In all likelihood, Brexit is coming. What will its effects be and what countries will be injured the most? It clearly “depends.” While it is apparent that the UK would like trade linkages to remain the same, numerous Economic Union (EU) members have been piqued by Brexit and want to strip away some of the UK’s trade benefits. At least they do as a starting point for negotiations. Below, the benefits and costs of a breakup are examined.
Initially, the sense was that Brexit would weaken Britain. This resulted in a weaker Pound: down nine percent against the Euro and twelve percent against the Dollar. And as a result, the UK’s exporters have been doing quite well since the vote.
The outcome of the Brexit negotiations remains uncertain. However, it is reasonable to assume that trade between the UK and the EU will be restricted in various ways. Who will this hurt the most? This will be reflected in lower exports and/or higher import prices.
a. EU Members
If Brexit occurs, it is likely that the completely free trade access that the UK now enjoys will be lessened. Table 1 provides EU members’ exports and imports to and from the UK. EU countries are ranked by what share of their exports go to the UK. The EU exports far more to the UK than it imports. The export dependency of Ireland is greatest, followed by the Netherlands, Belgium and Germany. On imports, the UK share of Ireland dwarfs all the others.
The UK created enmity among EU countries via the Brexit vote. However, the EU’s exporters will pressure the EU government to negotiate for very few restrictions on EU exports to Britain.
Table 1. – The EU: Exports to and Imports from the UK (mil. US$)
b. The UK
Table 2 indicates that the UK imports far more goods than it exports to both the EU and in total. Part of these trade deficits are compensated by capital inflows. The Bank of England estimates that these capital inflows are significant: $75 billion annually. Germany, the Netherlands, France, Belgium and Ireland are England’s most important EU trading partners.
What stands out from Tables 1 and 2 is just how much trade goes on between the UK and other EU members. The import and export linkages have been built up over decades, going back way before the EU existed. Neither the importers nor the exporters want trade restrictions: it will hurt their businesses. And as a consequence, they will lobby their governments not to impose trade restrictions.
A primary reason for investing in the UK is its factories can export to other EU countries duty-free. And in part as a result, foreign direct investment in the UK averages $47 billion over the 2013 – 2015 period. If free access to other EU countries is not allowed after Brexit, one can expect that foreign investments will fall.
Right now, there is animosity between Britain and other EU countries. Britain does not like the Brussels’ bureaucracy while the EU is angered that Britain wants to leave. But keep in mind: the “trading” industries are important in all countries and they don’t want any trade restrictions imposed. Their lobbyists will be hard at work before and during the negotiations. Will there be some disruptions and uncertainty? Sure. But the changes will be limited. The problems within the Eurozone where the “haves” are battling the “weak sisters” are far more serious with no end in sight.