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Running Head: BRACING FOR BREXIT

Bracing for Brexit: The Detrimental Economic Impacts of Great Britain Leaving the

European Union

Allison Courtney

Glen Allen High School

Introduction/Background Information

On June 23rd, 2016, a referendum was held in Great Britain to decide whether or not the

country would remain a member of the European Union. The final results of the vote were 51.9%

(17,410,742) of people choosing to leave the European Union, while only 48.1% (16,141,241) of

people voted to remain a member (“EU Referendum Results,” 2016). The referendum, also

known as a British Exit or “Brexit,” is defined as “the residents decision that the benefits of

belonging to the unified monetary body no longer outweigh the costs of free movement of

immigration” (Amadeo, 2019). On the 29th of May, 2017, the United Kingdom Prime Minister,

Theresa May, submitted the Article 50 withdrawal notification to the European Union. Article 50

of the Treaty of Lisbon gives any European Union member the right to quit unilaterally, and

outlines the procedure for doing so. It gives the leaving country two years to negotiate an exit

deal, and once it is set in motion, it cannot be stopped except by unanimous consent of all

member states (“Key points from the Article 50 letter”).

The exit deal between the United Kingdom and the European Union includes: The UK

does not want to continue allowing unlimited EU immigration, and the two sides must guarantee

the status of European Union members living in the United Kingdom, and vice versa. The same

principle applies to work visas, which are not currently required. Additionally, the United

Kingdom wants to withdraw from the European Court of Judgement. In regards to trade, the

United Kingdom wants a “customs union” with the European Union (which means they will not

imposed tariffs on each others’ imports and impose common tariffs on imports from other

countries), and both sides want to continue trade. Financially, the European Union will require a

cash settlement from the United Kingdom to meet existing financial commitments. The
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withdrawal plan must be approved by the European Council, the 20 European Union countries

with approval from 65% of the population, and the European Parliament in order to go into effect

(“Key points from Article 50 letter,” 2017). As it currently stands, Prime Minister Theresa May

and the EU Council have been granted an extension until October 31st, 2019, in order to ensure

that there is not a possibility of Great Britain leaving the EU with no deal.

Many people who decided to leave the European Union chose to vote this way because

they believed it would be the best action in order to regain control of Great Britain's borders and

policies on immigration. In addition, many thought that leaving the European Union would save

taxpayers billions and free Great Britain from an economic burden, as well as give Great Britain

more freedom in regards to trade. However, the vote caused many consequences for Great

Britain and its government. The vote was proposed because people were concerned about

controlling their own borders, government, and economy, something that was limited due to their

membership to the European Union (Allen, Oltermann, Borger, Nelsen, 2015). In spite of this,

the vote caused a major drop in Great Britain’s economy. Immediately after the vote was

finalized, the exchange rate between the pound and other European currencies drastically

dropped. These immediate repercussions of the referendum further indicate that Brexit will have

catastrophic impacts on the stability of Great Britain’s economy for years to come. Although

riddled with delays, uncertainty, and unpredictability, ongoing Brexit negotiations pose a severe

detriment to the economic stability ​of not only the United Kingdom's short and long term trade

relations, employment rates, and economic prosperity, but also all global relations, particularly

between the United States and Great Britain.

Differences in Exit Deals/Negotiations

The severity of the economic consequences of Brexit is vastly dependent on what terms

the United Kingdom leaves the European Union. The two main options currently being debated

are soft Brexit versus hard Brexit. A soft Brexit means a relatively slow negotiation designed to

“retain as close as possible a relationship with the rest of the EU.” This entails access to the EU’s

market, with as few tariffs as possible (Wintour, 2016). The objective of a soft Brexit is to

“minimize the disruption to trade, to supply chains and to business in general that would be

created by diverging from the EU’s regulations and standards” (J.P., 2018). In theory, a soft

Brexit means staying within both the EU’s single market and its customs union. This would

allow for a longer transitional period between Great Britain and the EU once an agreement has

been made, and ultimately lower the chances of economic turmoil. Therefore, it would allow for

a slow disassociation from the European Union, allowing Great Britain to adjust gradually to the

drastic economic and trade changes associated with Brexit. Those who support a soft Brexit are

typically “willing to be bound by EU rules and tariffs even though Britain will lose any say in

making them.” Additionally, they also accept “the inevitable consequence that it will be hard,

even impossible, for Britain to do any trade with outside countries” (J.P., 2018).

Contrarily, a hard Brexit would likely “see the UK give up full access to the single

market and full access of the customs union along with the EU” (Sims, 2016). The lack of

access to the trade market would mean Britain would both be in control of their own trade, but

also have to make new trade allies. Additionally, this exit strategy would “prioritize giving

Britain full control over its borders, making new trade deals and applying laws within its own

territory.” Due to this, in the initial stages of Brexit, it means the UK would “likely fall back on
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World Trade Organization rules for trade with its former EU partners” (Sims, 2016). This would

eliminate the possibility of a lenient transition period, making the economic consequences of

Brexit more immediate, something Great Britain is not yet equipped to handle. If a negotiation

deal is passed based on the premises of a “hard Brexit,” the economic stability of Great Britain

will be in greater danger, leading to both more short and long-term impacts. A hard Brexit is

predominantly supported by those who voted to leave the European Union in the initial

referendum, and the opposite is true for those who support a soft Brexit.

Soft versus hard Brexit is a point of contention amongst British citizens, but also amongst

Members of Parliament (MPs). The main reason the exit deal has not yet been negotiated, nor

passed, is because MPs cannot agree on which is the better way to leave. Although many citizens

feel as though there should be a moderate plan, one that combines elements of a hard and soft

brexit, many politicians and high ranking officials disagree with that sentiment. In an interview,

Markus Kerber of the German Bundesverband der Deutschen (BDI) group told BBC Radio 4’s

Today programme that it is better to have either a hard or soft Brexit “that works than to have a

fudge in the middle that has to be renegotiated or doesn’t politically work and you have

uncertainty lingering on” (Sims, 2016). This lack of consensus and compromise has further

complicated the options at hand, whilst also further delaying an already backstopped process of

negotiating an exit deal. Additionally, it has also increased the chance of Great Britain leaving

with an exit deal that nobody is satisfied with, and leads to the most detrimental economic

consequences.
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Irish Backstop

A key part of the Brexit negotiations over the past two years revolves around the border

that separates Northern Ireland and the Republic of Ireland. Northern Ireland is a part of the

United Kingdom and is a member of the EU; however, the Republic of Ireland is its own

separate country, has no formal bond to the U.K., and is not a member of the EU. This debate is

commonly referred to as the Irish Backstop. The backstop is “a position of last resort, to maintain

an open border on the island of Ireland in the event that the UK leaves the EU without securing

an all-encompassing deal” (Campbell, 2019). In creating the backstop, it would allow for a less

restrictive route of trade between Northern Ireland and the Republic of Ireland in the event of a

no deal or “hard Brexit” negotiation agreement. Presently, goods and services are traded between

the two jurisdictions on the island of Ireland with few restrictions. The United Kingdom and

Ireland are currently “part of the EU single market and customs union, so products do not need to

be inspected for customs and standards” (“What is the Irish backstop?,” 2019). However, Brexit

would drastically change this process, as the two parts of Ireland would be in different customs

and regulatory regimes, which could lead to products being checked at the border.

These checkpoints could drastically delay deliveries, exports, imports, and trade deals,

which would inevitably decrease the economic stability and prosperity of Great Britain. Up to

30,000 workers work and live on different sides of the border, and “31% of the exports from the

north have their destination in the south” (Rios, 2019). This makes Republic of Ireland the

largest international market for Northern Ireland exports. As a result, Northern Ireland will

become “particularly vulnerable due to the loss of EU funding and the potential impact of tariff

and non-tariff barriers for trade between both side of the island” (Rios, 2019). If Northern Ireland
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sustains a loss of trade of this proportion, a tidal wave of economic issues across Great Britain

will ensue, ultimately endangering its economic stability.

The UK government does not want this occurring, and neither does the EU; however, the

UK’s “current red lines, which include leaving the customs union and the single market, make

that very difficult” (Campbell, 2019). In order to guarantee the aspiration of a frictionless border,

a safety net would need to be put in place. The backstop is a safety net - “an arrangement that

will apply to the Irish border after Brexit, if a wider deal or technological solution cannot keep it

as frictionless as it is today” (Campbell, 2019). An agreement on a backstop is crucial, as the EU

won’t agree to a transitional period, or substantive trade talks, until it is place. However, drafting

the backstop is proving difficult, as there has yet to be a proposal passed through Parliament

during the past three years of negotiations. This delay is posing severe economic ramifications to

Great Britain, which would only be heightened if they were not able to secure a deal on the

backstop before the UK leaves the European Union.

Employment & Business Deals in the United States as a Result of Brexit

Britain’s departure from the European Union could “send shock waves across the global

economy and threaten more than a trillion dollars in investments and trade with the United

States” (Mui, 2016). The decision to leave the European Union carries detrimental consequences

for American businesses, as they employ “more than a million people in Britain” (Mui, 2016). If

Brexit officially happens, regardless of whether or not a deal is settled on, these people are at a

severe risk of losing their jobs and stable sources of income. The notion of an isolationist

viewpoint in regards to foreign affairs, and the commonly accepted idea that Brexit does not

impact the United States is entirely false. If Great Britain, one of the United States’ closest
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trading allies, leaves the European Union, the economic impacts will reach far greater than the

surrounding countries.

Additionally, the United States is the largest single investor in Britain, and many

American firms consider it the “gateway to free trade with the 28 nations that make up the

European Union” (Mui, 2016). Corporate America has been one of the biggest supporters of the

campaign to keep the union together, even several of Wall Street’s biggest names donated

substantial sums of money to the effort. According to Angel Gurria, head of the Organization for

Economic Cooperation and Development, Brexit would be “bad for the U.K., it would be bad for

Europe, it would be bad for the world, including the United States. You already have enough

uncertainty in the world today. We don’t need more” (Mui, 2016). The sheer uncertainty and

unpredictability of Brexit’s outcome poses a severe threat to the relationship between the U.K

and United States. Emanuel Adam, head of policy and trade for BritishAmerican Business,

which represents companies in New York and London, expressed “nobody knows at this point

how the world would look like with the UK out of the EU. This alone creates an uncertainty that

businesses don’t wish to see” (Kierzenkowski, Pain, Ruticelli, Zwart, 2016). If Great Britain

officially leaves the EU, they will suffer the blow of a lost ally, detrimentally impacting their

trade, business deals, and employment rates.

Decrease in Economic Productivity & Prosperity

The International Monetary Fund, an organization of 189 countries working together to

foster global monetary cooperation and secure financial stability, issued a forecast calling the

impact of Britain’s departure from the European Union “negative and substantial.” The fund

predicted that Brexit could reduce growth by up to 5.6 percent over the next three years in its
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worst-case scenario (Mui, 2016). These challenges are coming at an already weak moment for

Europe’s economy, as “Europe is still recovering from the series of financial crises that have

been roiling countries such as Greece and Italy along with others across the continent” (Mui,

2016). The economic repercussions of Brexit, in addition to an already wavering economy, will

prove detrimental to the stability of their trade, employment, and economic productivity, and will

be felt for years to come. Additionally, there are also worries about the strength of the economies

of Europe’s major trading partners, most notably the United States and China. Without the

support of these countries, and especially if Great Britain leaves the customs union in a hard

Brexit, Britain’s economy will begin to feel the severe, impending consequences.

According to the Harvard Business Review, “Brexit is likely to reduce future UK

productivity by around half a percentage point.” Additionally, “the majority of businesses

anticipate that Brexit will eventually reduce sales and increase costs” (Bloom, Bunn, Chen,

Mizen, Smietanka, Thwaites, 2019). Over the past two years since the referendum was held, the

UK has reduced productivity by roughly one percent, the equivalent of going backwards a year.

If this trend continues, by the time the current extension to reach an exit deal is expired, Great

Britain will have reduced productivity by 0.5%, the equivalent of moving backwards for half of a

year. Additionally, the expected impacts of Brexit on UK business are: -3.6% impact on sales,

-2.8% impact on exports, 5.2% impact on unit costs, 3.3% impact on labor costs, 0.3% impact on

financing costs (Bloom, Bunn, Chen, Mizen, Smietanka, Thwaites, 2019). These predictions are

moderate based on several compilations of data; however, the worst case scenario, entailing a

hard Brexit without a link to the customs union, could produce a much more dire situation than

these numbers present.

Trade Regulations & Impact

One of the biggest indicators of economic success and growth is a country’s trade, both in

relation to imports and exports. However, Brexit poses an impending threat to most of the

strongest trade alliances to Great Britain, further contributing to the instability of their economy

post-Brexit. The EU is the main trading partner for the British economy, as it is the destination

for roughly 45 percent of all British exports and goods, and around 38 percent of total exported

UK services. Dependent on the institutional arrangement decided between the UK and the EU, “a

Brexit would imply higher EU trade barriers” (​Busch, Berthold; Matthes, Jurgen, 2016). Trade

barriers and their corresponding trade transaction costs would rise customs clearance

requirements that would lead to delays for British firms exporting to the EU. Moreover, “the UK

would partially lose access to the EU Internal Market which would particularly affect the

freedom to provide services and the right of establishment in the EU” (Busch, Berthold; Matthes,

Jurgen, 2016).

In regards to trade alliances with other countries, those remaining in the European Union

and otherwise, the Centre for European Reform warns that trade costs would “rise after a Brexit

and the United Kingdom would have less bargaining power for trade agreements than it does as a

part of a bigger entity, the European Union” (Allen, Oltermann, Borger, Nelsen, 2014). A

smaller voice in the world of trade will prove detrimental to the economy of Great Britain, as a

majority of their wealth and success is in part due to their strong trade relations. According to the

Business for New Europe, a coalition of business leaders pushing for the United Kingdom to stay

in a reformed European Union, “there are a number of free trade agreements currently being

negotiated by the European Union, including with the United States and Japan” (Amadeo, 2019).
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They went on further to explain that, “The United Kingdom with 65 million consumers would

not have anywhere near the negotiating power that the European Union, with its 500 million

consumers, would have” (Amadeo, 2019). The United Kingdom, currently considered to be a

strong world power, specifically in the area of trade, will experience a drastic shift in negotiation

abilities, access, and trade allies, all proving to be a detriment to their economic stability.

In addition to a decline of pre-existing strong trade allies, Great Britain will struggle to

find new allies to the scale and caliber of the European Union and its trade benefits. The

Confederation of British Industry (CBI) foresees tricky negotiations if the UK wants to keep its

current trading conditions after an EU exit. The business group’s deputy direction general, Katja

Hall, explained: “while we could navigate trade deals with the rest of the world, we would have

to agree deals with over 50 countries from scratch just to get back to where we are now, and to

do so with the clout of a market of 60 million, not 500 million” (Allen, Oltermann, Borger,

Nelsen, 2015). This size difference is astounding, and will greatly limit Great Britain’s outreach

and accessibility to other countries with successful and thriving trade agreements. The limitation

of trade, both with countries in and outside of the European Union, is at a great detriment to the

economic stability of Great Britain, as their access and bargaining power will be greatly

diminished.

Conclusion

On the 23rd of June, 2016, Great Britain held a vote that will continue to implement

consequences on the United Kingdom for years to come. The decision to leave the European

Union sent shockwaves throughout both the United Kingdom and the rest of Europe. Coinciding

with Great Britain’s decision to remove its membership from the European Union, the United
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Kingdom’s status as an economic power will rapidly become unstable. Tariff-free trade and

negotiations between Great Britain and other European Union members will greatly diminish,

there is a heightened chance of a drastic deduction in employment, and standing relationships

with other world powers is now extremely uncertain. The referendum has often been referred to

as, “the largest immediate risk facing United Kingdom financial markets, and possibly also

global financial markets” (Mui, 2016). Despite citizen’s justification for Brexit outweighing a

connection and relationship with the European Union, the catastrophic implications of leaving

the EU will leave graver consequences than imaginable, in not only Great Britain, but around the

world.
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