Brexit's Impact: An Analysis of External Factors on UK Businesses

This essay analyzes the potential impacts of Brexit on the United Kingdom's international businesses, focusing on key external factors such as financial services, foreign investment, trade, and manufacturing. It discusses the expected depreciation of the pound, increased inflation, and potential trade barriers with EU countries. While Brexit may offer opportunities for the UK to establish independent trade agreements with non-EU countries like China, the United States, and India, the potential losses from reduced trade with the EU could be significant. The essay also examines the impact on specific sectors, including financial services, automobile, chemical and pharmaceuticals, and food and beverage, highlighting both potential advantages and disadvantages of leaving the EU. It concludes that Brexit presents debatable outcomes, with the potential for new trade policies but also the risk of losing free-trade agreements with EU member countries, which could significantly impact the UK's business environment.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
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Introduction:
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.
Discussion:
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.

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Figure 1: inflation rate in the United Kingdom
Source: (Tradingeconomics.com. 2018)
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,

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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.
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

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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.
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.

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Figure: Predicted contribution of U.K to the EU budget
Source: (Hunt and Wheeler 2017)
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.

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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.

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