Economic Consequences of Brexit

Table of Content

1. Introduktion Brexit
1.1. Approach
1.2. Timeline of the Brexit

2. National Economy of the United Kingdom
2.1. Economic relationships with the European Union
2.2. Economic situation of the United Kingdom

3. Current options for the economic relations of the United Kingdom
3.1. The Swiss model - bilateral agreements
3.2. The Norwegian model - European Economic Area

4. Economic consequences of the Brexit
4.1. UK trade of goods
4.2. Foreign direct investment in the United Kingdom
4.3. British service sector

5. Conclusion

List of references

List of references (Internet sources)

Table of Figures

Figure 1: Share of UK exports and imports of goods with the EU

Figure 2: GDP in 2016 of EU-28, UK and eight other OECD countries

Figure 3: Exports of Goods to the EU from the largest EU countries (2011-2015)

Figure 4: FDI received in 2015 from UK, Switzerland and eight other EU countries

List of abbreviations

EAA - European Economic Area

EFTA - European Free Trade Association

OECD - Organisation for Economic Cooperation and Development

1. Introduction Brexit

On the 23rd of June in 2016, everywhere o006E the world people were waiting to finally know, whether or not the Britons would vote for the end of Great Britain's membership in the European Union, the “Brexit”. The final result was a majority of 51% of the British people who wanted to leave the European Union. The second largest economy will leave the European Union, a one-time decision.¹ No member state in the history of the Euro­pean Union has ever left the confederation. The future relationship between the European Union and the United Kingdom has not yet been clarified, so the consequences of the Brexit for the British economy cannot be accurately assessed.

On the 29th of March 2017 British Prime Minister Theresa May officially submitted her country's withdrawal to the EU. From that date, the United Kingdom will have a maxi­mum of two years to complete the Brexit negotiations. During this time, it must also find a solution for future economic relations with the EU. This creates enormous uncertainty, particularly for companies that depend on free access to the EU's internal market.

1.1. Approach

The aim of this term paper is to present the possible consequences for the United King­dom after the implementation of the Brexit. First of all, it is dealt with the development of the Brexit over the last three and a half years. Next, the UK's relationship with the rest of the world and its economic situation will be described. Then the possibilities for the United Kingdom to continue using the global economic market after leaving the EU are discussed. Based on these options, the consequences that can result from a Brexit are then discussed. Special attention will be paid to foreign direct investment, as this is of partic­ular importance for the British economy. Finally, the results are summarized in a conclu­sion.

1.2 Timeline oft the Brexit

On the 23rd of June 2016, 52% of the Britons voted for a referendum, one day later on the 24th of June 2016, premier minister David Cameron declared his retirement. After this historical incident, Theresa May, originally Remainer, becomes the new premier minister of Great Britain on the 13th of July 2016.

Beginning of 2017, on the 29th of March, Great Britain made a motion for the exit of the European Union, this means Great Britain has to leave the European Union within two years, deadline is the 29th of March 2019. On the 18th of April 2017, Theresa may an­nounced new elections for the 8th of June 2017, with result to fail outright majority again and the beginning Brexit negotiations on the 19th of June 2017.

At the end of 2018 Theresa May and the EU made a draft for an agreement of the EU- exit of Great Britain which got rejected by the Hose of Commons at the beginning of 2019.

In a second vote on the 12th of March 2019 a changed version of the agreement got re­jected again. One day later, the Hose of Commons also rejected a No-Deal-Brexit. In March 2019 Theresa mays requested a Brexit postponement but this plan got also re­jected. On the 11th of April 2019 Theresa May finally got deadline extension till the 31st of October after several discussions. On the 24th of May 2019 the Prime Minister an­nounced her resignation in London and finally resigned from her position on 7th of June 2019. At the end of July 2019 Boris Johnson became the new British premier minister, he is Brexit-Hardliner and would accept a No-Deal-Brexit. On the 4th of September 2019 parliament has enacted a law prohibiting Boris Johnson from carrying out a disorderly Brexit if no agreement can be reached with the EU by the 31st of October 2019. The Brexit got postponed again on the 19th of October and on the 28th of October the remaining EU states have declared themselves in favour of a postponement of Bretix until the 31st of January 2020.

On the 22nd of January 2020 an agreement on Britain's withdrawal from the European Union has passed the British Parliament, the Queen only has to sign the law. A vote is expected on the 29th of January 2020, as Britain is due to leave the EU just two days later, on the 31st of January.²

2. National Economy of the United Kingdom

2.1. Economic relationships with the European Union

The United Kingdom has been a member of the European Union since 1973 and since then has enjoyed unrestricted access to the European single market and extensive eco­nomic relations with the EU.³ For the British economy, free access to the EU's internal market is extremely important. Access to the single market has been the reason for in­creased trade between the EU countries and the UK. It eliminated tariffs and non-tariff barriers to trade.⁴ Figure 1 illustrates these close trade relations.

It shows the share of goods imported from the EU in total British imports of goods and the share of goods exported to the EU in total British exports of goods for the period 1999-2014, with the highest proportion of goods exported being 62.7% in 2006. Even though the EU as a market has declined since then, it remains very important for British exporters.⁵

The reason for this is, among other things, the generally weaker economic growth of the EU states and the increasing trade relations with the constantly growing emerging mar­kets. This is because the economies of emerging countries such as China have grown enormously over the last decade. This development can also be seen in other EU econo­mies, such as the German one.⁶

The United Kingdom's main trading partners include China, the USA, Germany, France, Ireland and the Netherlands.⁷ This is reflected in a study by TheCityUK, 60% of Britain's foreign trade is with EU countries or those with which the EU has trade agreements, a figure which only highlights the importance of the EU's internal market for the UK.⁸ Through this economic relationship, 3.5 million jobs are indirectly and directly dependent on trade between the UK and the EU.⁹

2.2. Economic situation of the United Kingdom

According to OECD data from 2014, the United Kingdom is the third most populous EU member state after Germany and France with 63.7 million people. About half of the population, 32.6 million people, are of working age.¹⁰ With an unemployment rate of 4.9%, the UK is well below the EU average.

In 2016, the United Kingdom will be the second largest economy in the EU after Germany with a GDP of USD 2.81.¹¹ With 84.6% of value added, the services sector contributes the largest share to the UK economy. However, the industrial sector accounts for only a small part of GDP at 14.7% and the agricultural sector for 0.7%.¹²

Based on an OECD forecast, the UK economy has grown at an average rate of 2.11% over the last five years, the highest growth rate among the three largest EU economies over this period and above the OECD average.¹³ However, per capita wealth has de­creased compared to 2000, taking into account demographic trends and the evolution of the cost of living in the United Kingdom compared to the other EU countries.¹⁴

3. Current options for the economic relations of the United Kingdom

After the Brexit, the UK will have the opportunity to get at least limited access to the EU internal market. In the following, the Swiss and Norwegian models will be briefly de­scribed, both countries have a close economic relationship with the EU and therefore seems very obvious.

3.1. The Swiss Model - bilateral agreements

In the case of Switzerland, there are 120 sectoral bilateral agreements between it and the EU in addition to a free trade agreement, which provides free access to the EU internal market in some areas.¹⁵ There is no free access mainly for services, but due to its eco­nomic structure, these are not significant for the UK. Had bilateral agreements not in­cluded mainly financial services would have been disadvantageous for the United King­dom.

Without being able to help shape the internal market rules, the United Kingdom would have to apply them in areas covered by the bilateral agreements, similar to EEA states.¹⁶ The advantage of this model is that Great Britain has the possibility to conclude its own independent trade agreements with third countries.¹⁷

3.2. The Norwegian Model - European Economic Area

The term European Economic Area (EEA) covers a broad free trade area between the EU and the EFTA states.¹⁸ The United Kingdom, like Norway, has the possibility to become a member of the EEA and thus to have almost direct access to the EU internal market.¹⁹ This access covers areas essential to the UK such as free trade in goods, free services and free movement of capital.

However, UK traders would face higher trading costs as the EEA does not include the Customs Union. However, the United Kingdom would also have to apply the EU internal market rules in this model without having the opportunity to participate in shaping them. As a member of the EEA, the United Kingdom would also have to continue to pay con­tributions to the EU budget, even if the amount is lower compared to EU membership.²⁰ This model would allow the United Kingdom, after leaving the EU, to remain attractive. Furthermore, the impact on the British economy would remain the least with this model, as trade with EU states would hardly be affected by the extensive free access to the EU internal market.²¹

4. Economic consequences of the Brexit

For the EU internal market, the UK market is currently a single market which, as a result of the Brexit, would no longer belong to the EU internal market. Free access to the EU internal market in the UK has resulted in an annual growth rate of four to five percent of national GDP.

4.1. UK trade in goods

The EU is by far the UK's largest trading partner, accounting for 44.5% of UK exports of goods to EU member states.²² In the early 1990s, trade with the EU was even more sig­nificant, accounting for 59% of UK trade. Without access to the EU single market, the volume of trade with some EU countries would have been unequally reduced by up to 50% in the past, so the EU single market is of enormous importance for UK trade in goods.²³

In the Brexit negotiations, access to the EU's internal market is particularly important for the British, as the upcoming Brexit negotiations do not yet establish to what extent and in what form the UK will have access in the future. One currently unlikely possibility is that the United Kingdom will not have free access to the EU's internal market, which would allow the EU to impose duties on imports of goods from Britain.

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¹ Bpb.de (2016)

² wiwio.de (2020)

³ Busch (2015), S. 41

⁴ Busch (2014), S. 14.

⁵ Bpb.de (2016)

⁶ Busch (2014), S. 12

⁷ Böttcher et al. (2014), S. 11

⁸ Busch (2015), S. 46

⁹ Keep et al (2016), S. 9

¹⁰ OECD (2016) a, S. 220 f.

¹¹ OECD (2016) d,

¹² OECD (2016) b, S. 41.

¹³ OECD (2016) c, S. 271.

¹⁴ Tilford (2016), S.

¹⁵ Busch et al. (2016) a, S. 18

¹⁶ Dhingra et al. (2016), S. 6

¹⁷ Ohr (2015), S. 384

¹⁸ Busch et al. (2016) a, S. 16

¹⁹ Dhingra et al. (2016), S. 3

²⁰ Dhingra et al. (2016), S. 4

²¹ Ohr (2015), S. 384

²² Dhingra et al. (2016), S. 1

²³ Penatzer (2015), S. 3