Over the past few years, Brexit has been frequently mentioned in the news. However, most people don’t understand it entirely. What does it actually mean? How will the US be impacted? And will it actually happen?
Brexit would mean many changes for the United Kingdom (UK), starting with the change in free trading with other European Union (EU) countries. Here are a few of the most common questions about Brexit and its impact.
What is Brexit?
Brexit is a neologism, a new combination of the words “British” and “exit” to describe the departure of the UK from the EU. The United Kingdom European Union membership referendum voted on June 23, 2016, determined whether the UK should leave or remain in the EU. The vote was 51.9 percent leave the EU to 48.1 percent remain in the EU. The total referendum turnout was 71.8 percent and more than 30 million people voted. (Source: BBC) Theresa May, the current Prime Minister of the UK, recently published the full text to the 585 page Brexit deal.
What does Brexit mean for the UK?
Brexit will have an economic impact on the UK, especially because being a part of the EU means the UK experienced free trade with other countries in the EU previously. According to Rand Corporation, “the economic analysis shows that the UK will be economically worse-off outside of the EU under most plausible scenarios.”
Social studies teacher Scott Bennett agrees that leaving the EU would have a negative impact on the UK economy.
“Countries around the world make decisions to be more autonomous,” Bennett said. “From an economic standpoint, there’s a concern. Because what we’ve we seen, historically, is that free trade is good. Free trade is good for a lot of reasons. In the likelihood of severance of a relationship, even though the British want to be partners with the rest of the EU, there are going to be trade restrictions.”
Rand Corporation also predicts that the failure of the UK to achieve open trading and investment with the EU will have a negative impact on both the UK and the EU. In addition, Rand Corporation anticipates “leaving the EU with no deal and simply applying the World Trade Organization (WTO) rules would lead to the greatest economic losses for the UK.”
If the UK were to trade under WTO rules, the GDP would drop by $140 billion or five percent in ten years. Trading under WTO rules would increase non-tariff standards and harm the “ability of UK businesses to sell services to EU countries.”
Bennett is worried by the impact of Brexit on the global economy especially because all countries are connected in trade.
“A big concern would be the reduction in free trade that would really have an impact on the whole world,” Bennett said. “The British and the EU are partners with a lot of countries, so there will be a ripple effect.”
There may be a solution to this, however. A trilateral UK-EU-US agreement, similar to the Transatlantic Trade and Investment Partnership (TTIP), would most likely benefit the UK. The UK would gain “preferential access to both the US and the EU marketplaces” and benefit from economic growth. However, due to the current political environment, this agreement seems unlikely. (Source: Rand Corporation)
What is Article 50?
Article 50 was part of the Lisbon Treaty signed into law by the EU in December 2009. Article 50 is a basic, five-point plan for any country that wishes to leave the EU. The UK is the first instance where a member state of the EU leaves the bloc by using Article 50. (This is because Algeria left in 1962 after gaining independence from France and Greenland left in 1985 through a special treaty.) Article 50 can be found here.
On Mar. 29, 2017, the UK started Brexit when it invoked Article 50. This dictated that the UK would leave on Mar. 29, 2019. However, the UK has been granted additional extensions that pushed this date later in efforts to negotiate a deal for the arrangements the UK will have with other European countries after Brexit.
What does the Hard Brexit vs Soft Brexit mean?
Since Article 50 was invoked, numerous debates have discussed a deal between the UK and the EU. The ‘“hard” Brexit deal is considered a clean break from the EU for the UK. This means that the UK will give up its membership to the EU’s single market and lose free trade opportunities with other European nations.
Many supporters of a hard Brexit want the freedom to set up their own trade deals. However, due to the difficulty of setting up independent trade agreements, WTO rules would be used in the meantime. WTO rules (found here) are considered “less favorable” than EU rules for trade that allow free trade between EU countries.
“Should the U.K. go down the hard Brexit path, the U.K. economy would likely slow further as EU trade uncertainty weighs on consumer sentiment and business investment,” John Lynch, chief investment strategist at LPL Financial said.
Because hard Brexit means that Britain will be outside of the customs union, imported goods will become more expensive. Currently, imports from the EU consist of 53 percent of all imports to the UK while 44 percent of all exports from the UK go to the EU. (Source: Commons Briefing Papers)
The hard Brexit also consists of a transition period during which the UK and the EU would negotiate free trade deals that would last until Dec. 31, 2020.
Many economists that “soft” Brexit would be the “least damaging path”. The UK would remain “closely aligned” with the EU by “retaining some form of the bloc’s single market.” This allows the UK less disruption in trade and business. However, the EU has demanded that access to this single market will only be granted if all principles are followed.
Compared to hard Brexit, there will be more economic benefits associated with soft Brexit.
National Institute of Economic and Social Research (NIESR) forecasts the GDP growth to be 1.9 percent for 2019. In contrast, NIESR predicts under hard Brexit, economic growth would slow to 0.3 percent in 2019. (Source: NIESR)
Overall, it seems that soft Brexit would have more benefits for the UK. GDP is predicted to increase and free trade and movement would be maintained.
“We expect UK domestic stocks to outperform UK exporters by 20 percent if a soft Brexit materializes,” Sebastian Raedler, head of European equity strategy at Deutsche Bank, said in an interview with Bloomberg.
What about the situation where the UK and the EU are unable to reach a deal?
According to the Bank of England, no deal Brexit would shrink the UK economy by about eight percent in one year and domestic house prices would fall by 33 percent. This would also affect the world economy, however, because the UK “constitutes only about two percent of the global economy and four percent of world goods trade,” Lynch said. “Global ramifications of all realistic scenarios are likely to be manageable.”
Bennett does not agree with this statement.
“It would be very detrimental to the British economy and the world,” Bennett said.
Compared to soft Brexit, a situation where the UK and the EU are unable to reach a deal would be less favorable for all parties involved. However, if the UK and the EU cannot negotiate a deal before the Brexit date (which has been extended from the original Mar. 29, 2019), the UK will leave without a deal and without a transition period for trade and movement of people.
How will the United States be impacted?
According to Rand Corporation, “after Brexit, political and security effects would be the more important to the US.” After Brexit, the US has little to gain economically, however, there is also little to lose. Rand Corporation also states “(t)he US will miss the influence and global perspective that the UK brings to the EU decision-making process, particularly around foreign policy, security, and defense.”
Bennett also believes that the US will be negatively affected by Brexit.
“The British are a big partner of the United States,” Bennett said. “The EU is also a big partner of the United States. It’s just like everything else in our global economy. When one country stubs its toe, everybody feels pain. There’s a big impact. Every country’s connected to every other country in a global economy.”
When will Brexit actually happen? What is the current status of Brexit?
After negotiations on Apr. 11, 2019, the UK and the EU have decided to delay Brexit until Oct. 31, 2019. This means that the UK will take part in the European elections to elect new officials. There have been discussions about another referendum that would allow the people to once again decide whether to accept the deal or remain in the EU.
At this time, however, the UK has six months to reach a deal at which time Brexit may be extended once again or a new deal will be negotiated.