Implications of Free Trade for Businesses as a Result of UK Leaving the EU

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Implications of Free Trade for Businesses as a Result of UK Leaving the EU

Today’s most discussed topic all over the world is the fact that UK will possibly leave the EU. On Thursday 23 June 2016 a referendum was held in order to come to a decision if the UK should remain a member of EU and more than 30 million people have voted. Brexit was originally planned to happen on 29 March 2019. That took place two years later when Prime Minister, Theresa May, set off Article 50 and started with the negotiations (BBC, 2019). This, might cause some implications in free trade with businesses. Initially, free trade can be expressed as the movement of goods and services among nations without political or economic barriers. This also means that trade will be without any restrictions, tariffs, quotas or other forms of restrictions. International trade has also an essential importance which is very important form of trade because it plays a very decisive role in the overall economic activity of nations. That type of trade allows countries to exchange goods, services and factors across national borders. International Trade also cause impacts on domestic and global economies too. Moreover, countries have created groups with trade agreements which let countries to have a common external tariff, no internal tariffs and a coordination of laws to facilitate exchange. Some of them are NAFTA and CAFTA. NAFTA is the North America Free Trade Agreement. More specific, is the creation of free trade area and conditions among United States, Canada and Mexico. In 2005, CAFTA or Central American Free Trade has established a free trade zone with Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua.

The European Union is officially the largest trade partner. About half of the UK’s trade is with the EU. So, leaving the EU will probably low the trade between the UK and the EU thanks to the high rise of tariff and non-tariff barriers to trade. By merging the future market within the Europe, UK would gain less from the upcoming market. The main economic benefit of leaving the EU would be a lower net contribution to the EU budget (Dhingra et Al., 2016). Obviously, the members of EU have the privilege to importing and exporting goods without any restrictions. The benefit from being member of the EU union is that, all tariff barriers have been taken out and free trade is been accepted by all, as a free movement. Certainly, it is uncertain what is coming by the economic future and it is always hard to estimate these effects.

However, it can be guaranteed that by reducing trade, UK will end up with living standards’ issues. To begin with, there are two possible scenarios, one optimistic and one pessimistic. According to an ‘optimistic’ scenario, which is called also as ‘Soft’, UK will manage to have free access to the EU single market. After analyzing the effect, the result ended up to an overall 1.3% fall in UK incomes, more specific £850 per household (Dhingra et Al., 2016). Dhingra (2016) states that, the EEA association was established in 1994 to give countries that are not members in the EU a way to join the Single Market. Burke et Al (2016), also have agreed with the above statement by adding extra information to this stating that UK after leaving the EU connected with the benefits gained by the maintenance of the UK’s position will be able to contribute in the Internal Market with more free regulatory structure.

By being a member of EEA, UK would widely not discard its privilege of accessing into the Single Market and cherish all of the economic and trading significands with EU. UK will also be the linking part of the four freedoms which Single Market offers. EEA members need to pay some fees to continue being part of the Single Market. By subscribing to the EU budget, UK will continue being the 91% of the levels of the UK contribution. In 2011, Norway’s contribution to the EU budget was £106 per capita which means only 17% under the net contribution of £128 per capita of UK (House of Commons, 2013). As said before, UK through accessing in the areas of the Single Market, is going to adopt EU legislation that is associated with these areas. Participants of EEA have the chance to join the expert games and committees in the initial periods of a legislative proposal even if by that, they cannot take part in elections on legislations in the European Council or European Parliament. Staying in the single market after Brexit would lead to the lowest increase in UK-EU trade costs.

In a ‘pessimistic’ scenario, which is also called as ‘Hard’, every household will have a noticeable drop in income around 2.6% which is approximately £1,700. But the most important part is that, trade will lose its income per capita more than any other savings that the UK government gains from the decrease fiscal contributions to the EU budget. UK through exiting without agreeing any new deal with EU, will have to face the ‘consequence’ that all its trade with the EU will be under WTO terms and policies. Each member of WTO has to allocate exactly the same most favored nation (MFN) market access, for instance, charging the same tariffs to the other World Trade Organization members. If UK conclude to become a WTO member, most probably would no longer have the freedom to tariff-free trade in goods with the EU. In contrast with the FTA agreements, UK as a member of WTO would not have the authority to be bound of the four freedoms. Also, the condition with poorly quantified migrants inside the EU could terminate. However, as opposed to the FTA, no corresponding relaxation will appear in immigration agreements for highly qualified migrants. As a WTO participant, exporting from UK to the EU and to other WTO participants would be an issue to the importing countries’ MFN tariffs. In order to enter to the WTO membership, UK needs to accept the fact that WTO terms are not permitting free movement of labor so the UK will no longer have the ability to labor freely with EU. No deal Brexit means that politicians could not achieve to agree with EU before leaving. Otherwise, the country will walk away with no deal.

Employment will be affected too and the markdown of economic output is clear. Firstly, the short-term effects will fast appear by the fall of available jobs between 1.7% and 2.9% according to hypothesis in 2020. That, will eventually slightly recovering in the long-term. The number of people employed will also reduce by around 3500000 and around 600000 in approximately 10 years’ time (2030) significant to the counterfactual in the FTA and WTO scenarios (Dhingra, 2016). Another issue that has recently assumed increasing prominence is the labor mobility. EU origin workers play a key role in the UK labor market that is now representing over 5% of use.

In both scenarios, the UK unemployment rate is expected to rise peaking in 2020 at around 7% in the FTA scenario and around 8% in the WTO scenario. In the 2020s, unemployment gradually falls back in both scenarios as unemployment has returned to broadly the same level as in the counterfactual scenario (5%). The past decade the size of the British workforce was nearly 2 million people according to Richard Partington (2018), rather than only 820000 people that are going to get a job. That means to a very obvious slowdown in the workforce after UK leave the EU.

After many researches has been made about how migration will change after Brexit, analysts end up thinking that migration will be reduced in the UK. According to the FTA, migration in UK would face a difference between only -0.8% and -1.0% (Jonathan et Al., 2016). On the other hand, under WTO terms, UK migrants will face a slightly increase migration with -1.3% by 2020 and until 2030. The introduction of tighter restrictions on migration is estimated to reduce UK GDP by around 1-1.6% of GDP in the two scenarios due to reduced labor supply.

In summary, it could be argued that by having the UK leaving the UK, equal positive and negative effects will appear. It is generally agreed that Soft Brexit is the least bad option for UK economy whilst Hard is named as the most catastrophic scenario. In my point of view, I think that if UK wants to improve its trade relationships between EU, has to take advantage of Soft Brexit agreements and follow that path that leads to the better UK future regarding not only the economy but also the living standards. Trade will also be treated exactly the same as before Brexit (Piet EECKHOUT, 2018).

References

BBC. (2019). Brexit: All you need to know about the UK leaving the EU. Available: https://www.bbc.co.uk/news/uk-politics-32810887 [17 November 2019].
Ciarán Burke, Ólafur Ísberg Hannesson, Kristin Bangsund. (2016). ‘Life on the Edge: EFTA and the EEA as a Future for the UK in Europe’ . Available: https://www.kluwerlawow6nline.com/abstract.php?area=Journals&id=EURO2016005 [13 November 2019].
Prof. Piet EECKHOUT. (2018). Future trade relations between the EU and the UK: options after Brexit. Available: http://www.europarl.europa.eu/RegData/etudes/STUD/2018/603866/EXPO_STU(2018)603866_EN.pdf [28 November 2019].
Richard Partington. (2018). UK businesses told to expect workforce crisis after Brexit. Available: https://www.theguardian.com/global/2018/mar/29/uk-businesses-workforce-crisis-brexit-young-workers [13 November 2019].
Swati Dhingra, Gianmarco Ottaviano, Thomas Sampson, John Van Reenen. (2016). The consequences of Brexit for UK trade and living standards. Available: http://personal.lse.ac.uk/sampsont/TradeLivingStandards.pdf [13 November 2019].

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