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 where 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. It gave the U.K. and EU until March 29, 2019, to negotiate an agreement. The EU has extended that deadline to October 31, 2019.

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

  1. Leave with no deal, known as "no-deal Brexit." New PM Boris Johnson and his supporters favor this outcome. But without a trade agreement, ports would be blocked and airlines grounded. In no time, imported food and drugs would run short. Johnson warned companies to prepare for this outcome.
  2. Vote again on Brexit. Polls show the U.K. would reject Brexit if the referendum were held today. Johnson's opponents 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 revoke its Brexit application unilaterally. No other EU body is needed to approve the withdrawal.
  3. Approve May's deal or one similar to it. The U.K. doesn't have the economic clout to negotiate a better one. Johnson has told the EU he refuses to meet unless it agrees to a border between Northern Ireland and the Republic of Ireland.

The Wall Street Journal analyzed a total of nine possible outcomes.

Current Status

On July 24, 2019, Boris Johnson replaced Theresa May as the U.K.'s Prime Minister. Johnson promised to execute Brexit by October 31 with or without a deal. On August 28, 2019, Queen Elizabeth II approved Johnson's request to shut down Parliament between September 11 and October 14. This makes is difficult for the Brexit opposition to prevent a no-deal Brexit. He does not have to abide by the Cooper Bill, which made a no-deal Brexit illegal. Parliament approved the bill in April.

On October 28, 2019, the EU granted an extension to the U.K. government’s request to delay Brexit until January 31, 2020. A royally mandated general election is slated for December 21, 2019. Brexit’s outcome may depend on this election. Five possible scenarios are predicted to happen:

  • Brexit will conform to the Withdrawal Agreement Bill.
  • Renegotiation.
  • Referendum.
  • Cancel Brexit.
  • No-deal Brexit.

Former Prime Minister Theresa May resigned effective June 7, 2019. She was unable to get Parliament to approve her Brexit plan. May had negotiated the 21-month transition plan with the EU on March 19, 2018.

One reason was that May's opponents within her Conservative party prefer a "hard Brexit." That means leaving the EU with no restrictions other than a new free trade agreement.

Members of the opposing Labour party want another referendum. They don't want the U.K. to leave the EU at all. Others want a modified deal that keeps the U.K. in the EU market and accepts immigrants.

Many businesses have been planning for a no-deal Brexit. On February 11, 2019, the U.K. signed a bilateral trade agreement with Switzerland to avoid tariffs in case of a "no-deal Brexit."

Consequences of a No-Deal Brexit

A no-deal Brexit means that the U.K. would no longer be a member of the EU and it would have no trade agreement. It would eliminate Britain's tariff-free trade status with the other EU members.

Tariffs would raise the cost of exports. That would hurt exporters as their goods became higher-priced in Europe. Some of that pain would be offset by a weaker pound.

Tariffs would also increase prices of imports into the U.K. One-third of its food comes from the EU. Tariffs are as high as 74% for tobacco, 22% for orange juice, and 10% for automobiles. Higher import prices would create inflation and lower the standard of living for U.K. residents.

A hard border would require all imports to go through customs. Delays at the border could create food shortages. The U.K. is vulnerable because heat waves and droughts caused by global warming have already reduced local food production.

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

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

This could reignite 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. It would also force 35,000 commuters to go through customs on their way to and from work. Some of those in Northern Ireland who want to remain in the EU could call for a referendum to rejoin the country of Ireland.

The EU favors a customs border between Northern Ireland and Great Britain. Both Johnson and May rejected that option.

Britain would have to pay its outstanding EU bills of $51 billion. It would also have to find a way to guarantee rights to EU citizens living in the U.K.

Consequences of a Hard Brexit

A hard Brexit is like a no-deal Brexit but would include a trade agreement. It's unlikely one could be negotiated by the October deadline.

A hard Brexit could be disastrous for The City, the U.K.'s financial center. Companies would no longer use it as an English-speaking entry into the EU economy. The City of London reported that 5,000 jobs could be lost. That could lead to a real estate collapse. There are many new office buildings under construction that would sit empty. Housing prices have already started to fall. Many businesses have already left. The City's reputation as a bastion for business is permanently damaged.

The United Kingdom 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. A hard Brexit could raise the cost of airfares, the internet, and even phone services.

A hard Brexit would hurt Britain's younger workers. Germany is projected to have a labor shortage of 2 million workers by 2030. Those jobs will no longer be as readily available to the U.K.'s workers after Brexit.

London has already lost many nurses and other health care professionals. In the year following the referendum, almost 10,000 of them quit. The number of nurses from Europe registering to practice in Britain has dropped by almost 90%.

Under a hard Brexit, the U.K. could lose Scotland. It could join the EU on its own, as some countries within the kingdom of Denmark have. It may even have a referendum to leave the United Kingdom. 

Consequences for the EU

The Brexit vote has strengthened anti-immigration parties throughout Europe. As a result, Germany's Chancellor Merkel has already announced she will not run for re-election. 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 many in Europe feel a new cohesiveness. The U.K. often voted against many EU policies that other members supported. International Monetary Fund Director Christine Lagarde said, “The years are over when Europe cannot follow a course because the British will object.” She added, “Now the British are going, Europe can find a new elan.” 

Consequences for the United States

The day after the Brexit vote, the Dow fell 610.32 points. Currency markets were also in turmoil. The euro fell 2% to $1.11. The pound fell. 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. As a result, gold prices rose 6% from $1,255 to $1,330. 

A weak pound also makes U.S. exports to the U.K. more expensive. It affects the U.S. farming and manufacturing sectors. The U.K. is America's fourth-largest export market.

Brexit dampens business growth for companies that operate in Europe. U.S. businesses are the most significant investors in Great Britain.

U.S. companies invested $588 billion and employed more than a million people. These companies use it as the gateway to free trade with the 28 EU nations. Many have opened subsidiaries elsewhere in Europe to protect against a hard Brexit or no deal.

Britain's investment in the United States is at the same level. That could impact up to 2 million U.S./British jobs. It's unknown exactly how many are held by U.S. citizens. The uncertainty over their future will dampen growth. 

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.  

May's Brexit Plan Summary

The agreement May negotiated had two parts. One was the binding withdrawal agreement. The other was a non-binding set of principles to guide future negotiations.

Under the plan, the U.K. was to remain within a "customs union" with the EU for an unspecified period. This would have continued the trade that both parties wanted. The two sides would not have had to impose tariffs on each other's imports. They were free to tax imports from other countries. Critics wanted the freedom to negotiate separate trade deals with other countries.

The U.K. would have retained complete access to capital. The 3 million European nationals living in the U.K. could continue to live and work in the country without work visas. The 1.3 million U.K. citizens could continue to do the same in the EU.

The U.K. would have also abided by the European Court of Judgment and EU laws. But, since it was no longer a member of the EU, the U.K. could no longer vote on the laws. That's similar to Norway's relationship with the EU. 

The U.K. must pay a 50.7 billion euro "divorce bill" to fulfill any remaining financial commitments.

The deal was similar to the "Jersey deal" offered by the European Council on August 9, 2018. The deal would have kept the U.K. in the single market for trade while allowing it to restrict immigrants. In return, the U.K. must abide by all EU environmental, social, and customs rules. The deal was what the British dependency of Jersey already has. It would avoid borders between Northern Ireland and the U.K. or Ireland.

If the deal had been approved by Parliament, then the U.K. and EU would draft a detailed trade declaration. Another EU summit would rule on that declaration. Any plan must then be approved by the European Council, the 20 EU countries with 65% of the population, and the European and U.K. Parliaments.

Once those major hurdles were overcome, then the U.K. would copy the EU laws into its laws, which can later be amended or repealed.

Consequences of the Deal for the U.K.

May's plan did not allow the U.K. to prohibit the free flow of people from the EU. That was the primary reason people voted for Brexit. They were concerned about an increase in refugees from Africa and the Middle East. 

Brexit's biggest disadvantage is that it's slowing 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 to 1.3% in 2018. U.K.'s Treasury Chief Philip Hammond reported that it would slow to 1.9% in 2019 and 1.6% in 2020. A resolution should allow the economy to improve to 2% in 2019.

Bank of America is spending $400 million to transfer its European headquarters to Dublin. EasyJet, the U.K.’s largest airline, is transferring ownership to non-British Europeans. The British pound is 14% lower than before the referendum. That helps exports but increases the prices of imports. The pound would strengthen if a deal is approved.

Critics of May's plan said the U.K. must still follow EU guidelines and pay EU exit fees. But, since it's no longer a member, it won't be able to vote on those guidelines.

Brexit Causes

In June 2016, Former Prime Minister David Cameron called for the referendum. He wanted to silence pro-Brexit opponents within his Conservative party. He thought the referendum would resolve the issue in his favor. Unfortunately for him, the anti-immigration and anti-EU arguments won.

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 felt that EU membership was changing their national identity. They didn't like the budgetary constraints and regulations the EU imposed. They didn't see how the free movement of capital and trade with the EU benefited them. 

Younger voters and those in London, Scotland, and Northern Ireland wanted to stay in the EU. They were outnumbered by older voters who turned out in droves. 

The Bottom Line

Britain’s exit from the EU, voted on in June 2016, is abbreviated as “Brexit.” 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 happen should the U.K. no longer become part of the EU:

  • Inflation – The U.K. may no longer enjoy tariff-free trading with the EU, unless a new trading agreement is set up. 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. – Hurts Britain’s labor force. About 90% of health care professionals have already left the U.K.
  • The U.K. could also lose Scotland, which may opt to join the EU.
  • Widespread real estate depression.
  • Rise in the cost of travel and communication.
  • U.K. pays 51 billion euros for its “divorce bill.”

The United States has a stake in Brexit as the U.K. is the fourth largest consumer of its exports. Should Brexit become a reality, the U.S. export industry would feel the crunch of Britain’s decreased ability to afford its imports. 

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