What is Brexit?
Brexit is the abbreviation of “Britain Exit,” which refers to the decision of the United Kingdom to leave the European Union. Brexit involves the process of negotiating new trade deals, citizen registration rules, borders, etc. The process started on June 23, 2016, after the referendum passed by 51.9% to 48.1%.
Quick Summary Points
- Brexit stands for “Britain Exit”, which refers to the UK’s decision to leave the European Union.
- The process involves the renegotiation of things such as residence permits and trade regulations.
- The announcement of Brexit caused the depreciation of the pound, a decrease in car manufacturing within the UK, and relocation of $1 trillion worth of assets from the UK to other European countries by the financial services industry. However, many analysts believe Brexit will ultimately be net positive economically for the UK.
How Did Brexit Start?
Brexit officially started on June 23, 2016, after the passing of the Brexit referendum. However, there had been growing pressure for such a referendum for several years. The referendum passed for several reasons, such as immigration, sovereignty, and monetary issues. Immigration is a longstanding issue in Britain. Like much of Western Europe, the UK has experienced a massive influx of Muslim immigrants from the Middle East within the past 10-20 years. According to The Economist, areas of the UK that saw a large increase in the foreign-born population also saw a higher percentage of people voting to leave the EU.
There are also arguments that Britons feel less integrated with the EU than other citizens within Europe. UK citizens have less of a European identity and a strong UK identity.
Monetary issues also swayed votes for the referendum and were the source of criticisms about misleading information. During the leadup to the referendum, the Leave campaign stated that leaving the EU would lead to a £350 million increase in weekly spending for the UK. Not only was the amount incorrect, but it also did not take into account the amount saved from discounts and rebates from being in the EU.
Benefits of Brexit
If the United Kingdom does a hard Brexit, they will achieve more freedom to create their own trade deals and regulations. A hard Brexit is a scenario in which the UK gives up access to the single market and customs union. Regaining sovereignty is seen as a win even by those who opted to stay in the EU.
For example, under EU law, a citizen of another EU nation can decide to move to and live in the UK with no restrictions. This has led to a large increase in immigration into Britain and created difficulties fulfilling housing and service needs. Through a hard Brexit, the UK will exercise full control over its borders.
Drawbacks of Brexit
By being a part of the EU, the United Kingdom benefits from trade deals between the EU and other world powers. As an entity, the EU exerts stronger bargaining power as it is the largest economy as a group. Therefore, by leaving, the UK would lose negotiating power and free trade with other European countries. As the UK tries to recreate trade deals with other countries, they may get less favorable results.
The uncertainty of Brexit also causes volatility and affects businesses operating within the UK. In the case of a hard Brexit, goods and services will be subject to tariffs, increasing the cost of raw material into Britain and finished products out.
Brexit’s Impact on Britain
On the day of the referendum result, the pound dropped to a 31-year low. This reflected the uncertainty investors felt for the UK’s future after Brexit. As investors adapted to the news, the pound strengthened over the next year. However, once the Brexit transition plans were released and rejected multiple times, the pound weakened again. While a lower value currency increases exports, the volatility of the pound shows a lack of investor confidence. It also makes it unattractive to buy UK fixed-income assets, and foreign direct investment (FDI) will likely slow.
Uncertainty in terms of tariffs caused the UK car industry to slump 46% in 2017 and 80% over three years. While Brexit was not the sole reason for the decrease, it played a major role. British car plants get components from Europe and export a majority of finished cars to Europe as well. If there are vehicle import tariffs, auto manufacturing plants in the UK may become unprofitable.
Brexit may also impact the supply chain. With possible delays at the borders and additional requirements for importing components, companies will need to hold more inventory to avoid delays. Honda already closed its plant in Britain, while Nissan decided to make a new model of car in Japan instead of in Britain. However, both companies stated the decision was not made because of Brexit.
Another industry heavily impacted is the financial services industry. Since there are many regulatory laws in place for banks set by the EU, Brexit would leave the banks in the UK in an uncertain situation. For example, during a hard exit, UK banks may not be able to access the European market. At the beginning of 2019, it was reported that banks and financial companies had already shifted $1 trillion worth of assets from the UK to the EU.
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