Economics Series Part 2: How Will Brexit Affect Business in the UK and EU?

2019 will be a very interesting year for Europe and the rest of the world. With a little over six months left before the U.K. is scheduled to exit the European Union (EU) on March 29, 2019, many multinational companies are bracing themselves for what might be a very turbulent ride. I will examine the conditions that led to Brexit, and what Brexit will mean, from a macro economic standpoint, for those companies who do business in the U.K. An article published in the Wall Street Journal (WSJ), titled, Companies Stockpile Drugs, Chocolate as They Brace for ‘Hard’ Brexit, outlines some of the concerns that companies from various industries—including financial services, pharma, and manufacturing—share in regards to the Brexit ordeal.

What lead to Brexit?

The British people voted in a referendum in June 2016 to leave the EU, after many decades of membership. The EU is an organization that includes 28 member countries who share a single market for goods, services, labor, and capital. Citizens from member countries can travel and work freely in any other country inside of the EU. Goods and services produced in member countries also find tariff-free distribution throughout the Bloc, as the EU is often called. As a result of this single market, the cost of many goods and services have drastically reduced. The Euro has also increased in purchasing power over the dollar.

The free movement of goods and people inside the EU, however, come with many downsides. This will eventually led the British people to vote in favor of an exit. One of the major concerns raised by the British people was a loss of national identity and culture. There is a high rate of migration and refugees into the U.K. Secondly, the EU imposes stern service regulations and fees on member countries. This stifles the U.K.’s autonomy on the world stage. By leaving the EU, the U.K. hopes to cut more profitable trade deals with other countries outside the EU, like China. It will also regain control of its borders.

Economic Concerns Looming

Unfortunately, the U.K. has yet to agree on an exit deal with the EU, leaving many companies in a state of uncertainty. There are many macro-economic concerns looming. For example, there are concerns of new tariffs being imposed on goods coming out of the U.K. once it leaves the Bloc. This can lead to a shortage of outputs such as medicine, food, and other commodities, as well as inflation. For this reason, many companies are stockpiling their inventory. The British government has already ordered pharmaceutical companies like Pfizer to keep extra supplies of medicine, should there be a shortage caused by future tariffs.

Concerns for the EU

The EU has worries of its own. Up to this point, its single market comprised more than 500 million people. Its GDP totaled $20 trillion in 2017. The EU has been able to compete very well with other nations. Many of its economic success can be traced back to the U.K.’s own supply of human capital, top-notch educational system, and other resources. According to the European Commission, in 2017 the U.K. generated the second highest percentage of the Bloc’s GDP. The U.K.’s departure, therefore, poses a great economic threat. Not only will the Bloc lose one of their core members, it will now become a direct competitor with it. One of the things that EU leaders have said is that they do not want the U.K. to undermine the Bloc’s “single market achievement” (Norman, 2018). They also do not want the U.K.’s departure to encourage other member countries to leave the EU. It  would further cripple its economic strength.

Concerns for the U.K.

At the core of Brexit is its potential effect on trade. When President Trump imposed tariffs on goods coming from China, factory production loomed to a halt. This happens when prices of intermediate goods rise too high and too quickly. This is the anxiety of companies like Pfizer, chocolate maker Mondelez International Inc., and banking services. One of the key factors of GDP is net exports and imports (X-IM).

GDP = C + I + G + (X-IM) 

If the EU decides to impose tariffs on British goods after it exits, this can significantly reduce the U.K.’s GDP and lead the country into a recession. Furthermore, many multinational companies that operate plants in the U.K. will lose the incentive to do so. They will see their cost of production rise due to the new tariffs. Many companies set up operation in the U.K. because of the free entry they received into the Bloc. Those companies might be incentivized, therefore, to transfer their production out of the U.K. and instead into the EU. Some financial services firms are already preparing to move their operations into EU countries, according to the article cited earlier.

Benefits for the U.K. 

This is not all bad news, however, for the U.K. and the multinational corporations that do business there. By leaving the EU, the U.K. would gain the freedom to draft its own trade deals with other countries. They can do this outside the Bloc without the stiff cost of regulations and fees from the EU. Also, by regaining control of its borders, the U.K. can position itself to attract the human capital that it wants. The United States remain a strong investor in the U.K. This relationship would garner more opportunities for both countries post Brexit.

Lastly, it can say whatever it wants, the Bloc cannot exist successfully without the U.K. The economic advantages that the EU gains from the U.K. are far too great, in my opinion, for them to completely sever ties with it. The Bloc has rejected the U.K.’s recent post-Brexit deal. They will still need to come to a consensus with the U.K. if they wish to continue thriving on the world stage.

Exciting Times

These are very exciting times, from an economic standpoint. Many macro-economic issues are playing out on the world stage. Brexit remains a source of great anticipation, at the center of it all. For the millions of people who voted to leave the EU, the next six months will be thrilling. Although companies are fearing what the future will bring, I believe that there is no better time than now to invest in the U.K. Once the shackles of the Bloc fall off of its legs, the U.K. will be able to soar, flying to its own beat of trade deals and border control.

Take a look at other posts in this series:
Economics Series Part 1: Why Taxing Amazon Would be Bad for All of Us
Economics Series Part Three: President Trump and the Federal Reserve are Going Head-to-Head. Here’s Why.
Why Am I Writing About Economics in a Leadership Blog?

– Led by the Book