Open Access Research Article
IMPACT OF BREXIT ON INTERNATIONAL TRADE
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IMPACT OF BREXIT ON INTERNATIONAL
TRADE
AUTHORED BY - RAKSHITA MATHUR
4th Year Law Student
Guru Gobind Singh Indraprastha
University, New Delhi
Brexit refers to the official
separation of the United Kingdom from the European Union (EU), which took place
on January 31, 2020. The phrase Brexit is a mnemonic device created to
represent the departure of the United Kingdom. During a referendum conducted on
June 23, 2016, almost 52 percent of the British voters who took part expressed
their preference to withdraw from the European Union, so establishing the
precedent for the United Kingdom to become the first nation to do so. The
negotiations pertaining to the separation process spanned over a period of more
than two years subsequent to the formal submission of Britain's request to exit
in March 2017. In the end, the achievement of Brexit was realised under the
tenure of Boris Johnson the successor of Theresa May.
In June 2022, Johnson tried to
abrogate a portion of the trade agreement by proposing legislation in
Parliament that would eliminate restrictions on the importation of products
into Northern Ireland from other regions within the United Kingdom. The Johnson
administration claimed that the EU's excessively strict implementation of
customs regulations was eroding commerce and jeopardising peace in Northern
Ireland. Unionists expressed concerns over the potential negative impact of
customs checks on Northern Ireland's diplomatic ties with the United Kingdom.
Consequently, the Democratic Union Party (DUP) declined to re-enter Northern
Ireland's power-sharing executive unless the removal of these inspections was
ensured. Critics of Johnson's decision, such as May, contended that the action
was in violation of the law, and the European Union issued a warning of
potential reprisals.
The Brexit has had a lasting economic
effect on International Trade within and outside Europe. Within this paper, we
will explore the different ways in which intenational.trade has been affected.
INTRODUCTION
Brexit was the withdrawal of the
United Kingdom (UK) from the European Union (EU). The formal occurrence of
Brexit took occurred at 23:00 GMT on 31 January 2020 (00:00 1 February 2020
CET) after to a referendum held on 23 June 2016. The UK is the sole independent
nation that has withdrawn from the European Union. Since 1 January 1973, the
United Kingdom has maintained its membership in the European Union (EU) or its
precursor, the European Communities (EC). After the occurrence of Brexit, the
supremacy of EU law and the Court of Justice of the European Union over British
legislation has been revoked. The European Union (Withdrawal) Act 2018
preserves pertinent European Union legislation as domestic legislation,
allowing the United Kingdom to modify or revoke it. The European Union (EU) and
its institutions had a slow development subsequent to their foundation.
Eurosceptic factions have been present over the duration of British membership,
expressing opposition towards various components of the European Union (EU) and
its predecessors.
TRANSITIONAL PERIOD CUSTOMS &
TRADE AGREEMENTS
David Frost and Michel Barnier
persisted in their efforts to negotiate an enduring trade agreement throughout
the transition period. A agreement was mutually declared reached by both
parties on December 24, 2020. On December 30, both chambers of the British
parliament approved the agreement, which was subsequently granted Royal Assent
in the wee hours of the following day. The transition period came to a close
the evening after, in accordance with its provisions. The European Parliament
delayed setting a date to ratify the agreement after the United Kingdom
announced it would unilaterally extend a grace period precluding trade checks
between Northern Ireland and the United Kingdom. Later, on April 27, a vote was
subsequently scheduled, and the measure was approved by an overwhelming
majority.[1]
A temporary customs agreement was in
effect until 1 July 2021. Traders who imported standard products from the EU to
the UK during this period had the option to postpone the submission of their
customs declarations and payment of import taxes to HMRC for a maximum of six
months. This arrangement was implemented with the intention of streamlining and
circumventing import constraints in the initial stages of the new
circumstances. Its purpose was to streamline inbound trade amidst the COVID-19
pandemic and mitigate significant disruptions in domestic supply chains in the
immediate term.[2] In
response to concerns of unprepared border infrastructure, the UK government has
extended the deadline for import inspections from the EU to the UK until the
end of the year. This decision was made to prevent any disruptions in the
supply chain during the current Covid problem. Subsequently, there was another
postponement of import controls due to a scarcity of truck drivers. The implementation
of these measures is planned to occur gradually during 2022.
EFFECT OF THE BRITISH EXIT FROM
THE EUROPEAN UNION
Trade Relations Between the United Kingdom and the European
Union
“Before Brexit, the United Kingdom
enjoyed a significant level of economic integration with the European Union,
which resulted in the advantages of the single market and the customs union.
Following Brexit, the United Kingdom withdrew from the single market and
customs union, leading to alterations in the trade dynamics.”[3]
In the year 2020, the European Union
(EU) constituted around 43% of the United Kingdom's overall exports.
Conversely, the United Kingdom emerged as the EU's third-largest trade partner,
contributing approximately 9% to the EU's total exports. The presented data
demonstrates the notable level of economic interdependence between the two
institutions.
Trade Barriers & Tariffs
Brexit has led to the emergence of
trade obstacles and tariffs between the UK and the EU. Although a trade deal,
referred to as the Trade and Cooperation deal, has been established between the
United Kingdom and the European Union, it is evident that commerce between these
two institutions is no longer devoid of obstacles.[4]
Following the UK's withdrawal from
the EU's single market and customs union, customs procedures, border
inspections, and regulatory requirements have been reinstated. These
modifications have augmented administrative encumbrances and expenses for
enterprises involved in UK-EU commerce.
Disruptions in the supply chain
The occurrence of Brexit has resulted
in significant disruptions to supply chains, specifically impacting companies
that heavily depend on just-in-time manufacturing and cross-border
transportation. The heightened border inspections and regulatory mandates have
resulted in disruptions to the flow of commodities and introduced intricacies
to the management of supply chains.
Services Trade
Services Trade
Effects on Services Brexit has had an
impact on services trade, including several industries such as banking,
professional services, and digital services. The Trade and Cooperation
Agreement include restrictions pertaining to restricted market entry in
services; nevertheless, it does not offer an equivalent degree of access as the
United Kingdom had during its membership in the single market.[5]
UK service companies operating in the
EU are currently encountering difficulties due to the introduction of
additional regulatory obstacles and limitations on their ability to enter the
market. Likewise, European Union service companies encounter obstacles when
attempting to enter the UK market.
The potential for international trade
The occurrence of Brexit has
presented the UK with prospects to establish fresh trade alliances outside of
the European Union. The United Kingdom, as an autonomous trading nation,
possesses the capacity to engage in negotiations for trade agreements with
nations that are not part of the European Union.[6]
The United Kingdom has already entered into trade agreements with many nations,
such as Japan and Canada.
The primary objective of these
recently established trade agreements is to augment market accessibility,
diminish trade impediments, and foster economic collaboration. Nonetheless, it
will require a considerable amount of time to evaluate their whole influence on
the United Kingdom's global trading environment.
The Economic Impact and Trade Figures – Statistical Analysis
The continuous study and deliberation
revolve around the economic ramifications of Brexit on global commerce.
Although detailed data on the exact effects of Brexit on trade flows is still
being developed, there are significant patterns:
The Office for National Statistics
(ONS) reported a 14.9% decline (£18.9 billion) in UK goods exports to the EU
during the first quarter of 2021, as compared to the corresponding period in
2020.
According to the Office for National Statistics (ONS), there was a 20.3% decrease (£23.7 billion) in UK imports from the European Union (EU) during the first quarter of 2021, as compared to the corresponding period in 2020.[7]
The comprehensive ramifications of
Brexit on trade and the economy of the United Kingdom will persistently develop
as enterprises adjust to the novel trade environment and manage the enduring
consequences of the UK's withdrawal from the European Union.
The global trade landscape has been
significantly impacted by the Coronavirus pandemic and supply chain disruptions
in recent years. However, Brexit has had an extra influence on UK commerce.[8] In
recent years, there has been a notable increase in global trade volatility due
to the global recession and subsequent rebound following the pandemic, as well
as interruptions in global supply networks. The United Kingdom experienced
heightened uncertainty due to the protracted and extensive negotiations
surrounding the withdrawal arrangements and future trading relationship. This
uncertainty was further exacerbated by a significant depreciation of the
country's exchange rate, which had already had adverse effects on investment,
imports, and exports prior to the formal exit of the United Kingdom from the
European Union.
The investment growth rate of the United Kingdom had a poor trajectory before to the occurrence of Brexit, a factor that also contributes to the stagnation of productivity development within the country. After the Brexit referendum, there was a protracted period of uncertainty over the relationship between the EU and the UK, which further reduced investment. The diminished appeal of the United Kingdom as an investment hub for international corporations has also had an impact on exports.
The investment growth rate of the United Kingdom had a poor trajectory before to the occurrence of Brexit, a factor that also contributes to the stagnation of productivity development within the country. After the Brexit referendum, there was a protracted period of uncertainty over the relationship between the EU and the UK, which further reduced investment. The diminished appeal of the United Kingdom as an investment hub for international corporations has also had an impact on exports.
The commercial ties between the
European Union (EU) and the United Kingdom (UK) have been regulated by the
EU-UK commercial Cooperation Agreement (TCA) from January 2021. According to
the TCA, there are no duties or quotas imposed on products exchanged between
the European Union and the United Kingdom. In order to be eligible for
tariff-free access, UK products must satisfy the rule-of-origin criteria
outlined in comprehensive annexes to the TCA. Therefore, in contrast to the
Single Market, enterprises encounter supplementary administrative encumbrances
and delays at the border due to customs and regulatory inspections. The
implementation of the agreement by the United Kingdom and the European Union
has occurred at varying rates. EU member states promptly implemented
comprehensive customs regulations and inspections on imports originating from
the United Kingdom. However, the United Kingdom postponed the implementation of
full customs requirements on imports from the EU to the UK until January 2022.
Furthermore, the implementation of supplementary health, safety, and security
checks was postponed until the conclusion of 2023.[9]
The adoption of the TCA resulted in a
substantial decline in UK goods trading volumes with the EU, which remained
below their pre-pandemic level until the start of 2022. In terms of imports, it
is noteworthy that the United Kingdom had a significant decrease in imports
from the European Union (EU) during the initial months of 2021, despite the
delayed implementation of Trade Control Act (TCA) regulations. This fall stands
in contrast to an increase in imports of products from nations outside the EU.
This observation suggests a potential replacement between imports from the
European Union (EU) and non-EU countries, wherein products are being rerouted
away from transit through EU nations. Nevertheless, variations in cycle
patterns throughout the pandemic, resulting from disparities in case counts and
limits, as well as varying levels of vulnerability to global supply
constraints, may have significantly influenced the situation. In recent months,
there has been a reduction in the disparity between imports from European Union
(EU) and non-EU counterparts. However, it seems that the influence of these
variables has been relatively transient.[10]
Following the implementation of the
TCA, UK exports to EU nations saw a significant decline due to the difficulties
faced by exporters in meeting the increased paperwork obligations for
demonstrating adherence to EU standards. Following this, there has been a
partial recovery in UK goods exports to the European Union (EU) and a
subsequent alignment with exports to non-EU partners. However, it is important
to note that these exports have remained somewhat restrained in comparison to
the patterns observed before to Brexit. Brexit continues to be a significant
determinant. Based on a recent poll conducted by the British Chambers of
Commerce, which involved over 1,100 enterprises, it was found that 77% of
companies engaged in trade with the European Union reported that the agreement
did not contribute to sales growth or company expansion. Over 50% of the
companies had challenges in adjusting to the new regulations for exporting
commodities, with 45% specifically referring to services.
The level of services trade with the
EU has been somewhat lower compared to trade with non-EU countries. The
majority of the first more pronounced decrease in services trade with the
European Union (EU) seems to be attributed to the epidemic, mostly due to the
greater proportion of the travel and transport industries in EU trade compared
to non-EU trade, as well as the travel limitations imposed during the pandemic.
In conjunction with the revival of tourism, the services trade in the UK has
rebounded, surpassing the levels observed before the epidemic. This also
signifies the surge in travel costs following the outbreak. Exports of
financial services to the EU, along with other significant categories of
services, had a more significant decline or failed to rise as much as exports
to other countries until the end of 2021. These exports have stayed below their
levels before the epidemic. The phenomenon of Brexit seems to have exerted an
influence, maybe attributable to the absence of agreements pertaining to the
trade of services. he provisions of the TCA were restricted in the domain of
financial services, which constitute around 20% of the overall services exports
in the United Kingdom. The United Kingdom and EU had previously agreed to
establish a Memorandum of Understanding on regulatory cooperation, in addition
to the TCA.[11]
However, this agreement has not yet been signed. The significance of the
European Union (EU) as a trade partner for the United Kingdom (UK) has
diminished subsequent to Brexit. In 2022, the EU's contribution to the overall
financial services exports of the UK was at 29%, a decrease from the 37%
recorded in 2019.
Since the establishment of the TCA,
the UK's current account deficit has increased, mostly due to changes in the
goods balance. The UK current account deficit surged to an unprecedented 7.7%
of GDP in the first quarter of 2022, primarily driven by a deterioration in
both the trade deficit and the income balance. The increase in the trade
deficit may largely be linked to the rise in energy costs. However, the decline
in the goods balance since the introduction of the TCA has been the primary
factor driving the changes in the UK current account. Since the start of 2021,
the services balance has been relatively steady, accounting for around 6% of UK
GDP. This signifies the conclusion of the preceding pattern of increasing
surpluses in the UK services balance.
The commercial recovery in the United
Kingdom following the epidemic has exhibited a slower pace compared to other
developed countries. Although the United Kingdom saw a decline in exports, like
to other nations, during the onset of the epidemic, it derived far less
advantage from the following rebound in global commerce. By the conclusion of
2021, the exports of other developed nations had nearly returned to their
pre-pandemic levels, although the exports of the United Kingdom remained around
10% lower than that level. Consequently, the proportion of UK trade in relation
to GDP saw a fall of 11% from 2019 to the conclusion of 2021, which was notably
more pronounced compared to the decline witnessed in the euro area or the
United States. By the conclusion of 2022, it seemed that the disparity between
UK exports and those of other developed nations had diminished, suggesting that
the disruptions associated with the Brexit transition phase are diminishing.
Nevertheless, it is important to exercise prudence when interpreting this. This
growth may also be attributed to temporary catch-up effects resulting from the
epidemic and subsequent fluctuations in trade data in the United Kingdom.
The literature has employed two
primary methodologies to separate the influence of Brexit from the consequences
caused by the epidemic. A difference-in-difference technique has been employed
by several academics, with diverse datasets and specifications.[12]
Freeman et al., Du and Shepotylo, and Du et al. conduct a comparative analysis
of the development of UK-EU trade in relation to UK trade with other countries.
In contrast, Kren and Lawless utilise EU commerce with the rest of the world as
a benchmark for comparison.
In this study, we utilise
high-frequency product-level data pertaining to trade in products. To account
for variations in trade patterns outside Brexit, namely the impact of the
COVID-19 pandemic on trade flows, we employ a complete set of fixed effects for
product-time and product-partner. Springford presented many revisions of Brexit
effect estimates by employing a "doppelgänger" methodology, wherein
an algorithm is utilised to identify nations whose economic performance closely
aligns with that of the United Kingdom prior to Brexit.
Considering the variations in research approaches, the existing empirical data indicates that Brexit has resulted in a decrease in trade between the United Kingdom and the European Union, both in terms of volume and direction. Table 1 presents a comprehensive summary of current findings derived from several methodologies. The projected decrease in UK commerce with the EU varies between around 10% and 25%.[13]
Considering the variations in research approaches, the existing empirical data indicates that Brexit has resulted in a decrease in trade between the United Kingdom and the European Union, both in terms of volume and direction. Table 1 presents a comprehensive summary of current findings derived from several methodologies. The projected decrease in UK commerce with the EU varies between around 10% and 25%.[13]
The findings presented by Springford and Du et al. indicate that the outcomes are contingent upon the specific time frame under examination. Given that both UK and EU enterprises are now adapting to the new circumstances, it is possible that the disparity between estimates could gradually diminish in the future. In addition to offering estimates of the impact of Brexit since 2021, the existing research typically does not discover any indication of anticipatory effects, which refers to a decrease in the share of UK-EU trade in relation to total UK trade before the temporary implementation of the TCA at the beginning of 2021. Brexit has resulted in a substantial decrease in commerce with the United Kingdom across all EU Member States, but with various degrees of impact. The decrease in trade has been particularly evident in nations that have traditionally held a larger proportion of trade, such as bilateral trade with Ireland, exports to Cyprus and Malta, and imports from Belgium and the Netherlands.
There has been a significant decrease in the quantity of items exported from the United Kingdom to the European Union at the product level. Similar patterns are not observed in the exportation of goods from the European Union to the United Kingdom. In general, this observation aligns with the notion that the heightened customs regulations imposed by the European Union (EU) have a more pronounced effect on trade flows of lower value, frequently resulting in the entire cessation of such flows.[14] Simultaneously, there has been a growing trend of export sales being concentrated among a smaller number of larger exporters.
A juxtaposition of these findings with those derived from pre-Brexit analysis indicates that the immediate consequences subsequent to the TCA have exhibited greater severity than anticipated. Prior to Brexit, several simulations of Brexit scenarios were conducted using various models, incorporating different amounts of tariffs and non-tariff obstacles.
According to a New Keynesian DSGE model, which assumes a free trade agreement scenario for goods trade with the euro area similar to the terms of the TCA, it was generally anticipated that Brexit would result in a long-term decrease of approximately 3% in total UK exports and imports. This decrease would have minor impacts on goods exports to the euro area, but more significant declines in services exports to the euro area.[15]
Based on the existing facts, it can
be inferred that the first negative effect on the export of products from the
United Kingdom has been substantial. This shows that UK exporters have had
difficulties in meeting the heightened administrative obligations subsequent to
the implementation of customs inspections at the European Union border. Given
the apparent influence of pandemic-related variables on the advancement of
services, it is imperative to do more analysis in order to distinguish the
effects of Brexit from the impact of the epidemic on this particular sector.
Conclusion
The post-Brexit era, a recognizable
change has come in the functioning of the British economy. Despite the low and
slow increase in the UK’s revenue, the exit of the UK seems to have
economically empowered its citizens and create a more democratic environment
within the economy.
The Brexit has had a significant
impact on the trade relations between the United Kingdom and the European
Union. It has had a visible effect on the declining soft power of the United
Kingdom. Alternatively, it has struggled to recover in comparison to many other
countries in the post-pandemic 2020’s era.
The long-term effects of the Brexit
still remain difficult to predict.; however, it is clear that the Brexit has
caused a continental shift in the economic mindsets of the countries in the
European Union. Many countries who were formerly considering exit have
reconciled with this idea and are trying to increase their importance within
the EU; in contrast other countries have reviewed their own situation and are
considering such a break from the European Union.
[6] Ibid.
[7] Garcia, Maria J.
“Post-Brexit Trade Policy in the UK: Placebo Policy-Making?” 11 Journal of
European Public Policy 2494 (2023).
[9] Ansgar Belke & Daniel Gros.
“The Economic Impact of Brexit: Evidence from Modelling Free Trade Agreements”.
Atlantic Economic Journal (2017).
[10] Ibid.
[11] Dhingra, Swati, Hanwei Huang,
Gianmarco Ottaviano, João Paulo Pessoa, Thomas Sampson, John Van Reenen, Gino
Gancia, and Ugo Panizza. “The Costs and Benefits of Leaving the EU: Trade
Effects.” 92 Economic Policy Journal 655 (2017).
[12] Paolo R. Vergano,Tobias Dolle. “The
Trade Law Consequences of ‘Brexit.’” 4 European Journal of Risk Regulation
799 (2016).
[13] Ibid.
[14] Maria Latorre, Zoryana Olekseyuk,
Hidemichi Yonezawa. “Trade and FDI ?related impacts of Brexit.” 43 The World Economy Journal.(2019)
[15] D. Bailey, D.Hearne, D., et.
al. “People, places and policies beyond Brexit.” 18 Contemporary
Social Science,129 (2023).
Article Information
IMPACT OF BREXIT ON INTERNATIONAL TRADE
Authors: RAKSHITA MATHUR
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/05/15
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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