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Brexit (Britain-exit) is a commonly used inference to the withdrawal of the United Kingdom from the European Union (EU). On-going campaigns in the United Kingdom are anticipated to see a member state leaving the European Union. Supporters of this move feel that the exit of Britain from the EU would stabilize the economies of their countries. There are claims that countries in Britain are likely to make better deals without necessarily being members of the European Union. However, there are various economic implications of Brexit, as depicted in this essay. The predominant issues that characterize the exit of Britain from the European Union are the economy and immigration. Different projections have been derived based on different contexts of the European Union interventions in the United Kingdom. These predictions focus on primary issues, such as the effects of Brexit on the power of investment and trade patterns in the United Kingdom. This report aims at exploring probable economic impacts on trade patterns and foreign direct investment after the United Kingdom exits the European Union.
How Trading Patterns Will Be Affected by Brexit
Ebell, Hurst, and Warren (2016) reveal that Brexit will pose significant shifts in the trading patterns between Britain and other countries, especially those who are members of the European Union. As a result, the United Kingdom will most likely incur a huge and long-term loss of its gross domestic product. Although this assumption is based on inadequate research, most economists have used prudent methods that provide a close picture of what will probably happen after Brexit (Begg & Mushövel 2016). Indeed, Brexit would result in enormous economic costs for Britain. The ambiguity and distraction of lengthy and discordant separation meetings that are beyond the shadow of a doubt will most likely depress both investment and economic development in the United Kingdom. Studies have shown that the long-lasting annulment will result in reduced trade, investment, and migration between the United Kingdom and the European Union (Begg & Mushövel 2016). A research conducted in the London School of Economics’ Centre for Economic Performance reveals the anticipated lessening of trade between the UK and EU will presumably decrease the country’s GDP by approximately 9.5-percent (Ebell, Hurst & Warren 2016). Foreign direct investment (FDI) is also likely to drop by not less than 3.4-percent. These costs will pose potential threats to the economy of Britain in case it exits the European Union (MacDonald 2016).
According to Ebell, Hurst, and Warren (2016), the exit process is expected to bring about prolonged uncertainty. Although the Brexit process is theoretically projected to take two years only, there is a likelihood that it will even take a considerably longer time. In a controversial issue that involved fish, the arbitration of the disentanglement of Greenland amidst a population of 50,000 people in the 1980s took approximately three years. Being the second-largest economy in the European Union (with a population of over 64 million people), this scenario is an indication that Brexit will be a more multifaceted process that will take a considerable number of years. Furthermore, the exit of Britain from the European Union implies that it will require unison among all the member states. This standpoint further implies that the Brexit process will call for a renegotiation of more than 50 deals on economic relationships that have been sealed between the European Union and other countries. Investment and employment decisions would be highly affected by the imposition of local trading regulations on the UK market (Baker 2016). All these occurrences will presumably result in the plummeting of the UK pound.
Nonetheless, there are claims that the outcome of Brexit will only deter investment in the short run, owing to intermediate costs that will be incurred while moving to a new trade and investment platform. Anticipated volatility of currency and uncertain reactions in the financial markets also pose significant ambiguity to the UK economy (Baker 2016). For instance, Brexit could give rise to financial insecurity in the Bank of England, but it has been warned a number of times.
The prices of a broad range of products and services are also expected to rise upon the UK’s withdrawal from the European Union. For instance, the prices of imported cars will increase after Brexit. This situation will affect the transport sector, which facilitates trade. Prentoulis et al. (2017) report that the tariffs between the European Union and the United Kingdom are slightly 7% for transport equipment and approximately 1.8% for essential metals, including steel. The likely imposition of increased tariffs on transportation equipment will have a direct effect on the prices of imported cars, a situation that will compel consumers to dig their pockets deeper. The following figure shows the overall predicted price variations after the Brexit.
The Impact of Brexit on Capital Flows including FDI
Foreign direct investment (FDI) consists of business hubs that are put up by foreign countries either by establishing new or expanding existing firms. The United Kingdom is one of the largest beneficiaries of foreign direct investment. Dhingra et al. (2016) reveal that the UK’s estimated stock value amounts to more than 1 trillion pounds. This amount of FDI exceeds half of what other countries receive in the EU. Indeed, it is only the US and China whose foreign direct investment surpasses that of the United Kingdom (Dhingra et al. 2016). Various factors determine the locations in which firms invest. Markets that are the rich and extensive lure of many investors. The gravity model is used to explain the impact Brexit on foreign direct investment in the United Kingdom. The bilateral capital flows between any two countries is determined by the extent of the market, geographical distance, and gross domestic product per capita (Dhingra et al. 2016). According to Obstfeld (2016), the existence of a country in the European Union brings about a positive effect on the inward flow of capital. In fact, it has been shown that countries in the European Union have increased their foreign direct investment by about 14% to 38% based on the extent of their markets and geographical locations between them and their trading partners. Following this perspective, Brexit will most likely lead to decreased foreign direct investment. Therefore, leaving the European Union will lead to a smaller proportionate effect on foreign direct investment as compared to when Britain remains a member state (Obstfeld 2016).
Cumming and Zahra (2016) presume that Brexit will result in adverse effects that will raise international business challenges. This state of affairs will affect Britain’s FDI significantly. Some North American firms will seek to maintain a powerful relationship with the EU in the wake of the Brexit agenda. This plan is deemed to create the largest investment zone in the world. This inclination to business will negatively influence the capital flows to the UK since investors will most likely shift their interests to emerging markets that will also offer free trade (Cumming & Zahra 2016; Baier, Yotov & Zylkin 2016). However, the United Kingdom, North America, and the European Union are among the largest markets in the world, and their relationships are hard to establish. Possibly, continuous negotiations will result in jointly valuable welfares amongst the European Union and Britain (Ebell, Hurst & Warren 2016; Andersson & Nilsson 2016).
Dhingra et al. (2016) report that the United Kingdom is more dependent on foreign direct investment as compared to any other G7 economy. It is noted that some sectors of the economy are shielded from the adverse effects of Brexit. Nonetheless, the service-based sectors will most likely suffer from the effects of Brexit due to the presumed limitation of labor mobility between the European Union states and the United Kingdom (MacDonald 2016; Andersson & Nilsson 2016). Various researchers have revealed that entrepreneurial power is greatly stimulated by immigration patterns. Based on this inclination, restricted cross-border flows by the United Kingdom will shrink its unlimited access to foreign direct investment. Contrastingly, legal barriers to immigration and trade pose adverse effects to investment owing to weakened association with entrepreneurs around the globe (Cumming & Zahra 2016). The exacerbating entrepreneurial governance in Britain is swiftly creating a gap between the country and international investors (Andersson & Nilsson 2016). Although the UK is among the world’s largest economies and may disregard a likely shift in the number of investors, the effect of reduced capital inflows will be reflected in the gross domestic product per capita (Cumming & Zahra 2016).
According to Portes and Forte (2016), Brexit will have a negative influence on the establishment of new businesses in the United Kingdom. Particularly, the institutional turmoil arising from Brexit will apparently reduce the starting up of new ventures as investors from the European Union may shun away from funding businesses established in the United Kingdom (Portes & Forte 2016; Kierzenkowski 2016). This situation will create a gap that could be filled by investors from North America. Cumming and Zahra (2016) unveil that North American investors and financial organizations have numerous eye-catching opportunities in domestic and foreign markets. Consequently, the uncertainty resulting from Brexit is a primary determining factor in the formulation of decisions on investment locations. Many investors are likely to shift their attention to other EU countries, especially where new markets emerge (Alfano, Dustmann & Frattini 2016; Kierzenkowski 2016). For instance, many UK-based establishments are anticipated to relocate to the United States and Canada, where free-market rules are still in use. In fact, a recent survey that was conducted by Obstfeld (2016) revealed that 20% of entrepreneurs in the United Kingdom are determined to shift their businesses to others. This state of affairs will further reduce foreign direct investment in the country.
On a different dimension, Begg and Mushövel (2016) report that Brexit will have a direct impact on government spending. This situation will affect public-private affiliations that will ultimately affect both regional and international business. McGrattan and Waddle (2017) report that the United Kingdom receives more than 4 billion pounds from the European Union to develop infrastructure, especially projects in the education and clean energy sectors.
The benefits accrued from the European Union countries quantify some of the adverse effects associated with the United Kingdom’s decision to separate itself from the welfare. It would be wrong to misjudge the actual costs that will come along with the Brexit intervention. Reflecting on the previous effects of countries joining the European Union, there has been an increased rate of trade and income generation as compared to static investment decisions that are exercised in some countries. Following this inclination, it is predicted that Britain will incur some significant losses in some of its sectors, especially the one that is not protected from the adverse effects of Brexit. Most studies have predicted that the United Kingdom will incur losses between 6% and 10% upon withdrawal from the European Union. Regardless of these results, it should be made clear that the percentage of loss will probably be bigger in the eventual exit from the European Union. The United Kingdom will withdraw from many other factors associated with international welfare that improve business channels. For instance, immigration and movement of labor which have a direct impact on productivity besides other benefits such as R&D intensity and vertical production chains, among others. The exemption of these benefits should not be undermined since they are deemed to endorse trade locally, regionally, and internationally.
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Baier, S, Yotov, Y & Zylkin, T 2016, On the widely differing effects of free trade agreements: Lessons from twenty years of free trade integration, Web.
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