Impact of Brexit on UK Economy: Trade, Investment, Migration, Growth and Business

Running head: THE GLOBAL ECONOMY
The Global Economy
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1THE GLOBAL ECONOMY
Introduction
Brexit stands for exit of Britain from European Union. It is a referendum signed on
23rd June, 2016 where UK voted to exit European Union. The residents of UK decided that
the resulted benefits from the unified monetary bod outweighed the associated cost from free
movement of labor or net immigration. The event of Briext would have economic and
political consequences. The first direct channel of this impact would be trade. The most
important trading partners of UK are member nations within EU. More than fifty percent of
UK’s trade accounted by EU (Kara et al. 2017). Brexit indicates a weaker integration
between UK and EU. Besides loss of access to single market of EU, the UK economy is
directly vulnerable to protectionist trade policies. Leaving EU would hamper the flow of
foreign direct investment in UK. The combined impact of all these would be reflected from a
week economic growth. The essay briefly summarizes the likely impact of Brexit on UK
economy in terms of trade, foreign investment, migration, economic growth, business and
global position of UK.
Effect of Brexit on UK’s trade and economic performance
Trade
Most economists point out that a primary channel through which the economic cost of
Brexit would possibly be realized. Europe is considered as a regional trade hub in the world
market. More than 60 percent of the trade has conducted among the EU member themselves.
The membership of UK in European Union allows the nation to sell the domestically
produced goods and services to anywhere in the EU without facing any restriction in terms of
tariff. British companies and consumers are also allowed to import anything required from
the EU member states (Dhingra et al. 2016). In 2017, UK maintained a trade surplus over
£19.8 billion from trading with EU. The respective share of UK’s export and import with EU

2THE GLOBAL ECONOMY
are 44% and 53%. Following this trend, experts believe that Brexit would severely hurt
British trade. As the economy of UK is largely integrated with rest of EU, there could be a
substantial effect on UK economy resulting from higher barriers to trade. The export
elasticity measures of UK suggest that 1 percent reduction in export of UK would reduce
British GDP by 0.5 percent. The disruption in trade activity would result in an economic
stagnation that costs the economy around £70 billion (Van Reenen 2016). The new trade
deals at this moment are not expected to offset the difference. Even with the weaker exchange
rate, the increase production cost outweighs the competitive price for the finished goods.
The agricultural industry in UK would hurt the most by Brexit. This is because EU
spends a larger portion of its budget to give farmers’ subsidies in UK. Currently, 70 percent
import and 65 percent export of agricultural industry were with EU. The considerably large
share indicates integration of EU’s agricultural market with EU (Portes and Forte 2017).
Brexit would reduce subsidies to farmers in UK. This would increase the production cost of
food and raise the price level.
Brexit is also likely to impact professional and financial service industry of UK. The
sectors include banks, corporate, lawyers, accountants and investments. In Europe, the largest
financial hub is London (Gudgin et al. 2018). Nearly one third of the industry’s business
includes handling different transactions with clients in Europe. Following Brexit, most of
these businesses would seem to be illegal if banks fail to satisfy regulatory proclivities in 27
member states of European Union. In response to Brexit referendum, large banks in UK are
also planning to shift business to the EU state where they can freely access all the benefits of
free trade (Assets.publishing.service.gov.uk 2018). For example, Goldman Saches has
recently announced that they have planned to move out hundreds of jobs out of their London
office to Paris and Frankfurt.

3THE GLOBAL ECONOMY
The GDP of UK constitutes less than 20 percent of GDP of EU. Therefore, UK would
likely to have a considerably less bargaining power in the trade negotiations compared to EU.
This is especially the case for the countries where domestic policies favor protectionism like
China, India and United State (Bankofengland.co.uk 2018). For countries those yet not have a
free trade agreement with EU or in a process to negotiate a trade agreement with EU or UK
would not replace the trade gap because of the limited market size.
Foreign Direct Investment
Investment is one of the major drivers of economic growth in UK. Private, public and
foreign investment can together increase quality and number of machines, buildings,
available technologies and hence, can improve productivity. In the world market, UK is one
largest recipients of foreign direct investment among the major developed nations.
Approximately 42.6 percent of foreign investment in UK comes from EU (Belke and Gros
2017). The decision of leaving EU is likely adversely affect the UK’s attractiveness to the
foreign investors. The level of foreign direct investment could be lowered as a consequence
of Brexit. UK enjoyed free movement of capital in the single market of EU. This had made
easier for foreign investors from other member states of EU to investment in UK. After
Brexit, UK would likely to lose its access to the single market which would interrupt inflow
of foreign capital. The single platform of EU made UK an attractive export destination for
multinational corporations. By investing in UK they could take advantages of an attractive
business environment of UK and reap the benefits from free trade with rest of the EU. After
Brexit, these benefits would no longer be available to foreign investors resulting in a decline
in foreign investment (Ebell and Warren 2016). Operating from an EU nation is particularly
attractive for large multinational companies having a complex supply chain across different
countries within the large trading bloc. The single market of EU which include common