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Season Finale for UK - the Brexit (II)

As we pointed out in the last part, though brexit has taken place, it isn’t over yet. The impact of Brexit are starting to show up, on the global business network. As UK is one of the major financial hotspot, it’s exit from the EU causes roadblocks for businesses operating in the area.


Impact on Sectors


Without a trade agreement in place, UK trade with the EU would be governed by the World Trade Organization's Bali Package. This would lead to common tariffs and non-tariff barriers being imposed by the EU27 upon the UK's access to the European Single Market because the Market is also a customs union. However, the UK would then have an opportunity to control immigration as well as develop its own trade regulations and trade deals with India, US, China and others as well.


And here we have summarized industries which would create an edge for UK and the ones which would be impacted at large.


Fisheries and Agriculture

The EU27 has stated that UK fish suppliers could lose tariff-free access to the continent unless EU countries have continued access to UK waters after Brexit.

The Irish agricultural sector is also heavily dependent on UK markets for its exports.


Financial Services and Banks

Investment banks may want to have new or expanded offices up and running inside the EU27 bloc, and also the varied customers and offices spread across the globe would be financially hurt too. With Frankfurt and Dublin the possible favourites among many firms. Ireland's investment arm, IDA Ireland, witnessed an increase in inquiries from London-based financial groups considering to open up on an office in Dublin by the end of 2016, mostly coming from North American companies.


Insurance

Lloyd's of London has confirmed that it will open a subsidiary in Brussels, hoping to ensure the continuation of continental business which currently generates 11% of its premiums.


Asset management companies

The situation may be different when it comes to the fund management industry, as British asset owners, notably UK pension funds, often constitute an incommensurate share of total turnover for German, French, Dutch and other Continental European asset managers.

This imbalance could potentially give Britain some negotiating leverage e.g. power of retorsion in case the EU attempts to impose an abrupt cancellation of the mutually-binding obligations and advantages pertaining to the Markets in Financial Instruments Directive 2004.


Stock exchanges

The London Stock Exchange issued a warning over a proposal by the EU to allow euro-denominated transactions to be cleared only within the EU eurozone, claiming it would increase business costs by €100bn over five years and isolate the euro capital market.


Global Economy

Consequences for UK

The U.K. has already suffered from Brexit. The economy has slowed, and many businesses have moved their headquarters to the EU. Some of the other impacts are on growth, trade, and jobs. Brexit's biggest disadvantage is its damage to the U.K.'s economic growth (slowed from 2.4% in 2015 to 1.5% in 2018). Most of this has been due to the uncertainty surrounding the final outcome.

Brexit would eliminate Britain's tariff-free trade status with the other EU members. Tariffs would raise the cost of exports. That would hurt the U.K. exporters as their goods become more expensive in Europe. Tariffs would also increase the prices of imports into the U.K which would create inflation and lower the standard of living for U.K residents.

Also, U.K. companies could lose the ability to bid on public contracts in any EU country. Banking practitioners would lose the ability to operate in all member countries. Brexit would hurt Britain's younger workers as the European employers won’t be available now.

Brexit has already depressed growth in The City, the U.K.'s financial centre. Growth was only 1.4% in 2018 and was close to zero in 2019. Brexit has diminished business investment by 11%.


Consequences for the EU

The Brexit vote has strengthened anti-immigration parties throughout Europe.If these parties gain enough ground in France and Germany, they could force an anti-EU vote. If either of those countries left, the EU would lose its most robust economies and would dissolve.


Consequences for the United States

The day after the Brexit vote, the currency markets were in turmoil. The euro fell 2% to $1.11. The pound fell 8% to $1.36. Both increased the value of the dollar. That strength is not good for U.S. stock markets. It makes American shares more expensive for foreign investors. A weak pound also makes U.S. exports to the U.K. more expensive.

Brexit dampens business growth for companies that operate in Europe as companies use the U.K. as the gateway to free trade with the EU nations which would now be unavailable.


We have covered the possible consequences. But the effect on the global economy varies from short to long run. These effects on the global economy will depend on the form of the final agreement of the UK with the EU.


Short Run

Brexit is likely to lead to partial trade contraction (at least in the short run), some trade creation but mostly trade diversion. Certain countries (territories) are to a large extent dependent on imports from and in general economic ties to the UK. The share of the UK in the real value of world imports in 2019 was equal to 2.73%. The impact could be larger on the UK than EU27 states (more ability to substitute imports from the UK by imports from other parts of the large internal markets) and larger for the Western Member States of the EU than Southern or Eastern Member States.


Long Term

Lower trade due to the reduced level of integration with EU27 is likely to cost the UK economy far more than is gained from lower contributions to the EU budget. The potential benefits due to better regulations, for instance, are unlikely to cover the costs. Non depending on the scenario, the effects are likely to be highly asymmetric affecting certain countries (regions) and sectors to a large extent. The full adjustment to Brexit will take years and to adjust to circumstances and start new way of dealing without the EU.


BREXIT and INDIA

Brexit’s the happening has hit value of GBP which would majorly affect the companies headquartered in Britain.


Around 800 companies are there in the UK that employ 110,000 people. And, top companies earn over 26Bn Pound. It will extensively affect investing in the UK particularly those seeking access to the European market through the Gateway of Britain. Brexit will weaken the Global Growth and experience fall in commodity prices as a result of uncertainty over the negotiations going on.

India has a trade surplus with Britain of $3.6 Billion. So, Brexit would put pressure on GBP and will make India exports expensive as resultant wiping out trade surplus. Consequently, it will end up affecting the stock market in the short term. India is also the UK’s 3rd largest Foreign Direct Investor.


There are so many Indian companies who have their businesses concentrated in UK and have large exposure of revenue and profit to UK and European Market. So, if the negotiation does not end well. That would surely impact these firms as UK an EU exchange labour and financials. Thus, these firms have to rethink their European strategy. A few companies which would affect are Tata Steel, Cox & King, Marksans Pharma and Bharat Forge earn 50% of their revenue from Europe. HCL Apollo are some other names.


The Brexit impact can be seen in Equity and Currency Market and it will hurt Indian Economy too. The further consequences would depend on the kind of deal UK would reach with EU.



We can only estimate the level of such losses as one of the major synergy was wiped out of global business environment. Brexit implies something different for every stakeholder and non-stakeholder in this world. For Britons, it's autonomy and less of EU interference; for EU, it is like cutting off a limb and for the US, its an opportunity as always. But as stated, the move impacts everyone directly or indirectly, and the actual impact is on both economy and sentiments.


While we write this, the dealings aren't over yet and negotiations are going to stay there for a bit longer. It will take some more time to know whether leaving EU was a good decision on not. Whether it will be exactly as the Britons inspired or will lead them to a road of regrets. It might take a different turn as well due to COVID and greater autonomy for operations.


What do you think about the outcomes? Do you think it will go down in history as a success or failure? We would love to know the thoughts of Gen-Z, who would bear the consequences of this.


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