UK might need to make compromises on dealing the terms of the FTAs.

Conclusion

The date of the end of the negotiation phase is closing day by day at March 29, 2019. The two parties, the UK and the EU, have to come to an agreement of any sort before the date. If no deal were being made between UK and EU, the British government should negotiate a backstop solution with EU to cover the vacancy of trade agreements with EU during the extended negotiation period; in the long run, British government should establish bilateral Free Trade Agreements with EU to consolidate the stability of the EU-depended UK economy.

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