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The final count: can the UK strike a deal?

March 18, 2019
Editor(s): Maggie Tan
Writer(s): Nicholas Bea, Sam Iacono, Richard Sopatro, Wendy Gu

As we rapidly approach the March 29 Brexit deadline, the UK and EU are frantically trying to strike a deal to ensure a smooth and polished exit from the EU. The recently successful vote to ask for a delay to the Brexit deadline, put forth by British MP’s, until June 30, now waits upon the “unanimous” agreement of all 27 EU member states in Brussels. We are still sitting on a no-deal departure, but what exactly does this mean?  Essentially, UK would leave EU immediately on March 29 with no agreements in place about what their relationship will be like in the future.

THE PRICE OF A NO-DEAL RESULT

Firstly, the UK would automatically fall back on World Trade Organisation (WTO) rules. Under WTO rules, cars would be taxed at 10% when they cross the UK-EU border. Tariffs would vanish from 87% of imports, however meat and dairy would be set at around 50-60% tariffs. This would create severe pressure on Irish farmers, who will struggle to compete and enter the UK market. However, Trade Minister George Hollingbery claims that setting the majority of UK’s import tariffs to zero, while maintaining tariffs for the most sensitive industries, would “help to support British jobs and avoid potential price spikes that would hit the poorest households”.

Further, UK citizens hoping to travel to the EU for more than 90 days would have to apply for a visa and the current healthcare system – shared by the UK and the EU – would no longer apply. This could send health insurance premiums soaring for UK citizens. Another crucial point is the potential reintroduction of border checks, which would be costly and drastically slow down business. Consequently, The EU and UK agreed in a political deal to introduce a “backstop”. Currently, there are no checks on people crossing the border between Northern Ireland and the Republic of Ireland. This backstop essentially ensures that this frictionless crossing of borders remains, even after the UK leaves the EU with a no-deal.

POLITICS WITHIN BRITAIN

In what appears to be a most volatile political position for current UK Prime Minister, Theresa May, the beleaguered process of achieving the delay will most likely reduce her favourability with the British public. The deal Prime Minister May put forth has already failed twice and in an almighty scare, May held on by two votes when an amendment by the House to oust May from power and for them to personally take control over Brexit, marginally failed. With almost half of MP’s against the idea of leaving the EU with no deal, May is probable to undergo even more turmoil as her own political image within the party, begins to shrivel. While she has survived the many attempts to take her down, the delay to Article 50 voted for, may very well be disguising itself as a sabotage, not only for her negotiating power with the EU, but the current political power she holds in the British Parliament.

Moreover, as the second referendum is wholeheartedly rejected by UK Parliament, with only 85 MPs voting for, the spotlight is on May’s next deal to the ministers. On the 20th March, a third vote will be held on May’s Brexit deal. And, although 188 members out of her own parliamentary block did vote against her during the last vote, May has avoided defeat and will be arguing for the extension to Article 50, the “glimmer of hope”, that may help ease Britain through this highly publicised and tumultuous process.

THE DECLINE OF BRITAIN’S ECONOMY

Many different facets of Britain’s economy have faced uncertainty in the wake of Brexit. Britain’s economic growth stagnated to 1.3% in February 2019 from a rate of 2.1% before the referendum. For one, Britain’s business investment from when Brexit was first announced in June 2016 to the start of 2019 has experienced a noticeable degree of stagnation. Inflation rose rapidly due to the Pound Sterling’s immediate drop after the vote. As a result, in September 2017 Mark Carney—Governor of the Bank of England—projected that the Central Bank would be forced to raise interest rates to stabilise prices especially in the event of a no-deal Brexit, prompting further reluctance from businesses to invest.

Figure 1- Britain’s Business Investment expenditure (note: dotted line reflects trend rate). Source: Bloomberg.

Britain’s real estate market, especially in London, has also declined with domestic house prices escalating an average of 7% in two years since the Brexit vote. However, on the flip side of this figure, sales of houses worth over 10 million pounds have tripled, driven by wealthy foreign buyers taking advantage of the sterling slump following the Brexit vote.

In the last quarter of 2018, Britain’s unemployment rate also reached a record low level of 4 percent—the lowest rate since the 1970s. Many employers reported a shortage of migrant workers from the European Union since the Brexit vote, as data shows the number of migrants to Britain from the EU fell by double to a five-year low of 74,000 net migration by 2018 end. In essence, Britain’s economic situation has benefited everyone but the British themselves.

THE RIPPLE EFFECT OF BREXIT

The consequences of Brexit have not only hit the UK but across a much larger area of the world. According to the Australian Government Department of Foreign Affairs, those who still plan to stay in UK even after it leaves the EU under any circumstances will need to re-clarify their visa status and their permits to stay, except for those who possessed an “Anglo-Australians dual nationals”. Businesses are advised to consider “potential supply chains impacts” depending on their trade volume with the UK and the EU. Nevertheless, Brexit will surely bring difficulties towards those in need of traveling and conducting transactions, regardless of what kind of deal came to an agreement.           

On the bright side, ABC news claims Australia’s current Free Trade Agreement  negotiation with the EU would cause Australia to be “closer with the EU ironically than the Britain will”. Currently, “Australia is seeking an ambitious and comprehensive FTA with the EU to drive Australian exports, economic growth and job creation” to bring further benefits for Australians in the long run. Any UK decisions regarding Brexit is also expected not to hinder the process.           

Asian countries might also be influenced by the increase of “protection policies” in the post-Brexit future. Asian companies such as Toyota, Hitachi, Samsung and Panasonic that have a “strong presence” in the EU and UK regions will be impacted. Brexit’s policies will definitely restrict these companies to only operate on UK or EU soil, which will force them to reconsider their strategy in the future. Hence, UK sees Brexit as a chance to establish a stronger relationship with markets in Asia with the UK having “several objectives in Southeast Asia” such as “establishing a formal relationship with ASEAN”. Regardless, the true implications of Brexit on Asia and other areas are still uncertain and unclear.

CONCLUSION

Ultimately, there is no clear future for Brexit, hence the 2 year ongoing debate, to no avail. Brexit will prove to be the biggest change in terms of trade that Britain has faced since the mid-19th century, with such drastic change already occurring and still yet to occur. We can only wait to see whether the UK will rise or sink to its demise.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Maggie Tan
Editor

Maggie is a first-year Commerce student who moved to Melbourne from Brisbane at the start of 2018. She first developed a keen interest in Economics during high school and now wants to pursue a career in the Financial Services industry. When she’s not monitoring the latest market news, you can find her playing cards or making short films with her friends.

Nicholas Bea
Writer
Sam Iacono
Writer
Richard Sopatro
Writer
Wendy Gu
Writer