Brexit Consequences for the U.K., the EU, and the United States

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

Brexit is the June 23, 2016, referendum in which the United Kingdom voted to leave the European Union. The residents decided that the benefits of belonging to the unified monetary body no longer outweighed the costs of free movement of immigration. Brexit is the nickname for "British exit" from the EU. The vote was 17.4 million in favor of leaving versus 15.1 million who voted to remain.

On March 29, 2017, former U.K. Prime Minister Theresa May submitted the Article 50 withdrawal notification to the EU. The deadline, which has been extended several times, is now January 31, 2020. But it could be extended until July 1, 2020.

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 December 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 (outlined below). The sticking point has been the nature of the border between the U.K.’s Northern Ireland and the EU’s Republic of Ireland. 

Current Status

On July 24, 2019, Boris Johnson replaced Theresa May as the U.K.'s Prime Minister. A royally mandated general election took place on Dec. 12, 2019. Brexit’s outcome may depend on this election. Johnson’s Conservative party attained a majority. That makes it more likely that Brexit will conform to his Withdrawal Agreement Bill.

Withdrawal Agreement Summary

Johnson’s agreement is very similar to the one negotiated by Theresa May. The U.K. remains in the EU during the transition period until Brexit is finalized.

One main difference is that the U.K. would not be in a "customs union" with the EU. That includes U.K. member Northern Ireland. But it allows Northern Ireland to adopt EU customs rules in keeping with the Republic of Ireland, an EU member. This avoids a hard border between the two.

There will be no Value-Added Tax (VAT) between the two Irish countries. 

That means there will be a customs and regulatory border between Great Britain and Northern Ireland in the Irish Sea. That includes the VAT.

The EU and U.K. will negotiate a trade agreement that will probably impose tariffs on each other's imports. This won’t apply to goods already purchased or in process.

The 3 million European nationals already living in the U.K. will continue to live and work in the country without work visas. The 1.3 million U.K. citizens will continue to do the same in the EU. For the future, the U.K. has proposed an immigration system based on workers’ skills.

The U.K. must pay a "divorce bill" of 33 billion pounds to fulfill any remaining financial commitments.

Once the deal is approved by Parliament, then a special EU summit would accept Brexit. After that, the EU and the U.K. would negotiate trade agreements. Once these are ratified by the U.K. Parliament, the transition period ends. 

Consequences of Brexit for the U.K.

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, trade, and jobs. There would also be consequences specific to Ireland, London, and Scotland.

Growth

Trade and travel on the island of Ireland would become more complicated under a no-deal Brexit.

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 1.5% in 2018. The U.K. government estimated that Brexit would lower the U.K.’s growth by 6.7% over 15 years. That’s if there is a trade agreement but restrictions on 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. The pound may strengthen once a deal is approved, depending on the trade terms.

Trade

Brexit would eliminate Britain's tariff-free trade status with the other EU members. Tariffs would raise the cost of exports. That would hurt U.K. exporters as their goods become more expensive in Europe. Some of that pain would be offset by a weaker pound.

Tariffs would also increase prices of imports into the U.K. More than one third of its imports comes from the EU. Higher import prices would create inflation and lower the standard of living for U.K. residents. The U.K. is already vulnerable because heat waves and droughts caused by global warming have reduced local food production.

The U.K. would lose the advantages of the EU’s state-of-the-art technologies. The EU grants these to its members in environmental protection, research and development, and energy.

Also, U.K. companies could lose the ability to bid on public contracts in any EU country. These are open to bidders from any member country. The most significant loss to London is in services, especially banking. Practitioners would lose the ability to operate in all member countries. It could raise the cost of airfares, the internet, and even phone services.

Jobs

Brexit would hurt Britain's younger workers. Germany is projected to have a labor shortage of 3 million skilled workers by 2030. Those jobs will no longer be as readily available to the U.K.'s workers after Brexit.

Employers are having a harder time finding applicants. One reason is that the number of EU-born workers fell by 95% in 2017. This has hit the low-skilled and medium-skilled occupations the most. 

Ireland

Northern Ireland would remain with the United Kingdom. The Republic of Ireland, with which it shares a border, would stay a part of the EU. Johnson's plan avoided a customs border between the two Irish countries.

A customs border could have reignited The Troubles. It 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 9,500 commuters to go through customs on their way to and from work and school. Brexit would also affect the 2,100 workers who commute to Great Britain.

London

Brexit has already depressed growth in The City, the U.K.'s financial center. Growth was only 1.4% in 2018, and was close to zero in 2019. Brexit has diminished business investment by 11%. 

International companies would no longer use London as an English-speaking entry into the EU economy. Goldman Sachs, JP Morgan, and Morgan Stanly have already switched 10% of their clients. Bank of America has transferred 100 bankers to its Dublin office and 400 to Paris. 

Scotland

Scotland voted against Brexit. The Scottish government believes that staying in the EU is the best for Scotland and the U.K. It has 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.

Consequences for the EU

The Brexit vote has strengthened anti-immigration parties throughout Europe. If these parties gain enough ground in France and Germany, 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, new polls show that the majority of EU citizens still strongly support the Union. Almost 75% say the EU promotes peace, and 55% believe it supports prosperity. More than a third see the role of the U.K. as diminishing. 

Consequences for the United States

Brexit is a vote against globalization. It takes the United Kingdom off the main stage of the financial world. It creates uncertainty throughout the U.K. as The City seeks to keep its international clients.

U.S. stability means London's loss could be New York's gain.  

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. The United States has a $18.9 billion trade surplus with the U.K. In 2018, it exported $141 billion while importing $122 billion. Brexit could turn this surplus into a deficit if a weak pound makes U.K. imports more competitive.

Brexit dampens business growth for companies that operate in Europe. U.S. companies invested $758 billion in the U.K. in 2018. Most of this was the finance sector with some manufacturing. These companies use the U.K. as the gateway to free trade with the EU nations.

U.K. businesses invested $561 billion in the United States. Brexit puts at risk jobs in both countries. In addition, there were 716,000 U.K. immigrants in the United States and 215,000 U.S. immigrants in the U.K. in 2019.

Brexit’s Causes

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. They claimed citizens of poorer countries were taking jobs and benefits.

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

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

The Bottom Line

Britain’s exit from the EU, voted on in June 2016, is abbreviated as “Brexit.” The majority of voters were against the immigration policies of the EU. The deadline for Brexit’s finalization has been extended to January 31, 2020.

Several consequences could occur when the U.K. leaves the EU:

  • Inflation: The U.K. would no longer enjoy tariff-free trading with the EU, depending on the new trade agreement. Tariffs will raise prices of U.K. imports and costs of exports. 
  • Hard border: A customs border could be set up dividing Ireland. Northern Ireland is part of the U.K., while the rest of the country remains an EU member. This could reignite The Troubles.
  • Restricted labor movement: Constraints on immigration would hurt Britain’s labor force. 
  • Scotland: The U.K. could lose Scotland, which may opt to join the EU.
  • Real estate: Lower economic growth could depress real estate prices.
  • Travel: The cost of travel and communication could increase.
  • Divorce bill: The U.K. would pay billions in euros for its “divorce bill.

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