What was Brexit?
The United Kingdom commenced its departure from the European Union of which it had been a member state since 1973 called Brexit. In a referendum held on 23 June 2016, the UK electorate voted to leave the EU and officially left the EU on 31 January 2020; the remaining of 2020 is known as the transition period.
Brexit’s latest developments are that rigorous discussions and negotiations led to a ‘Trade and Cooperation Agreement between the EU and the UK, setting out the framework for future trading relations, and provisional application starting from January 1, 2021.
By the end of the transition period, the UK was no more to be part of the EU’s customs union and single market. As the UK relinquished its rights and obligations it had as an EU member state and cross-border mobility restrictions will be subject to immigration policies, ensuing which they will now require visas for long-term stay in the EU countries.
However, during this transition period, the EU and UK were able to negotiate their future relationship by ratifying a free trade agreement. Under this agreement trade between the United Kingdom and EU countries will undergo preferential treatment – no customs tariffs, no quota, however, new rules for customs documentation and VAT accounting will apply.
Great Britain now has customs borders with the EU, operating at crossing locations such as Dover and Holyhead, and a separate VAT system.
Under the Northern Ireland Protocol, Northern Ireland remains part of the EU customs area in respect of goods, in order to retain an open border with the Republic of Ireland. Thus the United Kingdom, except for Northern Ireland, now has customs borders with the EU and a separate VAT system.
What are the Costs of Brexit to UK Businesses?
UK Exports have suffered.
UK exports are expected to reduce considerably after Brexit due to increased tariffs and quota restrictions. As their prices hike up due to increased tariffs, UK businesses risk becoming uncompetitive with their EU counterparts and the international world. Cutting down prices to remain competitive, would not only act as a disincentive to competition but would also mean lower profit margins.
Oxford economists have estimated the long-term costs under World Trade Organization guidelines in the range of 1.5% – 3.9% with lower exports to the tune of 8.8%
According to statistics, before the year of departure from the EU, the UK exported goods worth over £ 133 billion to the EU countries, out of total exports of £280 billion equivalent to a share of around 47% of its global goods exports. The share of exported goods by the UK to the EU has hovered, by and large, at the same at 47% even until 2021. The share in exported services in 2015 from the UK to the EU remained at 36% and has increased gradually to 39%.
According to statistics, before the year of departure from the EU, the UK imported goods worth over £ 147 billion from the EU countries, out of its total imports of £406 billion equivalent to a share of around 54% of its global goods imports. The share of imported goods by the UK from the EU saw a decline to 47% in 2021. The share in imported services in 2015 to the UK from the EU remained at 44% and has almost remained at the same level at 44% in 2021.
After Brexit, estimations are that the UK will suffer a loss of £4.5 billion of pounds annually if they don’t negotiate a new trade agreement with the EU.
Possibility of Losing Access to Single Market
EFTA (European Free Trade Association) was set up in 1960 to promote free trade and economic integration between its Member States and other trading partners globally. EU is in a commanding position to change policies that could restrict UK’s access to the single market.
Under the terms of the Trade & Cooperation Agreement (TCA), the UK can no longer avail of any benefit from a seamless entry to the EU Single Market and Custom’s Union as well as the EU’s ecosystem of policies and international trade agreements generally referred to as the “EU Market”.
Consequently, there will be barriers to the free movement of people, trade of goods and services, and freedom of establishment across the EU Market. EU and UK will now form two distinct markets with different regulatory frameworks.
There is a certainty of additional customs checks and controls at the borders, which will make it harder to invest across the borders. Although the TCA will ideally serve to limit such disruptions, businesses, stakeholders, and citizens in both directions will most likely be impacted inevitably.
According to some estimates, if Britain is excluded from the single market, it could lose up to £75 worth of trade. Hence though Britain would save £9 billion annually towards the EU, they would still lose a substantial advantage.
There is a risk that any change in the EU policies following Brexit could mean that the United Kingdom’s access to the single market might be restricted and be at stake.
On 8 July 2021, the UK and three EFTA States, Iceland, Liechtenstein, and Norway, signed a new free trade agreement. This agreement marks a new closer alliance between the three states and the UK, which will see these four countries work together to promote free trade and mutual well-being.
Impact on Employment and Labour
After Brexit UK’s unemployment rate was expected to increase due to the recession in the economy; with Brexit kicking in, the number of migrants seeking jobs outside the UK has increased. Since 2019 the labour market remained tight, with Brexit also the pandemic, changing the situation and creating opportunities. The number of vacancies for skilled workers was expected to remain very high.
EU immigrants contributed substantially to the industries such as healthcare, engineering, IT, and construction, where there was a real shortage of skilled workers in the UK. As the EU immigrants began to leave the UK, a considerable gap was expected between the demand and supply of skilled workers. It hurt certain industries, and the UK’s ability to recruit international talent remained at risk.
Though the Unemployment rate was expected to rise to 6.5% due to the Brexit recession, the however past pandemic situation has kept the unemployment rate in January 2022 at 4.1%.
Reduction in Foreign Investment
Brexit may cause foreign direct investment to fall in the UK due to its being a separate market from the EU, which will make it less attractive for multinational companies and also result in a complex supply chain between the headquarters and local branches of such MNCs with higher coordination costs, and more difficult management.
Additionally, almost £1 trillion, which makes the UK’s half of the Foreign Direct Investments (FDI), comes from European countries. Leaving the EU would harm the FDI of the UK.
Before Brexit, the UK enjoyed access to the single market with no customs tariffs and quota restrictions and could easily export to other EU countries. But things will not remain the same after the UK decides to leave the EU and the single market; this also strains foreign investments.
Additionally, uncertainty in the UK markets may prove a handicap for certain SMEs to raise funds for their business; also, investors’ confidence will weaken and result in reduced foreign investment.
After several years of increasing FDI, Brexit witnessed an inbound investment dip in the UK. Since 2008 Volatility has been observed in the global foreign direct investment since the financial crisis 2008, with inbound investment projects declining from 2008 to 2012 but maintaining an upward trajectory until 2017, growing at a compound average annual growth rate of 8.3%. During the period 2017-19, the number of FDI projects fell by 25.6%, and in 2020, the global FDI fell by 42%, impacting new investments, expansions, and mergers and acquisitions.
The financial services industry is one of the largest recipients of foreign direct investment in the UK. the TCA places restrictions on ‘single passport’ privileges, which will ultimately lead to material changes in activities with an element of financial services. As a result of this, cross-border investment activities between the EU and the UK such as investment advice and underwriting, which were earlier carried out in reliance on a single passporting arrangement, may now be hampered.
With limited access rights, this means that the UK market participants will now be treated equivalent to third country participants. Instead of covering the future relations between the UK and the EU concerning financial services, the TCA provides a footing for future discussions on market access in financial services in light of the equivalence framework.
Despite its commitment to establishing a favorable climate for the development of trade, the TCA accords fewer substantial standards of protection to investors than those found in other international trade agreements or bilateral investment treaties. For instance, there are no clear protection measures against potential discrimination, or dispossession of property, for which investors will have to place reliance on customary international law principles.
Brexit negotiations with the EU such as those settling the final deal for financial services and data will be extremely important for key UK sectors and trade along with trade deals with other countries. The UK has the expertise to benefit from the continuing emergence of sectors, such as tech and renewable energy, financial services, and others.
What are the Effective Benefits of Brexit to UK Businesses?
No More Contributions to Common Budget
According to the official figures, the UK contributed £20 billion to the EU common budget in 2018. Leaving the EU can save the UK government from contributing every year.
Lesser Regulations and Obligations
As the UK has left the EU, the UK will not have to comply with the European Union rules and regulations, such as the EU’s employment regulation. Furthermore, there is no need to pay billions of pounds for the EU membership cost. The UK can use the saved money for its welfare and growth. The UK will be free to make trade agreements and negotiate their deals on favorable terms.
Free to Make Trade agreements
Voting to leave the EU will give the UK the independence and opportunity to make trade deals with other NON-EU countries around the globe on their terms and conditions. Business hubs like China and Australia are already seeing forward to making trade deals with the UK after Brexit.
On one end, the UK is exploring multibillion pounds of free trade with China, India, and other countries, and on the other end, they would benefit from smooth access to the UK’s manufactured products and investments.
How does Brexit affect Businesses and trade?
Brexit poses some serious impacts on most businesses; to the minimum following areas need to be examined by businesses post-Brexit.
- Imports and exports between GB and EU, VAT implications, VAT refunds, and payments, and excise duties for products outside the free trade agreement
- State donations, grants, and exemptions
- Product safety, conformity, and EU licensing labels
- Transport and logistics
- Environmental and industrial standards like go green policies
- Copyrights and patents
- Mutual recognition of relevant licenses
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