Brexit and Its Impact on UK International Businesses

This essay evaluates the potential effects of Brexit on UK international businesses. It discusses the declining value of currency, lower growth rate, and sectors vulnerable to Brexit. It also highlights the changes in the political and legal environment of the UK affecting the future of businesses.

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Economic Assignment
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As the name suggests, Brexit refers to the event of Britain’s from European Union. In a
referendum held in June, 2016, voting arrangement was conducted to decide whether to sustain
UK membership in EU or not. Majority (51.9%) was against continuation of UK membership in
confirming Britain’s exit from EU. UK regions that are voted to exit EU bear a greater economic
consequences than any other regions of Europe (bbc.com 2018). The Brexit not only interrupts
trend in UK’s economic performance but also has consequences for regulation, politics and
cultural environment. The changes brought by Brexit on internal and external environment have
impacted operation of domestic and international businesses.
The uncertainty about UK’s position in the international market changes the outlook for
international businesses. The instability of UK economy has led to a instability is pound value,
trade and regulatory barriers for cross border movement of people, goods or services and a more
complex legal and regulatory structure. Earlier UK businesses would enjoy the benefit of EU
membership in several ways. These benefits now have ceased to flow in UK. There are some
optimistic view of Brexit as well suggesting that legal the short run loss from Britain’s exit from
EU can be overcome by a strong performances of the economy in the long run.
The changes in external environment of UK businesses is critical to discuss. A clear
understanding is needed regarding implication for economic, political, legal and cultural
environment on international businesses. Among many of the factors influencing external
business environment economic factors are the major one. Economic factor affecting business
operation are interest rates, taxes, exchange rates and overall economic growth rate. UK is
recognized as having one of the highest GDP in world (Koch 2016). This provides UK
businesses a greater economic support. The stable economic condition helps to attract foreign
investment in the economy. The economic factors though relate to the economy on a broader

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scale these however have profound implication for internal functioning of each and every
companies.
Brexis has posed a sudden recessionary pressure for UK economy. The growth of UK
economy was contracted to 0.6% at the end of June, 2017. At the immediate next month of
Brexit the economic growth was as low as 0.2% (independent.co.uk 2018).
Figure 1: Actual and forecasted growth rate of UK
(Source: independent.co.uk 2018)
Before Brexit, UK experienced a recorded high employment of 74% and lowest level of
unemployment of 4.9% with a healthy economic growth rate 2.2%. The economic contraction
after Brexit has dragged the value of pound down in relation to trading partners of UK. Pound
recorded a depreciation both against dollar and Euro. The implication of depreciated currency is
on the price of the goods traded. UK now has to a higher price of imported items (reuters.com
2018). This apart from raisin domestic price level has imposed additional cost burden on
businesses using imported inputs or operating outside UK. The international businesses now
have to make a higher payment for factor input paid in terms of their domestic currency. The

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depreciated currency and the resulted high import cost reduces business profitability. The weak
growth rate along with weak currency reduces the business confidence of UK. This reduces the
business investment. The Bank of England has expressed a lower expectation about future
potential business investment.
Figure 2: Movement of currency value after Brexit
(Source:
One primary reason for unwillingness of UK to leave EU is the benefits derived from the
EU single market access. The EU single market access comes with our freedoms namely
movement of goods, services, people and capital. The idea of single market is to promote free
trade throughout by formation of committee called European Economic Community. By this free
trade agreement all the original sixteen members of EU were required to abolish any form of
interventionist policy like that of tariff or import tax (ft.com 2018). Besides, the member
countries also agree to set a common external tariff. Germany, Italy, France and other nation levy
same amount of import tariff for goods imported outside the European Economic Committee.

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Any goods and services from EU member nations thus comes into EU facing the lowest tax and
then distributed in the common EU market with no need to pay any extra tax. The free trade
agreement of EEC along with the common external tariff is known as custom unions.
The free trade and single market access provides several economic benefits. When people
have access to a wider market then consumers enjoy the choice of having the desired goods at
the least possible price. Business firms in the nation are consumers as well. With friendly
relation with different member countries the international businesses can make a profitable deal
with non-UK based companies (Kierzenkowski et al. 2016). The free movement of capital and
labor also benefit international companies to have a steady supply of required capital and labor.
In the post Brexit period, UK companies faces difficulties in trade negotiation. The
service sector is the most important sector of the UK economy making 80% of the economy. UK
trade deals outside EU exclude services. The service deals are mostly made within EU members
and are subject to free movement of people and need common regulation (Dhingra et al. 2016).
The non-tariff barriers after Brexit could impose additional cost to business.
The EU membership thus provides UK businesses considerable benefits from custom
union of UK and single market access. Losing custom union membership and single market
access have an estimated additional cost of £36bn to the UK economy (Brakman, Garretsen and
Kohl 2018). The services sector has the most vulnerability towards the Brexit shocks. The
financial services are severely affected from Brexit. The sector has accounted an estimated job
loss of 10,500 in the post Brexit period. Some of the major financial institution are considering
relocation from UK. Financial group including Daiwa, Citigroup and Morgan Stanly have
announced their relocation decision. The financial sector provides a major support to the UK
economy (Cumming and Zahra 2016). Weakness of the financial sector interrupt the flow of

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fund to the UK business sectors. The expected credit crunch thus inhibit business long run
business growth.
London is considered as a technical capital of EU. Brexit also disrupts UK’s position as a
technical hub. The UK based companies have lost their right to serve their European clients
anymore. Apart from financial service sector, the creative serve industry has accounted a drag
following Brexit. In the creative service industry the important sub sectors are fashion, film,
design and videos (Obstfeld 2016). EU trade agreement previously support UK businesses by
allowing a low cost of transport, fast cross border service delivery and other associated benefits.
Automotive industry is another sector vulnerable to the impact of Brexit. The association
of Motor Manufactures and Trader has estimated to have an additional cost of £4.5 billion on
tariff. The association clearly indicates that Brexit would lead to a permanent damage to the
automotive sector. The UK car manufacturers are facing a disastrous situation with additional
tariff burden. Like financial groups, any car manufacturers are planning to shift their operation
outside UK. Toyota had declared that Brexit might force the company to shift some of its
production to some other European nations. Like automobile the global construction and
manufacturing sector are exposed to a great loss especially when Brexit limit free movement of
laborers (Barnard et al. 2017). Seven of the largest trade bodies of construction sector claimed
that they are facing a cliff edge in the post Brexit era. The sectors has an urgent need of
government intervention to implement a grace period of two years to the European citizen to
stabilize the industry status. The construction businesses have already suffered from loss of
workers who are leaving to seek jobs on other states of the continent. Approximately 200,000
construction jobs will be lost following loss of UK access to European market. The loss of

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construction workers hamper many ongoing infrastructure projects worth billions of pounds
(Guerrina and Masselot 2018).
Businesses in food and beverage industry have forced to contract their operation due to
weak status of the economy. The businesses shrinks their product size by a process called
shrinkflation. This describes a situation in which price remain constant as size of the product’s
proportion get smaller and smaller.
Figure 3: Quarterly sales in UK retail business
(Source: bankofengland.co.uk 2018)
The announcement of Brexit referendum has posed a threat to the business leader doing
business in pharmaceutical sector. There is a potential uncertainty regarding the regulation of
concerned sector in the post brexit period. The adverse impact on trading and manufacturing
sector in turn influences UK international businesses. As discussed the major manufacturing
sector affected from Brexit are food and beverages, pharmaceutical, capital goods and
professional services. The contribution of pharmaceutical and chemical sector has recorded as
9.9% in the UK economy. Among total manufacturing export of Automobile industry 35% are

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exported to member countries of EU (Baylis, Smith and Owens 2017). After Brexit, the free
transaction of goods and services are no longer applicable for UK. The weak international
position of UK affect the position if UK international businesses as well. The loss of access to
EU single market, disruption in the capital flow hamper business operation of UK based
companies worldwide.
This is not the complete story. UK’s separation from EU might have beneficial impact on
the UK economy. Previously, UK was restricted to build any bilateral trade relation with nations
outside EU. After Brxit, UK has the freedom to build relation with nations depending on
mutually beneficial relation. The international businesses in UK now can extend their business
operation to non-member countries of EU (Griffith, Steinberg and Zysman 2017). Being free
from EU’s stringent regulation, the businesses in UK enjoys greater economic and political
freedom to do business in different nations. The double taxation rule of EU previously restricts
various business operation. The freedom gained from Brexit may help UK international
businesses to operate with a greater flexibility.
Besides economic environment, international business operation depend on the political
environment. Brexit being mainly a political event huge impact on UK political environment.
Law regulating employment, tariff and trade rules, corporate tax and other law affecting
businesses likely to be change in the post Brexit period The political parties of UK need to shifts
their attention to take care of the entire economy after Bexit. The political uncertainty has an
adverse effect on business investment. Recently, the president of US has announced withdrawal
from Transpacific Partnership and disputes over Free Trade Agreement has questioned EU and
US relation creating a room for UK to strengthen UK-US relation (Los et al. 2017). The UK
businesses then can have new opportunity to regions in US.

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The legal and cultural environment of UK have accounted several changes affecting
businesses. Reform has been made in migration law. The single market access and custom union
regulation allows free movement of labor among EU member states (Arnold et al. 2017). UK
now no longer is bound to allow immigration from EU nations. This reduces the burden from
UK firms to hire additional immigrants.
The essay has made a critical evaluation on potential effect of Brexit on UK international
businesses. The declining value of currency and a lower growth rate hurts business confidence in
UK. Automotive, chemical, pharmaceutical, food and drink, professional and financial sectors
are some sectors that are vulnerable to Brexit. In addition to economic environment. Brexit
marks some major changes in political and legal environment of UK affecting future of the
business. Brexit however offers UK freedom from stringent regulatory rules of EU. This in the
long run has potentiality to strengthen UK’s position globally.

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