Consequences of Brexit

On Monday, 11 July 2016, then home secretary Theresa May said the above line while running her presidential campaign. Four years later, Britain exited the European Union on 31 January 2020. This exit is known as Brexit, a negotiation process that took four years. What were its economic consequences? Let’s explore them.

What is Brexit?

To understand how and why Brexit happened, we need to go back to the post-Second World War years.

The war was devastating for everyone. Economies were crippled, cities were destroyed, and the population was starving. The European countries finally learned from their mistakes and understood that they could grow better together.

The first concept of a European trade area appeared in 1950 when the European coal and steel community (ECSC) was established. Later, in 1957, Belgium, France, the Netherlands, West Germany, and Luxembourg signed the Treaty of Rome. This treaty officially created the European Economic Community (EEC) and proposed the progressive creation of a customs union that would eliminate customs duties between these countries.

In 1973, after some failed attempts, the UK joined the EEC along with Ireland and Denmark. Over the years, via different agreements and treaties, the EEC acquired its current form of the European Union. However, the UK always saw the EU as a competitor and never wanted to join it fully. From the beginning, there were Euro-sceptic groups. That's why the country kept its currency and never became part of the Schengen area. In that sense, the UK was always an exceptional member of the EU.

In 2009, the representatives of the EU member states signed the treaty of Lisbon. Article 50 of this treaty gave member states legal rights to leave the EU.

Why did Brexit happen?

In 2015, the conservative party in the UK called for a referendum on Brexit. Those who voted in favour of Brexit thought that membership of the European Union was not providing them what they wanted: a prosperous economy, protection against crime and terrorism, control over immigration, and efficient public services¹. In the end, 51.8% of the electorate voted in favour of Brexit.

Let’s see what social and economic factors affected this decision.

But the country didn't reach that point from one day to another. In 2014, immigration to the UK rose by 25% as compared to the previous year. Immigration is an ongoing issue in the country and it started before the UK became a part of the EU.

The areas that saw a high influx of immigrants voted in favour of Brexit.

Older, white, socially conservative, and middle to lower-class voters felt that they were being left behind by the socially liberal class with the money. This group voted for the conservative party and later for Brexit.²

Let’s not forget as well that many in favour of Brexit saw economic opportunity in it. If the country wasn’t a part of the EU, it would be able to sign its own trade deals with other countries. Many in the UK saw the regulatory nature of the EU as a limitation on free-market ideas. Some others wanted to protect the UK’s economy from financial disasters like the Eurozone crisis in 2009 and the 2008 Financial Crisis.

Overview of the consequences of Brexit

In general terms, the UK’s economy has faced adverse effects after exiting the EU, while the EU’s economy has had some mild effects. Brexit demolished all the agreements between the UK and the EU regarding security, trade, governance, and free movement of people and goods.

There ought to be long-term repercussions of Brexit not only on the economies of the UK and the EU but also on the global economy.

Newspaper cover inviting people to get ready for Brexit, Unsplash.

The consequences of Brexit on the UK’s Economy

In the last years (2018–20), the UK’s economy didn’t perform well due to the combined effect of Brexit and the Covid-19 pandemic. After coming to power, Boris Johnson’s party executed Brexit formalities and signed a Trade and Corporation agreement (TCA) with the EU.

Figure 1. UK imports between 2016–20 in billion US dollars StudySmarter Originals. Created with data from the World Bank, data.worldbank.org

As Figure 1 shows, the UK's goods imports from the EU declined by almost 30% by January 2020. The UK exports followed the same pattern. Figure 2 shows a drastic fall of about 45%² in December 2020 and January 2021. By the end of August, the exports had gone down by an extra 15%.

Many big companies are now getting familiar with the paperwork that is required to import the goods to the UK but small businesses on both sides are still struggling.

Figure 2. UK exports between 2016–20 in billion US dollars, StudySmarter Originals. Created with data from the World Bank, data.worldbank.org

Impact of Brexit on the UK’s labour market

After Brexit, about 20,000 EU citizens left the UK. This resulted in a massive shortage of workers in fields such as retail, hospitality, and goods transport. Due to a lack of proper immigration status, drivers from the EU were unable to drive fuel tankers in the UK, which resulted in fuel shortages in October 2021.

How has Brexit affected the UK automobile industry?

The EU is the major importer of cars from the UK. After Brexit, UK car safety certifications are not valid in the EU. Hence, UK car manufacturers have to follow other regulations to sell cars in the EU.

Honda, for example, has shut down their plant in Swindon while other companies have implemented employment cuts.

On the other hand, the import of Tesla electric cars from the US has increased by 16%.

Overall, the automobile sector in the UK has suffered due to a decrease in trade between the UK and the EU.

Consequences of Brexit for the EU economy?

The EU economy initially benefitted from Brexit as many financial institutions moved to the EU. This created a sudden requirement for skilled workers in the financial sector.

However, the UK was one of the major contributors to the EU’s budget. Between 2014 and 2018, on average, the UK contributed £7.8 billion per anum. After Brexit, the EU’s budget is short by 5%. Now the EU has to fill in this gap either via cutting the expenses or collecting more from the other member countries.

Regarding trade, both the UK and the EU are looking for other trade partners. The EU increased its trading with the US (18%) and China (17%) in 2021 as compared to the year 2020.

Consequences of Brexit on the World Economy

The immediate effect of Brexit was the decreased price of the Sterling pound. As the pound fell, investing in foreign markets like the US and China became expensive for UK investors.

Regarding international trade, the UK has now signed new trade agreements with non-EU countries like Australia, China, and the US. This has strengthened the country’s international relationships and UK consumers can now enjoy the products of non-EU countries at lower prices.

Impact of Brexit on Northern Ireland

The Republic of Ireland is an EU country that shares a border with Northern Ireland, which is a part of the UK. During the Brexit negotiations, the transport of goods and people between the Republic of Ireland and Northern Ireland was an important point of concern. Due to the history of these countries and the Good Friday Agreement, they can’t have a border.

As per the current arrangements, goods do not have to go through customs or pay tariffs while crossing these borders.

References

1. Paul Whiteley, ‘Insight: Why Britain really voted to leave the European Union’, University of Essex.

2. Rob Ford, ‘Older 'left-behind' voters turned against a political class with values opposed to theirs’, The Guardian, 2016.

3. Ben Chapman, ‘Brexit: Banks and insurers move £1 trillion of assets from UK to EU', Independent, 2021.