Overview of European Union (EU)

Free Trade Agreements (FTAs) refer the situation when two or more than two countries agree to trade with each other, without any trade restriction. The member countries minimise tariffs and import quotas to reduce trade barriers for promoting imports and exports. Hence, FTAs affect the terms of trade of those member countries significantly (Anderson and Yotov 2016). In this context, a brief overview of European Union can be discussed with which the concept of Brexit is associated (Telò 2016). By applying a standardised law system for all member countries, the EU has formed a large international single market. The policies of this union have intended to move goods, services, people and capital freely within the member countries.

The United Kingdom (U.K) has taken the decision to withdraw itself from this EU in 2016 (Hartmann and Leug 2017). Consequently, the outcome of Brexit may lead the socio-economical and political environments of this concerned country either to a negative direction or to a positive one. Hence, this essay has focused on some possible changes of external factors, which can influence the U.K’s international businesses. Those factors are financial services, foreign investment, trade and manufacturing.

Based on some forecasts, it can be stated that the currency value of pound in terms of the U.S dollar is going to depreciate by 30%. According to the exchange rate trend, this value has already decreased by 12% against the U.S dollar since November 2015 (Dixon and Jo 2017). This phenomenon has consequently led the prices of fuel and other imported products to increase further due to inflation. On the contrary, this decreasing value of pound may have some positive impacts on the country’s international business activities (MORAN, Johal and FROUD 2018). Value depreciation may help the concerned country to increase its export in international market.

According to figure 1, it can be observed that the inflation rate of this concerned country has increased drastically after 2016. This has influenced the price level of this country to increase further and consequently has decreased the value of pound in world market (Nasir and Simpson 2018). Moreover, it has decreased the real wage rate of this country as well.

However, exporters may face some trade barriers from other member countries of the European Union after Brexit. This is because, the concerned country may not utilise the common customs of the EU (Chen et al. 2018). On the contrary, the U.K can trade with rest of the world including members of EU, independently, through applying new trade policies. For instance, the U.K can utilise this freedom by implementing free trade policies with China, the United States and India. According to some economists, Brexit may influence the U.K to trade with other non-EU countries by large extend because of fall in trade diversion. However, this increasing magnitude of trade with other countries may not offset the losses that the U.K can incur after reducing trade with EU (Dhingra et al.  2017). EU has possessed the largest market based on gross domestic product (GDP), all over the world. In this context, it can be mentioned that, the amount of U.K’s GDP is low compare to the one of EU’s single market (Campos and Coricelli 2017). Consequently, the concerned country may utilise less bargaining power than the EU in trade negotiations.

Possible changes in external factors

In addition to this, the chief reason behind foreign direct investment (FDI) to U.K is the unrestricted access of this country within the single market of EU. Hence, after Brexit, the flow of FDI may reduce significantly. The financial services of this concerned country are consisted with almost 45% FDI stock, which may be affected adversely after the withdrawal (Latorre, Olekseyuk and Yonezawa 2017). This is because all member countries of the European Union allow international banks to operate their business activities anywhere within this Union.

In this context, the situation of labour market can be described. The U.K has some major industrial sectors, which have generated almost 20.79% employment opportunity and also has contributed 53.2% to the country’s total exports (Sampson 2017). Impacts of Brexit on those sectors can be described as follows.

Firstly, the financial services along with insurance sectors have employed almost 3.6% labour force in this concerned country. The share of financial services to the country’s total export is 9.6% within which, 41% is exported to the EU. In addition to this, the insurance sector has contributed 4.3% to the total export of U.K while 18% of this is exported to the EU (Moloney 2017). In this context, it can be mentioned that the insurance industry has captured a significant position worldwide and this in turn has helped the concerned sector to reduce the risk level after Brexit. On the contrary, financial sector my experience negative impacts. Secondly, the automobile sector has provided 0.42% employment opportunity of the country’s total labour force and also has captured a 4.9% share of the country’s total exports within which 35% have exported to the EU (Bailey 2017). However, after leaving this single market, tariffs on cars may be increased by 10% without negotiation. Thirdly, sector of chemical and pharmaceuticals have employed 0.52% of the country’s total work force. Moreover, this sector has exported 9.9% of the U.K’s total export while 57% of this share has exported to the EU (Kazzazi et al. 2017). Without any negotiation between the U.K and EU, the tariff rate on this chemical and pharmaceuticals sector may increase by 4.6%. Fourthly, capital good and manufacturing sectors have provided 0.61% employment opportunities to the country’s total workforce and have exported 8.6% from which 31% has destinated to the EU, while after Brexit, tariff may increase (Graziano Lecca and Musso 2017). However, the food and beverage sector along with tobacco can be affected more compare to the others. This food sector, by employing 3.7% of total workforce, has exported almost 3.7% share of the U.K’s total export from which 61% has exported to the EU (Partridge 2017). Without any negotiations between the United Kingdom and the European Union, the tariff can be increased significantly.

Financial services

Hence, this Brexit has some advantages and disadvantages as well. People, who have voted for Brexit, have argued that leaving the EU can help the concerned country to reduce its cost, which the country has contributed to the budget of European Union. In 2016, the net amount of U.K’s contribution has remained at £ 8.5 billion (Hunt and Wheeler 2017). However, it is essential to compare this amount of cost savings with the financial advantages in the form of free trade barriers, which the country has received for being a member of the EU. On the other side, the U.K may lose its negotiation power after Brexit, but can also establish its own trade agreements for different countries according to the requirement. It can help the concerned country to make good political relationships with others. On the other side, investment may be affected adversely after leaving the biggest market of the world.

According to the above diagram, U.K’s contribution on the budget of EU may increase significantly, in future. For this, the concerned country may bear a huge amount of cost in 2018-19 and can increase further.

Therefore, from the above discussions, two economical outcomes can be drawn. Firstly, the business pattern of the U.K may change drastically after Brexit. As devaluation and higher rate of inflation can be seen within the concerned country, this phenomenon can adversely affect its imports of goods while exports can be easy. Hence, the country may produce more amounts of imported products within the domestic (Rey et al. 2018). Hence, the country may allocate and consume scarce resources in different ways, according to the new business pattern of the country after the post-Brexit era.

Secondly, it can be seen that the entire business environment of the U.K has changed after Brexit. The value of pound has decreased immediately after voting. Moreover, the U.K has faced inflation. For this, the country’s business environment may affect adversely (Goodwin, Hix and Pickup 2018). The amount of foreign direct investment has also decreased after the announcement of Brexit. Those factors have greatly influenced the country’s business environment.

Conclusion:

In conclusion, it can be stated that the Brexit has some debatable outcomes. The United Kingdom may experience positive outcomes due to international trades by implanting new trade policies. The country can get chances to build free trade relationships with other non-European countries, for instance, The U.S.A and China. On the other side, due to the withdrawal of membership from the EU, the U.K can loss the free-trade agreements with all member countries of the EU. As this single market is the largest trading partner of the concerned country, it can make some trade negotiations regarding tariffs.

Foreign investment

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