write an essay on brexit
Answers
Advocates of the UK leaving the EU claim that there would be little trouble negotiating a free trade agreement with the EU once it left, because the UK has a large trade deficit with the rest of the Union: if trade barriers between Britain and the remaining member-states were erected upon exit, the EU would lose more exports earnings from Britain than vice versa. At the same time, the UK would be freed from the burdens of EU regulation and hence able to boost trade with faster growing parts of the world, by eliminating tariffs and signing trade agreements without the constraints of EU membership.
Underpinning this assertion is the belief that the UK is a big enough economy to be an effective trade negotiator in its own right. As a result one might conclude that the UK would see little impact from leaving the EU except perhaps a minor reduction in trade while new arrangements were made.
However, it would be ill judged to assume that the UK would be able to dictate terms with the EU simply because it is running a trade deficit. Primarily, the EU buys half of Britain's exports whereas the UK accounts for little over 10 per cent of exports from the rest of the EU, so the UK would be in a weak position to negotiate access on its terms. Furthermore, it could be argued that the UK's access to many non-EU markets is by virtue of its EU membership. On its own, the UK only accounts for 4% of global exports (vs 15.4% EU) and this is declining as emerging markets become increasingly integrated into the global economy. Therefore, even trade that is not within the EU is at risk and the UK faces a potential significant reduction in trade that will likely cause a reduction in growth unless there is sharp growth in the domestic market.
Furthermore, not only would trade be lost but FDI also. The EU represents a significant contributor of FDI. In 1997, EU countries accounted for 30% of investment but by 2012 this figure had rise to 50% (ONS). This growth caused the significance of other nations to fall (US down from 45% to 28%) and as a result FDI was less diverse placing an increased emphasis and reliance on the EU. Admittedly, FDI decisions are made on numerous factors - however, firms are fickle and if government shows signs of no longer supporting them (through EU membership) will be quick to move.
This can be demonstrated by the Samsung factory closure just two years after construction to move to Poland - rarely does sentiment drive decisions, profit does. It is hard to dispute that leaving the EU would make the UK a less attractive investment location for firms intending to sell to other EU markets from their UK facilities, even if the UK managed to create a free trade agreement or something of that ilk with the EU.
Faced with two potential locations with similar strengths, Britain's position outside the EU would be likely to count against it. The reduction in investment will likely see a rise in unemployment, particularly in the North East where manufacturing has had a revival post the 1990s. Therefore regional inequalities would also be furthered, enlarging the divide between the South East and the rest of the economy and causing a reduction in the diversity of industries which the UK is proficient at. Should unemployment be long term then human capital will start to diminish further preventing the chances of FDI making a comeback.
However, with that said there are some causes for optimism following a UK exit from the EU. One such reason would be the reduction in regulation that many EU member-states have a far greater desire for than the UK which is relatively liberal economically speaking. Many pieces of regulation actually end up imposing more costs than benefits such as the 'agency workers directive', which gives temporary workers the same rights to equal pay and working conditions as permanent staff. According to the British government's impact assessment, this pieced or regulation has a net cost of £490 million a year. Therefore, if Britain leaves the EU it would be free to regulate its own product and labour markets as it sees fit - making it more attractive to do business in and using that liberal standpoint as an attempt to grow domestic firms and FDI at the same time.
The OECD, however, demonstrates that while in theory this sounds like it will have a significant impact - the reality may be different. This is because, despite EU membership, the OECD data for product and labour market regulation show that British markets are among the least regulated in the developed world already. Furthermore, the British economy's supply side may be significantly damaged if divergent relations between the EU and the UK make trade more difficult and expensive than they were before.