How Trade Is Affected by Recent Foreign Policies

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Despite the fact that it hasn’t yet actually happened, ‘Brexit’ is doing all that its supporters hoped it would: it is seriously shaking things up in Europe. Already the economy has slowed right down, people all over Europe are scrambling to gain residency for fear of being kicked out of their country of residence without the correct passport, and the political chaos that has ensued needs no mention. 

Following the 23 June 2016 referendum that asked the British populice the question “should the United Kingdom (UK) remain a member of the European Union (EU), or leave the European Union?”, a mere margin of 51.9 percent to 48.1 percent voted that the UK should leave the EU. And so it was decided that the country would extrapolate itself from the clutches of the club that links some of the world’s strongest nations to one another. 

Everyone – from the IMO, to the Bank of England, to the Confederation of British Industry to Barack Obama – said the change in foreign policy would have major implications on the UK’s economy and on global trade, warning there would be major financial shocks in the near term as well as long-term economic decline. But the nation forged ahead, committing itself to establishing a new trade relationship with EU27 by the end of the two-year window, and as a result hopefully boosting the British economy for the first time in many years. 

The irony of all this, is that the UK decided on Brexit in a bid to fix itself and drag itself out of the stagnant economic situation the rest of Eruope had found itself in – but in reality, uncertainty over the Brexit outcome has simply damaged the UK’s economic growth, seeing it drop from 2.4% in 2015 to 1.5% in 2018. Businesses are shutting up shop and moving their headquarters from the UK to other parts of the EU, and the British pound fell from $1.48 on the day of the referendum to $1.36 the very next day, according to the GBP index and dollar index. But perhaps the most consequential impact of Brexit has been on global trade.

Beyond that the mere exiting of the UK from the EU set a global precedent for countries leaving trade agreements (TAs), meaning that in future the exit process may become more difficult, Brexit might even have had such an impact that it will discourage the future creation of TAs. This is because they will likely become more costly to negotiate and perhaps less valuable once established due to reduced flexibility or insufficient integration. 

On the ground though, moving to an EU free trade deal and establishing new free trade agreements with the US, Australia and New Zealand following Brexit has an estimated negative impact on the UK economy of 1.4% – equivalent to £28 billion or £1,000 per household. By eliminating Britain’s tariff-free trade status with the other EU members, it will raise the cost of exports, in turn hurting UK exporters as their prices would therefore jump up in price, making them less affordable to EU buyers. The weaker pound, however, will negate some of the impact. Despite knowing all this the British government has nonetheless forged ahead, claiming free trade is the best way to increase exports, investment and support local businesses. 

Some other sad and potentially difficult outcomes of Brexit for the British people are that tariffs will also increase the cost of imports into the UK – one third of which come from the EU – creating inflation and lower standards for UK residents. Many UK companies could also lose the opportunity to bid on public contracts in EU countries, an ill-considered aspect of Brexit by the UK government and one that could cost the UK workforce billions in the long run. Banking is another area which will be hit hard by the change in foriegn policy, which is significant when one considers that British banks lend nearly $1.4 trillion annually to EU companies and governments, and most financial activities taking place in Europe are either directly or indirectly performed out of London.

It’s not all negative, though. In the long-term,the UK could certainly benefit from greater non-EU specific trade, by reducing barriers bilaterally with countries like Australia and New Zealand. New trade and investment agreements with these non-EU partners have the power to open the UK market to enhanced overseas competition, while simultaneously allowing the UK to focus more on areas of strength, such as services. There is no argument that Australia is well positioned to redefine its trade and investment relationship with its motherland, so it is therefore likely Australia as well as the UK will benefit from Brexit in the area of trade.

The thing is, countries that are open to international trade tend to grow faster, innovate, are more productive and enjoy higher incomes than those that do not. Open trade also benefits lower-income households by giving consumers access to more affordable goods, and services. Has the UK shot itself in the foot by voting yes for Brexit? The answer – for the time being – is yes, it has hurt the UK economy. But hopefully in the long-run, having a future relationship based on free trade and friendly cooperation will save the UK.

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