Brexit Consequences for the U.K., the EU, and the United States
What Happens Next
Brexit is the nickname for "British exit" from the European Union. The U.K. left the EU on Jan. 31, 2020.
The Brexit process began on June 23, 2016 when the United Kingdom voted to leave the EU. The residents decided that the benefits of belonging to the unified monetary body no longer outweighed the costs of free movement of immigration. 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. On July 24, 2019, Boris Johnson replaced Theresa May as the U.K.'s Prime Minister. Johnson’s Conservative party attained a majority during a royally mandated general election on Dec. 12, 2019.
As a result, Brexit will conform to his Withdrawal Agreement. On Jan. 23, 2020, the Agreement Act received Royal Assent. This is the legislation that will implement the withdrawal agreement negotiated by the UK and the EU.
- Brexit is the nickname for "British exit" from the EU. It occurred on Jan. 31, 2020.
- A new trade agreement could raise tariffs and cause inflation.
- The cost of travel and communication could increase.
- The U.K. must pay billions in euros for its “divorce bill.
- Constraints on immigration could hurt the U.K.'s labor force.
- The U.K. could lose Scotland, which may opt to join the EU.
Withdrawal Agreement Summary
Johnson’s agreement is very similar to the one negotiated by Theresa May. 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.
The EU and the U.K. must negotiate trade agreements by Nov. 26 for it to be approved by Parliament in 2020. Otherwise, the U.K. must request an extension from the EU. If a trade deal or extension is not completed in time, the U.K. will revert to the same tariffs with the EU as other World Trade Organization members.
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.
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.
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 the 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.
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.
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.
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 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.
The Brexit Vote
In summary, the Brexit vote imposed these three hard choices on the U.K.:
- 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.
- 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.
- 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.
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 an $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.
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 voted to stay lived in London, Scotland, and Northern Ireland. They liked 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.
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