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Brexit: How Does this Affect World Trade?

The Brexit Referendum is geared towards Britain quitting the EU. This desertion will have a great impact on the global economy and will be a threat to a trillion of dollars, either investments or trade. It has been foreseen that a new UK government shall be in power by October 2016. The new government will prompt the Article 50 of the Treaty on the EU. The European Council will be notified of the UK’s intended departure. This notice will be given a two years countdown whereby the United Kingdom and the other European Union Member States will compose a withdrawal agreement, which means the UK will not officially leave the EU until two years from now. The EU customs and trading laws will remain intact in the UK until it exits officially.

Some possible Brexit Consequences:

Changes in Trade and Manufacturing

Trade statistics mirror that the European Union is a landing-place for more than half of all the British exports. These trading links expand more if the countries which the UK trades freely with, simply because they have a free trading agreement with the EU. These trading agreements are an indicator that 62% of Britain’s exports are connected to European Union Membership. It is highly expected that a better trade agreement will be reached after the exit since advantages for both sides will carry on a close commercial arrangement.

In a worse scenario, the exporters might face some extra charges such as abiding to the EU origin rules since they are not included in the single market, although these factors would be inconveniencing but not trade barriers. There is no doubt that a lack of a trade deal with the EU will not hurt the Unites Kingdom’s total exports. This is because the membership benefits of EU have diminished with time. Though the Brexit effects will be felt across various economic sectors, it will be a great opportunity for Britain to broker trade deals with countries that are non-members of the European Union. This will give Britain a free trading policy. Also, the Brexit move may attract the non-EU countries to strike deals directly with Britain since it will be easier and quicker than using EU as a trade channel.

The sector of production faces a more uncertain result than the services sector. This is because the production sector depends on the trading agreements and the nature of the agreements between the UK and the European Union. A huge potential downside are the taxes on goods to the EU, while there is a greater upside potential since Britain will be able to open trade opportunities with other countries and also increase  sector’s competition through cheaper inputs. Contrary to many, leaving the European Union will be of great benefit to the Britain’s trading sector since it will be able to apply its newly found freedom to negotiate its trading deals.

Cities and Financial Services

The financial services sector will have more to lose than any other sector after Brexit. Even on the brighter case whereby pass-porting rights are preserved, the UK would lose influence towards the rules of the single market. Though the city will still be wounded, it won’t scream disaster. This is because the city’s competitive advantage is not only founded on free access to the single market. Brexit will probably enable the UK to be able to broker trading deals with the emerging markets that could, in the long run, pay dividends for the financial services sector.

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Property Market and Consumption

The role of holding the property market by the financial services sector is obviously overstated, making us believe that the economic impacts will be less. We expect that the overall impacts on the property market, and increasing consumption in the economy will be less. If the latter happens, positivity may be encountered due to independent rules on trade and immigration.

Foreign Investment

It seems like foreign direct investment will dry up if Britain leaves the European Union. Although access to a single market is a major reason why foreigners invest in Britain, there are other reasons why Britain is attractive to foreign investors. This will result in more foreign investments even when it officially exits the EU. A weak period of foreign direct investment is expected as the new relationship is being renegotiated but will be terminated with time.

Immigration

Since 2012, there has been a double up on the annual net migration. Due to the European Union immigration, the workforce is boosted by 0.5% per year. Due to this, the economy has been able to grow without causing inflation and wage growth by keeping interest rates low for a long period. The future relationship of the United Kingdom and the European Union will determine whether it will gain powers on immigration restriction.

Though unlikely, Britain will have to maintain the free labor movement between it and the union to keep possession of full access to the single market. Also, there is likelihood of policy change so as to keep off low or poor skilled workers from accessing the country, and instead attract experts or the highly skilled. This step will have a great impact on the low-wage sectors such as agriculture that are highly dependent on migrant labor but could be of great benefit to the sectors suffering from lack of highly skilled labor.

Public Sector

By leaving the European Union, the British government will save around 10 billion pounds which it contributes to the EU’s budget. The government might also be required to contribute to the EU for it to be able to retain single market access. Compensation to sectors of the economy that currently benefit from EU handouts will be required. In addition, Britain will have to sacrifice custom duties income so as to be able to strike trading deals with countries that are outside Europe.

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