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Brexit

The decision for the United Kingdom to leave the European Union

What is Brexit?

Brexit is the abbreviation of “Britain Exit,” which refers to the decision for 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 passes by 51.9% to 48.1%.

 

Brexit - chess pieces representing the U.K. and E.U.

 

Quick Summary Points

  • Brexit stands for “Britain Exit”, which refers to the decision to leave the European Union.
  • The process involves the negotiation of borders, 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.

 

How Did Brexit Start?

Brexit officially started on June 23, 2016, after the passing of the Brexit referendum. However, there’s been growing pressure for a referendum years before. The referendum passed for several reasons, such as immigration, sovereignty, and monetary issues. Immigration or migration is a longstanding issue in Britain, with debates over the value of the process. According to The Economist, areas that saw a large increase in the foreign-born population always saw a higher percentage of people voting to leave.

There are also arguments that Britons feel less integrated with the EU than other citizens within Europe. Since the citizens have less of a European identity, they believe decisions about the UK should only be made by people in the UK. The strong UK identity is another reason there was support for Brexit.

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 states 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 UK.

 

Benefits of Brexit

If the United Kingdom does a hard Brexit, they will achieve more freedom to create trade deals and regulations. A hard Brexit is a scenario in which the UK give 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 nations can decide to move and live in the UK with no restrictions. It led to a large increase in immigration into Britain and created difficulties fulfilling housing and service needs. Through a hard Brexit, 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, good 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. It reflected the uncertainty investors felt for the UK’s future after Brexit. As investors adapt 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 low currency increases exports, the volatility of the pound shows the 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 also 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, manufacturing plants in the UK will 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. Companies such as Honda already closed its plant in Britain while Nissan decided to make a new model of car in Japan instead of 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. It means that the firms will not be allowed to serve clients outside of the UK. At the beginning of 2019, it was reported that banks and financial companies already shifted $1 trillion worth of assets from the UK to the EU.

 

Additional Resources

Thank you for reading CFI’s article on Brexit. To keep learning and advancing your career, these resources will be helpful:

  • Trade Wars
  • Business Cycle
  • Economic Union
  • Common Market

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