Much to the surprise of experts, governments,
and businesses around the world, Britain and Northern Ireland voted to leave
the EU in June of 2016. The referendum result shocked not only the UK and the
EU, but also the global economy as a whole. Nevertheless, the UK government has
been determined to honour the results of the vote, and initiated the Brexit
process officially on March 29, 2017, which is set to culminate in the UK’s
departure from the EU on March 29, 2019, two years later.
After two years of tense negotiations and
internal political wrangling, the UK appears to have made no appreciable
progress in establishing the UK’s future economic relationship with the EU, or
the rest of the world. As of today, Brexit appears to be progressing toward
what was forecast as the worst-case scenario: a no-deal Brexit, in which the
UK’s trade relationships would revert to World Trade Organization rules. Such
an outcome is predicted to not only devastate the UK’s economy in the short
term but may also have significant secondary impacts on its major trading
partners around the world.
the UK join the EU at all?
To understand the import of Brexit on a global
scale, it’s important to understand the original purpose of the EU. Decades
before the EU was formed, the EEC was established by France, West Germany,
Italy, and the Benelux countries as a way to economically unite European
countries. Close economic and political cooperation was meant to help these
countries both to economically recover from World War 2 and to help build long
term relationships that would serve to prevent future martial conflicts.
It was this economic community that the UK
joined in 1973, after the 1969 resignation of France’s Charles de Gaulle, who
had vetoed Britain’s prior attempt to join in the 1960s. When the single
market, the EU as we know it today, was formed in 1992, Britain became a part
of it by default.
Over time, the EU’s influence over its
constituent countries grew, even as more and more countries joined. Unlike the
EEC, the EU functions as far more than just an economic community, but rather
as a loose superstate comprised of 28 countries. The UK government, for its
part, found itself torn between the economic advantages of membership, and the
vocal opposition of its right-wing voters even since before it ever joined the
Before it ever considered joining, the UK had
planned to reestablish its status as an economic superpower by developing its
own Commonwealth trading bloc. For many British voters, joining the EEC, and
later being part of the EU was perceived as a humiliation for a country that
had, at one point, governed nearly one-fourth of the world’s landmass.
Capitalising on this, British politicians have, whenever possible, laid blame
for the country’s economic failures on the EU as a whole, while doing their
best to claim credit for British successes nationally. As a result, a large
portion of UK voters had little or no concept of how the EU-UK relationship
actually works, or how it helped the UK. Instead, it has been primarily viewed
as a drain on the country’s resources, and an impediment to its success.
Global Financial Crisis and the Refugee Crisis
Following the financial crisis in 2008, many
of Britain’s fears about the bloc seemed to become reality. The economies of
Greece, Spain, Italy, and Ireland were in shambles, apparently validating UK
prejudices about propping up weaker countries through its contributions to the
bloc. At the same time, immigration to the UK increased as other EU citizens,
as well as immigrants from outside the EU, flocked to the country in search of
work. Under pressure by his own conservative party, which routinely capitalised
on vague anti-EU sentiments, Prime Minister David Cameron was forced to agree
to hold a referendum on whether the UK should seek to leave the EU or to remain
in it, before December of 2017.
Expecting it to offer him a strong
pro-European mandate, the Prime Minister went ahead with the referendum in
2016. However, Brexit campaigners, riding a wave of anti-immigrant sentiment
following the 2015 refugee crisis, and capitalising on the public’s weak grasp
of the EU’s relationship with the UK, won the simple in-out vote 52% to 48%.
UK’s negotiation nightmare
The UK economy is the second largest in the
EU, and its departure represents a serious loss for the bloc. While this does
give it some leverage in negotiating post-Brexit trade deals with the EU, the
UK has made practically no progress in securing a deal. The reason for this is
that Brexit supporters are determined to secure trade terms that are more
advantageous for the UK than EU membership was. Effectively, they want to
retain all of the benefits of membership, while simply doing away with the
associated costs. After all, this was what they had promised their voters.
EU member states, for their part, see little
benefit to agreeing to any such relationship. The UK relies on the EU for over
half its import goods, and 44 per cent of its export market. This means that
future trade complications with the EU could severely damage the UK’s capacity
to trade internationally while being merely painful for the EU. Furthermore,
the UK is not able to negotiate new trade deals with non-EU countries until
after Brexit takes effect, which would force other trading partners to also
begin trading with the UK under WTO rules. This could severely impact the UK’s
ability to trade competitively until such a time as new trade deals can be
This puts Prime Minister Theresa May, and
British negotiators in a position where any deal the country can feasibly
negotiate will fall far short of what politicians need to satisfy their
pro-Brexit constituents. As a result, the country has gone through two years of
negotiations with the EU to produce nothing but a single lacklustre draft deal
that the British parliament has vociferously rejected.
businesses have made no preparations
While no clear plans seem to exist for the
UK’s economic future, UK politicians appear adamant that a no-deal Brexit will
be avoided. As a result, 5 weeks before the final Brexit date, UK businesses
are entirely in the dark with regard to how they will be able to continue to
operate internationally after March 29. Not knowing what to do, more than half
of the country’s businesses have taken no steps of any kind to prepare.
no-deal Brexit means in the southern hemisphere
In the southern hemisphere, Brexit manifests
primarily as a bureaucratic headache for exporters, as businesses try to work
out what existing EU import quotas mean for trade with the UK and the EU after
Brexit. Despite this, total trade with the UK is valued respectively at 1 and 2
per cent of GDP for New Zealand and Australia. While slowed growth in the UK
might adversely affect some businesses who trade with it, it’s simply not
enough to cause larger economic problems.
This doesn’t mean, however, that there is
nothing to be wary of going forward. After all, Brexit is just one of a whole
list of events that are rattling global financial markets and raising trade
barriers around the world.
financial markets are vulnerable
The US’ escalating trade war with China has
already slowed trade between the two countries noticeably and is making
investors increasingly nervous with talks of a recession in the world’s two
largest economies. China’s exports in December of 2018 dropped by 4.4 per cent,
while imports fell by 7.6 per cent. This, as well as the US’ internal political
difficulties, are putting pressure on 5 of the world’s 10 most important
financial centres: New York City, London, Hong Kong, Shanghai, and Beijing.
These are ranked as the first, second, third, fifth, and eighth largest
financial centres in the world respectively.
growing threat of trade barriers
If the UK fails to secure a deal that would
preserve its international trade deals by 29 March 2019, it will automatically
revert to trading under WTO rules. With the US and China already imposing major
tariffs, this would make the UK the third of the world’s top 5 largest
economies to erect significant trade barriers. This will strongly encourage
other countries to follow suit, hoping to protect businesses in their own economies.
Ultimately, this would make international trade more expensive for all
countries, slowing growth and effectively stalling globalisation.
While it will likely have a secondary chilling
effect on the world economy, including the economies of Australia and New
Zealand, even a no-deal Brexit would be unlikely to cause real damage. In an
analysis of Australia’s position in the global economy, the International
Monetary Fund (IMF) determined that global conditions might have some negative
impact on the country, but would fail to halt its strong growth. While
businesses should certainly pay attention to the larger global developments in
the coming months, most will remain well protected from any direct Brexit