What Was Brexit, and How Did It Impact the UK, EU, and the US?

Brexit
••• Photo by Michael Tubi/Corbis via Getty Images

On Dec. 31, 2020, the transition period for the United Kingdom (U.K.) to withdraw from the European Union (EU), otherwise known as "Brexit," officially came to an end. This marked the end of a years-long process that was overseen by two different Prime Ministers, included several delays and extensions, and left the U.K. divided.

What Was Brexit?

Brexit was the nickname for "British exit" from the EU, the economic and policy union that the U.K. had been a member of since 1973. That changed on June 23, 2016, when the U.K. voted to leave the EU. The residents decided that the benefits of free trade weren't enough to offset the costs of free movement of immigration. The vote was 17.4 million in favor of leaving versus 16.1 million who voted to remain.

Key Takeaways

  • Brexit is the nickname for "British exit" from the EU.
  • It took four years to complete after the 2016 vote.
  • A new trade agreement between the U.K. and EU retains their tariff-free status.
  • Constraints on immigration could hurt the U.K.'s labor force. 
  • The U.K. could lose Scotland, which may opt to join the EU.

What Caused Brexit?

In 2015, the Conservative Party called for the referendum.  Most of the pro-Brexit voters were older, working-class residents of England's countryside. They were afraid of the free movement of immigrants and refugees, claiming in the process that citizens of poorer countries were taking jobs and benefits.

Small businesses were also frustrated by EU fees. Others felt leaving the EU would create jobs. Many felt the U.K. paid more into the EU than it received.

Those who voted to stay in the EU primarily lived in London, Scotland, and Northern Ireland. They liked free trade with the EU, and claimed most EU immigrants were young and eager to work. Most felt that leaving the EU would damage the U.K.’s global status.

Brexit Process

Leaving the EU was a complicated process. Former U.K. Prime Minister Theresa May, following the voters' will, submitted the Article 50 withdrawal notification to the EU on March 29, 2017. She negotiated a withdrawal agreement with the EU that outlined their new relationship but couldn't get approval from a divided Parliament.

In July 2019, Boris Johnson succeeded May as the U.K.'s Prime Minister. Johnson’s Conservative party subsequently attained a majority during a royally mandated general election on Dec. 12, 2019. That allowed him to get Parliament's approval of the Withdrawal Agreement he negotiated with the EU.

On Jan. 23, 2020, the Agreement Act received the necessary legislative Royal Assent, which is when the Queen formally agrees to make the bill into law. The U.K. formally left the EU on Jan. 31, 2020, but entered a transition process that ended on Dec. 31, 2020. The EU-UK Trade and Cooperation Agreement was agreed to on Dec. 24, 2020 (and signed on Dec. 30).

Brexit Trade and Cooperation Agreement Summary

The Trade and Cooperation Agreement has three main pillars: trade, cooperation, and governance that took effect on Jan. 1, 2021. Notably, the agreement does not cover foreign policy and defense.

Trade

The U.K. is no longer part of the customs union and single market with the EU. Instead, it has a trade agreement that allows zero tariffs and zero quotas on goods traded that comply with the appropriate rules of origin.

Brexit put a big strain on the relations of U.K. member Northern Ireland with its neighbor, the Republic of Ireland, an EU member. The new agreement allows Northern Ireland to adopt EU customs rules so there isn't a hard border between the two adjacent countries. Instead, there is a customs and regulatory border between Great Britain and Northern Ireland in the Irish Sea.

Free movement between the U.K. and EU has ended. European nationals already living in the U.K. must make sure they have documents from the U.K. government specifically allowing them to remain.

Travelers between the EU and the U.K. must have passports ready to show at the border. Business travelers have additional requirements. If they do business regularly in an EU country, they may need to set up a local subsidiary. Many services, such as telecommunications, broadcasting, and electronic services, may be taxed.

The U.K. must pay a "divorce bill" of 25 billion pounds by 2057. This is to fulfill any remaining financial commitments made while a member of the EU.

Security

While EU law no longer applies to the U.K., the latter will cooperate with the EU on law enforcement and criminal justice matters.

Governance

The agreement established a Joint Partnership Council to make sure the agreement is properly applied and interpreted. This includes dispute settlement, legal enforcement, and rules for retaliation if needed.

How Did Brexit Impact the UK?

The U.K. has already suffered from Brexit. The economy has slowed, and many businesses have moved their headquarters to the EU. Here are some of the impacts on growth and jobs. There would also be consequences specific to Ireland, London, and Scotland.

Growth

Brexit's biggest disadvantage is its damage to the U.K.'s economic growth. Most of this has been due to the uncertainty surrounding the final outcome.

Uncertainty over Brexit slowed the U.K.'s growth from 2.4% in 2015 to 1.0% in 2019. The U.K. government estimated that Brexit would lower the U.K.’s growth by up to 6.7% over 15 years. It assumed the current terms of free trade but restricted immigration. 

The British pound fell from $1.48 on the day of the referendum to $1.36 the next day. That helps exports but increases the prices of imports. It has not regained its pre-Brexit high.

Jobs

Brexit hurts Britain's younger workers. Germany is projected to have a labor shortage of 3 million skilled workers by 2030. Those jobs won't be as readily available to the U.K.'s workers after Brexit.

Employers are having a harder time finding applicants. One reason is that EU-born workers left the U.K., their numbers falling by 95% in 2017. This has hit the low-skilled and medium-skilled occupations the most. 

Trade

The U.K. must negotiate new trade agreements with countries outside of the EU, which had more than 40 trade agreements with 70 countries already in place.

Ireland

Northern Ireland remains with the U.K. The Republic of Ireland, with which it shares a border, stays a part of the EU. The agreement avoids a customs border between the two Irish countries.

A customs border could have reignited The Troubles, which was a 30-year conflict in Northern Ireland between mainly Catholic Irish nationalists and pro-British Protestants. In 1998, it ended with the promise of no border between Northern Ireland and Ireland. A customs border would have forced about 9,300 commuters to go through customs on their way to and from work and school.

London

Brexit has already depressed growth in the U.K.'s financial center of London, which saw only 1.4% in 2018 and was close to zero in 2019. Brexit also diminished business investment by 11% between 2016 and 2019.

International companies are less likely to use London as an English-speaking entry into the EU economy. Barclay's moved 5,000 clients to its Irish subsidiary, while Goldman Sachs, JP Morgan, and Morgan Stanley switched 10% of their clients. Bank of America has also transferred 100 bankers to its Dublin office and 400 to a broker dealer unit in Paris. 

Scotland

Scotland voted against Brexit. The Scottish government believed that staying in the EU was the best for Scotland and the U.K. It had been pushing the U.K. government to allow for a second referendum. 

To leave the U.K., Scotland would have to call a referendum on independence. It could then apply for EU membership on its own.

The Brexit Vote

In summary, the Brexit vote imposed these three hard choices on the U.K.:

  1. Leave with no deal, known as "no-deal Brexit." Without a trade agreement, ports would be blocked and airlines grounded. In no time, imported food and drugs would run short.
  2. Vote again on Brexit. Many argue that voters did not understand the economic hardships that Brexit would impose. On Dec. 10, 2018, the European Court of Justice ruled that the U.K. could unilaterally revoke its Brexit application to remain in the EU. 
  3. Approve a negotiated deal. The sticking point had been the nature of the border between the U.K.’s Northern Ireland and the EU’s Republic of Ireland. 

How Did Brexit Impact the EU?

Brexit is a vote against globalization. As a result, it has weakened forces in the EU that favor integration. Members of right-wing,anti-immigration parties are particularly anti-EU in France and Germany. If they gained enough ground, they could force an anti-EU vote. If either of those countries left, the EU would lose its most robust economies and would dissolve.

On the other hand, the majority of EU citizens still strongly support the union. In a Pew Research Center survey across 10 European nations, almost 75% say the EU promotes peace, and 55% believe it supports prosperity. In addition, more than a third see the role of the U.K. as diminishing. 

How Did Brexit Impact the US?

Brexit threw into uncertainty the status of London as a global financial center. U.S. stability, though, means London's loss could be New York's gain.

The long-term effects of Brexit could be positive for the U.S.   

The day after the Brexit vote, the currency markets were in turmoil. The euro fell 2% to $1.11. The pound fell 8% to $1.36. Both increased the value of the dollar. That strength is not good for U.S. stock markets. It makes American shares more expensive for foreign investors. 

A weak pound also makes U.S. exports to the U.K. more expensive, although that hasn't slowed exports. In 2019, U.S. exports to the U.K. were $147.4 billion, up from $141 billion in 2018. That's created a $21.8 billion trade surplus. Meanwhile, imports were only $125.6 billion.

Brexit dampened business growth for companies that operate in Europe. U.S. companies invested $851.4 billion in the U.K. in 2019. Most of this was in the finance and insurance sector, as well as manufacturing and nonbank holding companies. These U.S. companies previously used the U.K. as the gateway to free trade with the EU nations. U.K. businesses, on the other hand, invested $505.1 billion in the U.S. in 2019, up 1.7% from 2018. Most of this was in manufacturing, wholesale trade, and finance.

The U.K. is in the process of negotiating a trade deal with the U.S. The biggest stumbling block is agriculture. The U.K. requires greater food safety and animal welfare regulations than the U.S. does. U.K. farmers are concerned about inferior, cheaper agriculture products putting them out of business.

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