Brexit: Potential Risks for the UK Economy

Brexit is currently one of the most controversial topics in the world, especially in Europe. From the name ‘Brexit’ we all understand that it stands for the exit of Britain from EU. Britain always a questionable role in European Union. Britain first applied for the membership of the EU at 1973. But at that time, Britain was rejected twice because the President of France at that time Charles de Gualle rejected it twice, because he thought that Britain wasn’t compatible enough to join the EU. His prediction was right in some way because only 2 years after joining the EU, there was a referendum in Britain to leave the EU but it failed. Britain’s position in the EU was always questionable because, Britain didn’t adopt with the common currency and immigration policy of the EU. Britain kept their pound sterling instead of Euro. In case of immigration, Britain didn’t accept the immigration policy. According to this policy, people of the member countries of the EU can live, work and pay taxes in any other EU member countries. Also, there was a huge surplus in the trade. The EU membered countries enjoy the free movement of product and services among themselves without any kind of trade barrier (tariffs, import tax, import ban etc.). As a result, the EU is currently is number one trade organizations in the world. An EU membership will give any country a very good advantage for their trade situations. They can trade with other countries without any kind of trade barriers, which will give any country a significant advantage during trade. Also, EU is also a very lucrative market for any countries. Many of the world’s top economic superpowers are the member of the EU. Also, EU has one of the fairest and easiest trade policies for their members.

Impact of Brexit on Britain

As Britain wants to leave the EU, it will not help Britain that much. The British Currency, pound sterling has fallen down the most in the last 31 years. There is both positive and negative impact of this incident. Since pound becomes cheaper, Britain will become more lucrative for foreign investment since now investment will become cheaper. Also, people coming outside from Britain will also spend more in the country then before, since Britain has a big tourism market. There was also negative impact also. Since Pound becomes weaker, the purchasing power parity (PPP) of British people will also go down. When Britain will try to import goods from outside from their country, they will have to spend more than before, since pound becomes weaker. As a result, import of raw materials and other services and products will fall down severely. Also, as the currency becomes weaker than before, there is a possibility that Britain will face more inflation than expected before.

Britain is still trying to make a trade deal with the EU member countries so that they can make a trade agreement. In this agreement Britain is trying to keep the trade deal like any other EU member countries. If it doesn’t happen, then Britain will face some severe trouble. As a member of the European Union before, they were enjoying free trade like any other member countries in the EU. But, if Brexit happens without any trade deal, then they will lose this advantage. The price of the UK made products will go up since now they have to pay high amount of import taxes. As a result, they will lose their market competencies in the other European countries. As a result, thousands of people will lose jobs. Moreover, companies who are based in the Europe, but doing business in the UK, will also remove their business from the UK since it’s not such a lucrative market than before. The GDP growth rate of UK will be affected most.

The labor market of Britain will also become impacted, since skilled people will not be able to come in UK to work. This might seem like good for the people of UK since less people are coming for work from other countries, but in the long run, they might face problems like worker shortage. It will severely hamper the progress of UK economy. Also, due to Brexit, the other European market will lose interest to invest money in the UK, since investment will be cheaper at the beginning due to weaker pound, but since market access is now much smaller than before, so companies will not be so much interested in investment.

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As a member of the European Union, UK was privileged by becoming the member of one of the biggest markets in the world. As a result, they were able to compete with some of the biggest economic superpowers in the world like United States, China and India. But, if Hard Brexit occurs (Leaving European union without any trade deal), then they will have to face severe market competition with countries like China and India since currently they are now one of the fastest growing and also two of the biggest economic superpowers in the world. Moreover, both of these countries have huge landmass and a huge population to fuel their economy. It will be difficult for UK alone to compete with them.

Impact of Brexit on EU Markets

If Brexit takes on full affect, trade imbalance will occur and problems will arise. Since, various British companies are now operating in many of the European countries, due to Brexit, they will not be able to enjoy the free trade facility like any other European countries. They have to pay taxes and tariffs. As a result, they will lose market competitiveness. Also, people who are working in those companies will be at risk of losing their jobs.

Risk factors for companies with branches in each other’s territory:

1. Since there is no trade deal, so the British countries operating in the European countries would have to take permissions and other licenses so that they can do business, in another words, they have to be more bureaucratic than before.
2. Since the currency exchange rate will fluctuate, it will directly impact the product price.
3. As there is no free movement of goods, companies have to reevaluate their supply chain routes and distribution network.
4. Higher customs cost since there is no free flow of goods and long customs clearing procedure.

Risk factors for companies with marketplaces in each other’s territory:

1. Due to Brexit, companies need different kinds of certification and permissions from different areas for doing business.
2. Companies have to pay high import duties which will impact product pricing and marketing strategies.
3. Companies will try to manufacture product in territories where they will sell their product.

Conclusion

Brexit itself is a very controversial situation. Though this issue is still in the early stage, but the impacts can be seen now, though it hasn’t implemented yet. But if it deals, with or without any deal, Britain will take the worst impact of them, Also, EU will lose one of their closest allies in trade.