Jayasmita Ray

Brexit stands for Britain’s exit from the European Union. This decision has long standing implications for Britain, EU and other nations of the world that have trade relations with it. The referendum that happened in Britain witnessed voting by an unprecedented number of citizens. Two schools of thought emerged – leave or stay which had close margins (52% vis-a-vis 48%).

So why did Britain want to leave?

The first reason was loss of sovereignty in economic decision making, increasing membership fees for the comparatively decreasing benefits in terms of trade relations and resources. Secondly, the EU’s collective decision making has often led to decisions that have proved to be against UKs industry interests. An example of this is the UK fishing industry which has suffered downturn due to quota on fishing output access. This provides further view on the massive level of regulation on products available ranging from about 500+ regulations on ownership of a dog for instance, 5 regulations on pillow and over 70 on the material in the pillowcase alone. Thirdly, the most vocal reason in the media is due to easy influx of migrants despite the quotas already set in place.

It’s complicated to say the least

Many economists and international institutions have cited that this exit will damage the economy and cause chaos. There are further complications ahead though for Britain to exit EU. The story has now shifted from “what and why” to “how and when”. Recently a UK court has ruled that the parliament must ratify the Brexit decision as the referendum is not binding. The more complicated part is what happens after this ratification.

Article 50 of the Lisbon Treaty deals with the provisions of exiting EU. The stipulated time to end negotiations with other EU countries is two years. Prime Minister Theresa May has clarified that article 50 will be evoked on March 2017 and in the process of two years, negotiations would take place on new regulations between the 27 EU countries and Britain.

The time frame itself sounds rather short for the level of negotiations required on several thousands of agreements. This is further complicated when one thinks of a 43 year old relationship ending and sorting this out in 2 years sounds unlikely. In other words, Britain won’t be leaving that easily that soon. After all, if we take the case of Greenland which left EU in 1985.They were able to finish negotiation in a span of 2 years as they had about 55,000 people and main commodity was fish.

The impending chaos is evident from logic alone. One also needs to consider Britain’s trade scenario over the years. Let us have a look at the data:

Relations with EU countries will be affected due to this exit – trade relations will get hit, even now major chunk of UKs trade is with EU and it’s trade with non-EU has started to rise only recently. The largest trade source is by services driven by total professional and management consulting services, particularly business management and management consulting. As observed from trade data, we can see that the majority of UKs trade is based on tertiary services and is intra industrial trade – this is characterized more by differentiation rather than quality of the product life cycle, unlike for goods in the lower end of the value chain, the latter which UK essentially imports from the non-EU.

Trade with EU

The data suggests that Britain is a net importer and has trade surplus with Ireland (EU). The deficit with respect to EU has been on rise over the years. In light of Britain’s decision to exit EU and negotiate, this implies a weaker bargaining position. David Cameron had already mentioned the stance of EU bureaucrats being fuelled with resounding sternness and no concessions underway.

Trade with non-EU

UK will have to expand trade further with non-EU members to ensure growth for its economy. So far, its largest trade surplus is with USA and it also has significant trade with China, Japan as shown below:

What is currently worrisome is the stance the UK is giving out to some of its non EU trade partners in terms of migration. Before the referendum occurred, David Cameron, former UK PM mentions during a debate that it would be preferable if skilled workers would be allowed to migrate for UK’s benefit and receive full welfare benefits after completion of 4 year residency required. However, recently tightened policy towards ICT-2 skilled workers visa (90% of the applicants are from Indian IT) has given a glimpse of the current administration’s stand towards “Hard Brexit” despite 800 Indian companies already present in UK and many more keen to do business in tertiary services. Theresa May’s visit to India will unfold things nonetheless on the governments comprehensive position.

Therefore, what emerges is the idea that the process of exit will be messy to say the least and fresh elections are possible in the future. The bargaining power of UK is weak at the moment with the main control holders of the EU. Indeed there will be an inevitable set back for a short adjustment period when the chaos of un-regulation to new regulation follows (about 2-4 years on a minimum) and there will be proper yields provided a hard Brexit is not adopted as it defeats the very purpose of propelling the economy towards better competitiveness while in the mean, time giving more opportunities to the citizens to trade (especially small to medium businesses), increase domestic human capital and reap long-run benefits.

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