Brexit and its speculated impact on UK’s International Trade and Foreign Direct Investment
The United Kingdom’s presence in the international trade stratosphere is presented through the abundance of skilled labor, geographical effectiveness, and attractive corporate legislations. Portraying such characteristics allowed them to pave the path in dominating the Tertiary market, hence the service sector of the global economy. This is the sector that consists of intangible services sourced from skilled labor, which is abundant in the UK. Moreover, these same characteristics dictate the nature and tangent of the UK Foreign Direct Investment (FDI) flows, all of which were adversity affected when the British parliament decided to leave to exit the European Union (EU).
From a geographical perspective, Europe’s economic size and location naturally facilitated the UK as a viable trading partner. As a result, FDI is concentrated in industries that facilitate high-income consumers and industrial needs in European countries (Anderson, 2011). In accordance with the referendum passed on 23rd June 2016, there would be adverse effects on the capital flows and international trade stance of the economy. With respect to FDI, members within the EU have comparatively decreased investment and trade associated costs between countries, as a result leaving the EU may discourage investment in the UK due to moderately cheaper options. Furthermore, in the absence of Union benefits, trade and production costs would increase for a transnational and multinational firm in both the UK and EU countries due to their subsidiaries being subjected to stricter regulations, reducing profit margins, and discouraging investor confidence. A revaluation from a logistical perspective for different countries would be required after the dissolution of the free movement of capital benefit members of the union had. According to speculations, with companies investing considerably in EU technology industries, there is an expected decline in outward FDI, which means that fewer people from within the UK would make foreign investments, especially in a high--income country like the UK. With increasing costs in the technological market, multinationals in the UK are expected to become less innovative and decrease investments in Research and Design and foreign countries. Hence exiting the EU is likely to decrease FDI inflows by approximately 22% (Ebell 2016).
Moreover, concerning the economic consequences of the UK leaving the EU would be highly dependent on the laws and associative legislation adopted by the government following Brexit. According to economic analysis, comparatively lower volumes of trade due to decreased integration with EU members would financially cost the UK economy relatively more than its gain from having lower contributions to the EU budget. Concerning calculations by Baier et al (2008), it is estimated that being a part of the EU allows trade volumes with other countries to be around 25% or more when compared to other free-trade union agreements. Speculations are varied with regards to whether the UK exiting the union would lead to increased or decreased trade barriers with non-EU members, but what will take place is the ease of making trade decisions. Additionally, not being a member of the EU would allow for greater trade autonomy. Rather than consulting 27 other countries on decisions regarding trade agreements and policies with new countries, the UK would be allowed to make quicker and more tailored decisions without needing to compromise on other demands. Then again doing so would result in it being represented as a smaller market with lesser bargaining power and the risk of losing already established trade deals with EU members. With around 60% of total UK trade being that with either members of the EU or those of free trade agreements, leaving the single market is estimated to reduce total UK volumes trade due to speculated increased costs of trading activities.
To conclude, given that the movement of goods, labor, capital, and services within a single market economy is the core principle the European Union is established on, leaving the Union would affect the United Kingdom on those respective fronts. With the absence of trade benefits associated with Union membership, trade costs would increase. Capital inflow to and from the UK in the form of FDI and remittance would decrease, and Multinational companies would be adversely affected forcing them to focus on maintaining profit margins, discouraging innovation. Furthermore, abandoning EU polices and practicing autonomy would bring restrictions on movement and require tailored trade legislations with new countries. Hence, even though the financial cost to the UK leaving the EU is greater than if it were rather to contribute to the European Union budget, in the long run, the economy will settle and adapt to the global economic stratosphere and lead to growth in the economy.
By Shaheer Saad - BSc Economics Undergraduate at Aston University
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