DI$UNOMICS

Everything in life is a transaction

002: BREXIT

What is Brexit?

 

Brexit is the term coined for the possibility of Britain leaving the EU, both economically and politically. What this would mean is that Britain would have more power to decide how to operate, whereas Britain currently has to delegate power to the EU - economic and political decisions are made in Brussels. 

There are pros and cons to Brexit. As this is Disunomics, the focus will be on the economic factors. My opinion is that the UK is better off remaining in the EU, to the extent that I consider those in favour of Brexit to be mentally unstable. The type of deals we would need to broker are as likely as Arsenal winning the league. I think we Brits delude ourselves just as much as Arsenal fans as to how important we are on the world scale. We are not big enough to stand on our own, for example, if we had to live off our own produce, we wouldn't have enough food to feed the nation. We all would die. Okay, maybe not, but you get the point. I do, however, feel it is important to understand the reasons why people have been campaigning for Brexit. As barmy as I think it is, it would be irresponsible not to consider both sides of the coin.

 

What are the cases for Brexit?

 

Savings on EU budget contribution:

Each year the UK pays a membership fee towards the EU budget, as well as benefiting from EU spending. Last year the UK contributed £13 billion towards the EU budget, and received £4.5 billion in EU spending. Therefore, the membership fee for the EU in 2015 tallied up at £8.5 billion, almost 10% of what the UK government have budgeted to spend on education. Imagine that, £8.5 billion for common membership.

How does this affect you?

The money being used for this membership fee isn’t from Mr Cameron’s Barclays account (more's the pity). The money comes from the taxpayer, which could be used for things such as better facilities in hospitals or schools. The EU economy is not as dominant as it once was. The EU’s share of global GDP when the UK joined in the EU in 1973 was 37%, and it is forecasted to drop to 22% by 2025. If we were to imagine the world’s economy as one giant pizza, the EU’s slice is thinning. Is it worth paying £8.5 billion to join a club that is less powerful as it once was? Wait, you're still thinking?

Trading with non-EU nations

Currently, the UK doesn’t have free trade agreements with the likes of China, India, Brazil and the USA. What this means is that if you want to import goods from nations outside the EU, you would be charged an additional 6.5% (listen up, you Aliexpress frequenters). If the UK strikes trade deals with countries similar to those mentioned above, UK consumers could benefit from cheaper and better quality goods. Cheap weaves and designer knock-offs for everybody! The more variety and volume a product has, the more its price in the UK will drop, due to the increase in competition. For example, Firm X can’t keep charging a price of £10.00 for jumpers, because there are Chinese importers charging £6.00 for the same product.

How does this affect you?

As a regular consumer, you can get cheaper products, as the barrier of additional costs are now removed.

As an entrepreneur, if you import products from the likes of China, and resell them in the UK, you could witness an increase in competition from others doing likewise. People may be "inspired" by your venture, and want to compete with you. In the unlikely event that that didn’t happen (weave-merchants, here's looking at you), you would make more money, as your costs would be reduced.

As a small business owner/employee of a small business, you are likely to be in danger from increased competition as mentioned before. If, for example, you are a textiles company, you would now be competing with ridiculously cheap Asian imports. This is likely to push some small businesses into making job cuts or going out of business entirely.

Immigration

Net migration to the UK in 2015 was recorded at 336,000 in 2015, which is approx. 60% of the population of Sheffield. Leaving the EU will enable the UK to determine its own immigration policy. Currently, EU nationals are free to move in between EU nations. This has contributed to issues such as overcrowded schools, stretched NHS services and increased competition for work. The UK isn’t just receiving migrants seeking low-skilled work; there is also an increase of skilled workers from the EU - from accountants to engineers. Some argue that the effects on the labour market have hit university graduates as well. For example, in 2014 PwC had 24,000 applicants for its grad scheme, a 66% increase from 2013.

How does this affect you?

As a student, you could benefit from less competition for places at universities. University applications are at all time highs, despite the government's move to triple the costs of going to university.

As a parent, if immigration is effectively reduced, you are also likely to benefit from less competition for school placement. A recent study showed 1 in 10 primary school children are not gettinginto their first choice school. More controlled immigration could lead to less overcrowded schools, which will provide better learning environments.

As a member of the UK labour market (somebody who is looking for work), you too would benefit from decreased competition from EU workers. According to the FT, 6% of the UK labour market consists of EU nationals. Therefore, if there were fewer people going for the same jobs as you, the chances of you getting said jobs would increase. Furthermore, if only a small amount of people are able to do a specific job, then it is likely that they would be paid more to do that job.

 

Pretty compelling stuff, right? Wrong. The scenarios considered assume that the EU would lay out the red carpet for the UK to leave, throwing one helluva party, with bottomless drinks and a huge cake, from which a stripper would emerge. Unfortunately, that wouldn't be the reality. However, before I go on to babble on about why I am right and Team Brexit are wrong (because they are), it’s important I remind you of incentive.

When x happens, what is the best thing to do for company y?

Well, I ask you, what are businesses trying to do? Make money. If their costs go up, that means they make less money. So, what would be the best thing for that business to do: take the reduction in profits, or reduce the costs to make profits? Make profits, right? Okay, now we can have a look at why the UK should stay in the EU.

 

What are the cases for staying in the EU?

 

Labour mobility, for nationals and firms

One of the driving factors for Brexit is the effect of immigration on the UK. If the UK leaves the EU, it is unlikely that they would be able to strike a deal that enables British citizens and EU nationals to move as freely as they do now.

How does this affect you?

This could stop UK businesses attracting some of the best workers for some its industries. As a business owner, you will have a smaller pool of skilled or unskilled workers to select from. You will also probably have to pay them a bit more than previously, which will cause you to employ less people to reduce costs.

As a consumer, this also can have an impact on travel: would trips to Berlin, Barcelona and Brussels be as easy and cost effective? Doubt it. UK nationals will likely have to deal with additional barriers like purchasing visas. Also, as a student, it provides additional complications to studying abroad.

As a member of the labour force, although there may be less candidates to compete with, the wage level is likely to rise. Is this a good thing? Well, it depends on how significant that increase is. If wages rise significantly, then businesses are paying more than before to produce their goods/provide their services. More costs means less profits, which is likely to make business hire less people to battle these costs.

Dangers of global trading for British business

50% of the UK’s trade is with the EU. The fate of UK businesses is largely in the hands of any trade agreement the UK can reach with the EU. The issue is in the unlikeliness of a favourable agreement - the EU would want to send a message to any other nations considering an exit. If you look at the deals the Swiss and Norweigens currently have, it is unlikely that the UK would agree to similar in the case of Brexit. They have to make big contributions to the EU budget (the membership fee discussed earlier), and they have to employ free movement of persons. Those are two of the pros of Brexit mentioned earlier, and are what the EU demanded in return for access to its single market. The UK adheres to a lot of EU regulations in various markets, but if Brexit happens, the UK will have NO SAY in decision-making. The leaving process takes two years, and in this time the EU will be making decisions on markets that involve UK businesses without the input of the EU. The UK can strike free trade deals with nations such as India, China and the United States. The potential issue with this is the increased competition from these nations will reduce the demand for UK businesses, and could send many out of business entirely.

How does this affect you?

As a business owner, you are either faced with 2 possibilities. 1) Facing export and import charges when doing business with your EU customers, which would likely reduce the demand for your business (as it is more expensive), if there is no trade deal with the EU. 2) If the EU and UK reach a trade agreement, you would be engaging in business in a market where your government can’t protect you, as they aren’t involved in the regulation process.

As a consumer, if the UK doesn’t strike a trade deal with the EU or an unfavourable[double check, conflicting meaning] one, some of the products we purchase are going to cost more than before. Products that were previously imported freely will now have import duties imposed.

Economic Climate

One of the risks of Brexit is the effect it will have on the economic climate and financial markets. Many banks and businesses have warned of the risk of uncertainty in the markets. In other words, people and entities with a lot of money will panic and stop investing.

For example, if you were an international corporation that was looking to invest in the UK, you would be advised to scale it back, due to the possibility of Brexit alone.

How does this affect you?

As a member of the labour force, unemployment is an issue. Unemployment figures have risen slightly, and some economists believe this could be due to uncertainty of Brexit.

As an investor, uncertainty is something you don’t want. You don’t want to risk your money in a climate were nobody has a good indication of what is to come. How would you be able to know what is a good investment with your money? You would probably keep your money and save it. This isn’t good for the economy because you aren’t injecting money, rather you are taking it out.

As a business owner, when there is a lack of investment and uncertainty, people panic and save. The more people save, the less they spend on your business. Furthermore, the less people invest in businesses, the less businesses grow. When businesses don’t grow they make cuts, which could also lead to job cuts.

 

Conclusion:

The issue with Brexit is the advantages we should gain from leaving are not likely attainable. The UK isn’t large enough to trade on the World scale alone and benefit, and the EU would not facilitate any sort of deal that would benefit us. The UK is much better suited to remain in the EU, and push for better implementation and favourable policies. Net migration is a big problem, and should be pressed by our government with the EU. Unless the EU decides to behave like their brains are made of custard creams (and sometimes I do wonder), there is no way the UK will be in a beneficial position if we leave.

I hope you found this easy to follow. Any questions please hit me up!