Answer

How Brexit Will Affect Trade between the UK and EU Countries

Introduction

Background and Rationale

The exit of the United Kingdom (U.K.) from the European Union (E.U.) (Brexit) marks a step-change within the U.K.’s economic relationship with the bloc. The U.K. will be moving away from the close co-operation and integration with its neighbours, yet potentially re-opening the opportunity for negotiation of trade agreements and deals with non-E.U. countries. However, economic considerations are among the crucial elements of debates regarding Brexit. At the very core of every assessment is an analysis of how Brexit will impact the U.K.’s trading deals with the E.U. along with other nations, and how this will consequently affect the U.K.’s economic growth (Melitz, 2003). Manacorda et al. (2011) state that a more robust economic growth implies that family incomes rise more faster on average, permitting citizens of a country to enjoy a higher standard of living. It equally implies that tax revenues tend to more strongly grow, which could make additional resources to be available for a country’s public services. And it is important to note that various economic growth patterns benefit various parts of an economy, and various industries of that country’s economy.

To date, several studies have been done on the possible effects and implications of Brexit on the U.K., E.U., and the globe as a whole. Many organizations have also published approximations of how Brexit might ultimately affect the U.K. economy. All these analyses have attempted to answer the question:  “How much larger or smaller will the UK economy be in future if the UK leaves the EU than it would have been, had the UK remained a member of the bloc?” The answers by the organizations’ publications also vary significantly (Ebell, 2016; Dustmann & Frattini, 2014). Most of the studies conclude that Brexit will minimize the U.K.’s economic growth, despite the fact that the scale is of reduction forecasted differs (Melitz, 2003; Caliendo et al., 2015). There is only a single study that was conducted by the Economists for Free Trade (EFT) that concluded that the U.K.’s economy would get a substantial boost from the Brexit. These differences in the findings have been associated with the assumptions that were made when each of the studies were conducted. Other economists have also considered the exit from big picture economic models, leading them to infer about distributional implications. Using the big picture economic models, analyses have revealed that high-tech, clothing, and manufacturing industries will heavily be affected by Brexit as a result of these sectors’ dependence upon exports to and imports from the E.U. (Caliendo & Parro, 2015). Meanwhile, the analyses have indicated that industries like food processing and agriculture could benefit from any kind of new trade restrictions that emerge between the E.U. and the U.K. It is also not clear whether Brexit would diminish or exacerbate existing regional inequalities. 

Evidently, while several studies have been conducted on Brexit, little has been done regarding how Brexit would affect trade between the U.K. and the E.U. This study will, therefore, bridge the gap in literature by answering the question: How Brexit will affect trade between the UK and European countries?

Research Statement/Aim

There are several concerns that are arising about the trade between the U.K. and the E.U. members. According to Ebell (2016), the U.K. is more reliant upon the E.U. than the reveres given the fact that 12.6% of the U.K.’s GDP is connected to exports to the E.U. member countries while only 3.2% of its GDP among the other 27 E.U. member states is connected to exports to the U.K. Similarly, the E.U. is the destination of about 44% of the U.K.’s exports as well as about 60% of the total U.K.’s trade is covered by its E.U. membership and the special access it grants to 53 marketplaces outside the E.U. (Sampson, 2016). The implication is that if Transatlantic Trade and Investment Partnership (TTIP) along with other trade negotiations that are currently going succeed, this could rise to 85% (Bloom et al., 2015). The U.K. is also a service-based country/economy with its service industry accounting for about 80% of the country’s economy (Sampson, 2016). What is more, notwithstanding the fact the U.K. has a net trade deficit with the E.U., it had a net trade surplus in services of 10.4 billion pounds in the year 2013 (Ebell, 2016). The E.U. is equally among the biggest partners to the U.K. with 36% of the U.K.’s total service exports going to member states of the E.U.

Worth adding is that the U.K. is equally the leading E.U. destination for FDI (foreign direct investment) since it combines an English-speaking as well as relatively flexible labour marketplace with a restriction-free access to the Single Market of the E.U. (Dustmann & Frattini, 2014). Caliendo et al. (2015) reason that marketplace size is a crucial determinant of the quantity of FDI flows, and U.K.’s membership of the E.U. functions to enlarge the U.K.’s marketplace. The trade restrictions that currently matter to investors within a competitive contemporary economy are not tariffs but non-tariff restrictions like regulations and divergent national standards.  The E.U.’s Single Market offers a level playing ground, substituting 28 different sets of restrictions and regulations with one rule book along with access to more than 500 million buyers to the firms operating with it (Ebell, 2016). The U.K., outside the E.U., will most probably lose a full access to the E.U.’s Single Market, and this will make it a less enticing or appealing for firms that would be interested in using it as a base for their investment within the E.U. marketplace. Bloom et al. (2015) add that the level of non-tariff and tariff measures applying to exports from the U.K. and imports to the U.K. could be impacted upon by Brexit. The trade barriers could either go down or up, depending upon the agreements attained between the E.U., U.K., and non-E.U. countries. Non-tariff restrictions between the E.U. and the U.K. could be lower compared to those facing other non-E.U. member states. It is against this backdrop that this study will explore the effect of Brexit on trade between European countries and the U.K.

Research Objectives

The objectives of this study will be:

1. To determine the economic effects of Brexit on the E.U. and the U.K.
2. To determine how trade restrictions and regulations will affect trade between European countries and the U.K.

• To determine the probable effect of Brexit on the value of sterling pound if the trade between the U.K. and European countries be affected.

1. To analyse how Brexit’s effect on trade between the U.K. and European countries will affect the type and number of workers in the two economies.
2. To analyse how Brexit’s effect on trade between the U.K. and European countries will affect the economies productivity.

Research Questions

The main research questions for this study will be: How will Brexit affect trade between the UK and European countries?

Other questions will be:

1. What are the economic effects of Brexit on the E.U. and the U.K.?
2. How trade restrictions and regulations will affect trade between European countries and the U.K.?

• What would be the effect of Brexit on the value of sterling pound if the trade between the U.K. and European countries be affected?

1. How will Brexit’s effect on trade between the U.K. and European countries affect the type and number of workers in the economies?
2. How will Brexit’s effect on trade between the U.K. and European countries affect the economies productivity?

Literature Review

Brexit has been viewed by people from various angels to determine its likely effects. According to McCombie and Spreafico (2018), as at now, EU countries are fully benefiting from the EU’s single marketplace. The single marketplace includes absence of quotas and duties for member states trading and doing business across the EU. The free movement of people principle across the countries within the EU has facilitated access of services and workers (Adler-Nissen et al., 2017). Additionally, simplified customs protocols minimize administrative stress and burden for companies trading across and within the EU to a minimum. Additionally, another benefit of free trade rests upon the economic policies and principles of comparative advantage since countries tend to specialize in producing goods at the most affordable and cost effective ways, thereby producing affordable goods and services (Park et al., 2017). This implies that the exit of Britain is likely to have both negative and positive effects on the free trade that is currently being experienced within the EU. By itself, Europe is both a global and regional trading hub, with more than 60% of EU member states trading among themselves. As such, the UK is currently free to trade their services and products to their customers both within and without the EU without having to pay extra taxes on imported goods. Additionally, the UK companies and consumers can import goods and services from EU member states minus paying tariffs.

The effects of Brexit would be felt both within the UK and the EU member states. On the one hand, in a study by Belke and Gros (2017), it was revealed that experts hold the belief that Brexit will hurt the UK trade. This argument is hinged on the fact that the UK’s economy is significantly integrated with the EU’s. The study indicated that for any 1% minimization in the UK’s exports to the EU member states, there would be about 0.5% loss in the UK’s GDP. Another survey by the Institute Fiscal Studies asserted that minimized trade activity along with resulting economic inertia would significantly cost the UK approximately £70 billion (Liguori, 2017). From this reason, the study highlights that the UK will have to make new deals and agreements to have free trade with those countries remaining in the EU for it to survive in the global marketplace. Lewis (2017) points out that without a business agreement or deal between the EU and the UK, the latter would have to follow the World Trade Organization (WTO)’s tariffs and rules. This implies that without such deals, the UK would have to pay tariffs for services and goods it would export into EU member states, yet owing to the fact that the UK would have to pay MFN rates, that would forbid either of the parties from imposing punitive tariffs and duties and sparking a business war. The WTO’s tariffs vary from 32% on wine to 4.1% on liquefied natural gas, with products such as wheat products (12.8%) and cars (9.8%) somewhere within the range (Langan, 2019). Nonetheless, Sampson (2017) contends that the bigger harm to the British exports would not originate from the WTO tariffs, yet from other EU member countries imposing new policies and duties along with other non-tariff hurdles to bar out the UK services and products.

On the other hand, the effect of Brexit will equally be experienced in the EU member countries. It has been argued that Brexit would have minimal negative effect upon the EU. According to Bilal and Woolfrey (2018), the UK is a large EU’s trade partner with an aggregate trade total of about 5% of the EU economy’s GDP. For this reason, the EU would lose the free trade access to the UK’s marketplace should the UK choose on a hard Brexit to fully quit the EU single marketplace. Additionally, Brexit would minimize UK’s demand for EU’s services and goods.

Narrowing to specific countries, there are a number of EU member states that will be significantly be affected by Brexit. According to a 2015 report, among the top-ten trading associates of the, seven of them are members of the EU (Bilal & Woolfrey, 2018). During the same year, approximately 44% of the UK economy’s export was directed to the EU member states, while about 53% of the UK’s total imports came from EU countries (Sampson, 2017). Specifically, Ireland will be affected by the exit since it has a robust orientation to exports, depending upon the UK for about 14% of Ireland’s exports and 34% of its imports. Along with trade disruption, the re-introduction of new tariffs territories would impose new trade costs and lead to lose of time with regard to cross-border transactions (Langan, 2019). Contrarily, Liguori (2017) states that Ireland could benefit from greater investment inflows and alternative locations.

Similarly, Netherlands would be affected by Brexit. Netherland is the second largest trading partner of the UK, both in terms of percentage and volume of imports and exports, besides having close investment bonds with British (Lewis, 2017). Belke and Gros (2017) state that the UK is Dutch investors’ most popular  destination in addition to the fact that the Netherlands is the second most popular UK investors’ destination. The rise in the value of Euro against Sterling will be of significant impact upon the Dutch-UK trade. Dutch flower exporters are likely to register a fall in demand for the commodity from the UK. Other EU countries that are likely to be affected by Brexit are Germany and Belgium.

Research Design and Methodology

Paradigm of Enquiry

To meet the objective of this study, applied econometrics concepts will be employed. This will be aided by a multipurpose research design. The principal reason for using the multipurpose research design is that it provides a combination of a comparative and analytical strategy to a study by use of cross-sectional information at all levels of a study for quantitative and qualitative researches (Adler-Nissen et al., 2017). The quantitative trade model will also be employed.

Data Collection Methods

To calibrate the quantitative model, researchers will use the World Input-Output Database (WIOD) for the year 2011. The WIOD database will be used because it aggregates the world into 40 nations and covers 35 industries which additionally aggregate into 35 regions as well as 31 industries as in Belke and Gros (2017).

The researchers will also use data regarding the E.U.’s applied most-favoured-nation (MFN) tariffs at product levels from the WTO. Combining the U.N.’s comtrade data with the tariff data flows will allow the researchers to compute average MFN tariffs at the WIOD industry level for the U.K.’s exports and imports with the E.U. by using product level export and import values as weights (Bilal & Woolfrey, 2018).

Lastly, for trade elasticities, which determine the responsiveness of trade flow to trade costs, the researchers will employ estimates by Langan (2019) in which an exploration of tariff variations are explored to help estimate trade elasticities for different sectors and goods.

Data Analysis Procedures

To meet the objectives of this study, the following quantitative trade model will be used to predict the effect of Brexit on trade between the U.K. and European countries.

GDP = B₀ + B₁ TARF + B₂ AIMP + B₃ AEXP + B₄ REXP +B₅ OPN + U_t                                                  (1)             (Lewis, 2017)

Where GDP = Gross Domestic Product, AIMP = Aggregate Import, AEXP = Aggregate Export, TARF = Tariff Levy on Import and Export, OPN = Openness, and RTEXP = Ratio of Export to GDP, and B₀ = Constant, U_t= Random error, and B₁– B₅ are the parameters. Other than the model, various econometric models and formulas, and statistical analysis software will be used. Liguori (2017) states that using various econometrics models, formulas, and statistical analysis is effective for assessment and can successfully help in predictions, projections, and simulations of the effect of Brexit on trade between the U.K. and European countries.

Ethical Issues

Before beginning this study, approval of the university’s ethics committee will be sought. Permission from other relevant bodies and agencies will be sought as well. Researchers will ensure that no data is falsified and/or fabricated to meet the study’s objectives, but will make sure that knowledge and truth are maintained throughout the research since they are significant in a research as noted by McCombie and Spreafico (2018). A careful choosing of methods and data will be ensured to make sure that the study’s validity and reliability. Acts like copy-pasting, use of other researchers’ ideas and concepts without acknowledging them, deliberate paraphrasing, as well as plagiarism will be limited to the least possible level (Park et al., 2017). Beneficence, informed consent, confidentiality, respect for privacy, and respect for anonymity principles will be upheld throughout the study. Cumulatively, these considerations will ensure that the research conforms to ethics and codes of conducting a research as stipulated in Caliendo et al. (2015).