BREXIT AND ITS CONSEQUENCES AN ECONOMIC PERSPECTIVE – Mahmudul Hasan Jobayer

International, Issue

Brexit, the abbreviation of “British” and “exit”, is the withdrawal of the United kingdom (UK) from the European Union .The UK will formally leave the European Union (EU) on 31st January with a withdrawal deal – and it will then go into a transition period that is scheduled to end on 31 December 2020. During this period, the UK will effectively remain in the EU’s customs union and single market – but will be outside the political institutions and there will be no British members of the European Parliament. But, the government has made clear that the UK must leave the customs union and single market and end the overall jurisdiction of the European Court of Justice. After the dead line of extending the transition,If a trade deal is agreed and ratified, then from January 2021, UK will start a new relationship with European Union. If not, it will exit EU without a trade deal.
The European Union (EU) is a political and economic union of 28 member states that comprises some important economic union like European union customs union (EUCU), European monetary union that introduced a common currency ‘euro’. A customs union is generally defined as a type of trade bloc which is composed of a free trade area with a common external tariff that is the same customs duties, import quotas, preferences or other non-tariff barriers to trade are applied to all goods entering the trade area, regardless of which country within the area they are entering. 19 of 28 members use the common currency ‘euro’ as their state currency. What will happen to the economy of Britain, how will the economy of rest of the world be affected, is there anything for Bangladesh to be concerned about if Britain exits European Union?
The U.K. has already suffered from Brexit. The economy has slowed down. Its economy will mainly be affected in growth, business and job sector. Brexit’s biggest disadvantage is its damage to the U.K.’s economic growth. After passing the referendum in June 2016, Uncertainty over Brexit slowed the U.K.’s GDP growth from 2.4% in 2015 to 1.5% in 2018. So, it can easily be conjectured what will be the growth condition after Brexit is transacted. The U.K. government estimated that Brexit would lower the U.K.’s growth by 6.7% over 15 years.

Source: A slide from Moody’s most recent credit rating report for the UK.

One of the biggest advantages of customs union and free trade area is to conduct trade free of tariffs and other trade barriers. Brexit would eliminate Britain’s tariff-free trade status with the other EU members. As a result, Tariffs would raise the cost of exports for the UK. That would hurt U.K. exporters as their goods become more expensive in Europe. When its exports becomes expensive, it will lose its competitiveness with other European country; its export volume would be lower, which, in turn, would reduce national income level of UK. For example, according to a December 2017 ‘Financial Times’ analysis, the Brexit referendum results had reduced national British income by 0.6% and 1.3%. On the other hand, Brexit will cause British’s currency, pound, to depreciate against others currency like euro, dollar. This depreciation, in some extent, can alleviate the pain of higher export price caused by tariffs since the depreciated pound would make British goods and services cheaper to foreigner, increasing export demand. While More than one third of its imports comes from the EU,Tariffs would also increase prices of imports into the U.K. This is another way how it can cause the balance of payment of U.K to deteriorate and make its national income be swooped. Also Higher import prices would create inflation and lower the standard of living for U.K. residents. According to one study, the referendum result had pushed up UK inflation by 1.7 percentage points in 2017.
A study says that Germanyis projected to have a labor shortage of 3 million skilled workers by 2030. As within the European union each citizen any other country is treated as domestic citizen, those jobs will no longer be as readily available to the U.K.’s workers after Brexit. Thus, U.K.’s younger workers could be hurt. For rest of the world, there are many reasons to be worried about. The EU would lose its most robust economy with Brexit. The day after the Brexit vote, the currency markets were in turmoil. The euro fell 2% to $1.11. Since EU created an optimum currency area for attaining some goals like risk sharing by automatic fiscal transfer mechanism that can maximize economic efficiency throughout the region. Thus, Brexit could create a large diminution to EU in attaining the desired goals.
Another immediate impact of Brexit referendum was fall of values of euro and pound against dollar. That strength in dollar currency value is not good for U.S. stock markets. It makes American shares more expensive for foreign investors, reducing world demand for US assets and contracting foreign reserve of Federal Reserve Bank. A weak pound also makes U.S. exports to the U.K. more expensive. Though the U.S.A. has a large trade surplus with the U.K., Brexit could turn this surplus into a deficit if a weak pound makes U.K. imports more competitive. Some manufacturing companies use the U.K. as the gateway to free trade with the EU nations. Brexit dampens business growth for companies that operate in Europe. Trading countries of EU might lose advantages that they used to get from shipping goods. Thus, not only the U.K.’s own economy but also the world economy might get impaired.
The UK is a major player in the export field of Bangladesh—the third single largest export destination after the USA and Germany. UK accounted for 10.9 per cent of Bangladesh’s total global exports, 18.7 per cent of exports destined for the EU market in FY2017-18. Bangladesh exports to the EU enjoy duty-free quota-free (DF-QF) market access for all exports but arms, under the EU’s generous Generalised Scheme of Preferences (GSP) offer for the LDCs.Bangladeshruns the risk of losing this benefit in the U.K. market. If Bangladesh lose this benefit, it will generate huge collapse in its exports earning, causing national income to fall.The latest figures from the Export Promotion Bureau show that for the last fiscal year, the apparel sector contributed USD 30.61 billion, or 83.49 percent, to Bangladesh’s total exports of USD 36.66 billion. Being the main source of our export earning, RMG (Readymade garment) sector would be mostly affected by losing GSP benefit. For instance,RMG (Readymade garment) sector’s export contribution to GDP becames 11.17% in the fiscal year 2017-18 (after referendum), which was around 14.17% in the fiscal year 2013-14.
The official exchange rate of British pound against Bangladeshi taka from BDT115.3 per GBP to BDT95 per GBP within a year after the referendum. Although the value of euro against taka reverted to its pre-referendum rate, immediately euro also depreciated against taka. So, weaker currency of both the U.K. and the EU would reflects their lower buying capacity and lower export demand for Bangladeshi goods and services. Because of uncertainty and huge volatility in EU and theU.K.’s market, it is likely to have an adverse effect on investment in Bangladesh economy. It might discourage foreign investors to focus on investing here, lowering the amount of foreign direct investment. The depreciated values of euro and British pound against taka may have immediate impact on remittance sent by Bangladeshis until they revive against taka. So, these are how Brexit can have impact on the economy of Bangladesh.
Finally, Bangladesh would have to go for bilateral deals with U.K. for trade after Brexit. However, the economy of Bangladesh might be beneficial from Brexit if U.K.’s economy gets benefit from exiting European union. Otherwise, not only Bangladesh but also all south Asian countries would be adversely affected from Brexit.

The author is a student of Economics at the University of Dhaka.