Brexit Reality and Implications

Brexit Reality and Implications

Brexit Implications: The Future of Britain

Following the successful re-election of David Cameron in 2015, the reality of a British exit (Brexit) from the European Union became clear. Now, the date has been set for the referendum to determine the future of Britain. David Cameron opposes an exit. The powerful London mayor, Boris Johnson supports the idea. Boris has been ranked as the most senior official to take the lead from Cameron. While many polls predict that Britain will stay in the Eurozone, what would be the implications of a Brexit?
The significance of EU to the United Kingdom’s economy cannot be underestimated. In fact, a large percentage of the United Kingdom (UK) trade is conducted by the EU. The role of the UK (and all the member states) is in promotion. Currently, more than 60% of all trade agreements the UK is is as a result of its membership to the EU. This will probably increase to 85% if the negotiations spearheaded by Cameron bear fruits. In addition, as part of the European Union (EU), the UK enjoys no tariffs on goods moving within all the member states. This ensures that there is a free movement of goods and services within different countries. In addition, the EU is a key negotiator for all the 28 member states in the World Trade Organization (WTO). It also negotiates the Free Trade Agreements (FTA) on behalf of the member states. The UK is also a full member of the European Commission (which proposes legislation). It is also a member to the EU Council of Ministers and European Parliament.

Graphic Crispus

Brexit Implications: Understanding the Losses

Therefore, with all these issues, it is clear that UK will have major losses if it exits the union. According to a research by Open Europe, an exit will lead to a 0.8% decrease in Gross Domestic Product (GDP) by 2030. Other studies by NISR states that the GDP will drop by 2.5% after the Brexit. In addition, UK will have a reduced role in Europe because of the new tarrifs that will be introduced. Some might argue that UK will also levy other countries. However, as an individual country doing business around Europe, this will be to Britain’s disadvantage. A research by CEPR states that the withdrawal will cost 1.77% of GDP annually. With a GDP of £25.7 billion, this means that £3.8 billion will go to tariff barriers while the rest will go to non-tariff barriers (NTB). Another challenge for a Brexit will be on the agreements and FTAs the UK is party to as a member of the EU. The UK has many treaties and agreements (trade and political) with many countries such as South Korea, South Africa, and Mexico among others. After the exit, it is expected that the UK will not automatically retain these agreements. This will bring its fair share of challenges.
As a trader, having a good understanding of the various sectors of the UK’s economy will help you allocate capital to the right areas. Remember that the UK has for long had an important role in trade in the European Union. The chart below shows the trade balance between UK and the EU member states.

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Many UK’s companies have a footprint in other EU member states. For instance, the aerospace sector in the UK is responsible for about 2.3% of exports. Imposing trade barriers among the countries will have significant impacts. The food, beverages, and tobacco sector is a highly protected sector within the European Union where the key beneficiaries are the producers. If UK exits, then this sector will be greatly affected.
With these implications, it is certain that the UK will lose if it exits the European Union. This will lead to a decline in value to the pound. In fact, a few weeks ago, when Boris endorsed the idea of a Brexit, the pound lost more than 2%. In addition, the other sectors of the economy will be negatively affected. In days (or months) before the poll, I expect the major indices in the UK to decline. The same will be true to the pound. However, since I believe that the UK will not exit, these asset classes will go up after the poll.

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