Since BREXIT has been such a hot news item this past week, I decided to take a one-week hiatus from the economics tutorial series to address this important issue briefly. This is an economics blog, so I am going to deal primarily with the economics of BREXIT, especially as it impacts you.
The European Union (EU) is made up of almost all European countries–28 of them. The United Kingdom (UK), including England, Scotland, a small part of northeastern Ireland, and several small islands, joined the European Economic Community (EEC) in 1973. The EEC became the EU in 1993. The BREXIT, or British Exit, movement began several months ago as much of Britain’s populous became disenchanted with the policies of the EU. Although membership in the EU is mostly for economic advantage, the opposition in the UK has been primarily political. Over the years, the EU placed increasing restrictions on member countries, gained more control over business standards, brought open borders to the entire continent, and levied burdensome taxes and fees. This has fostered a nationalist fervor among some nations, and they are beginning to reject these constraining mandates. The UK is the only place where this growing isolationist attitude has resulted in a formal vote of the people to withdraw from the EU. Britain has now severed its ties with the EU and is claiming independence from mainland Europe. Again, most of the rationale is political rather than economic. However, the EU’s main objective is economic cooperation among members, and BREXIT will have an economic impact.
The economic impact will be a reduction in international trade with other European countries. The UK currently sends over 50% of its exports to its European neighbors. Major exports from the UK include automobiles, petroleum, machinery, and pharmaceuticals. Of course, these won’t just dry up, but, without the EU ties, they will certainly suffer loss. Likewise, the UK’s needed imports from neighboring countries will be more expensive and even more scarce without the EU membership trade agreements.
One of my recent posts was about how a nation determined what to produce. You may want to review that post. Comparative advantage is a major factor in what a nation produces and markets. It will be to its advantage to produce what it has most resources for and can do most efficiently. If the UK were best at producing refined petroleum, and Germany were best at producing trucks, then they should trade those items with each other. The UK could produce the petroleum it needs plus a large amount for export to Germany, Germany could buy the petroleum more cheaply than producing it themselves. Similarly, if Germany could produce all the trucks it needed plus a large number for export to the UK, the UK could buy the trucks more cheaply than producing them domestically. That is why global trade is so important for the benefit of all countries. With BREXIT, the UK has chosen to accept less economic advantage in trading with the EU countries. There will be higher tariffs and more trade barriers between the UK and its European trading partners. That will obviously be an economic minus for both the UK and the rest of Europe. But, what will it mean for America, and you?
The UK is the seventh largest source of imports for the US. We import about $59 billion each year from them including automobiles, machinery, petroleum, and pharmaceuticals. Import prices will likely rise, since they will have to make up for lost revenues from the EU. However, that may be offset by the weaker pound (the UK never adopted the Euro). In other words, the dollar will be worth more in the UK. Our exports to the UK such as aircraft, chemicals, and automobiles currently amount to about $56 billion each year. We are their fourth largest supplier of imported goods. The stronger dollar relative to the pound will be to our advantage there also. Plus, they may need more goods and services from America as their trade with Europe becomes more complicated. The bottom line is that America stands to gain from BREXIT in the long run. Then, why did our stock market react so negatively?
A key economic principle that we have to be constantly aware of is volatility. Any time the domestic or global market hiccups, any time there are surprises or unknowns, there will be short term volatility. Particularly since this vote was such a surprise to the world, lots of questions about various ramifications have begun to circulate. Investors tend to run to safety and drop any risky investments when the unexpected happens. Stocks fall as investors seek refuge in bonds, gold, etc. This will probably play out over time, and stability will return. In the meantime, we should look to craft more bilateral agreements with England and solidify our economic partnership with them.
The politics of BREXIT will be all over the map, especially in the election year as the two presidential candidates and each of their parties will try to use the upheaval to their advantage. But, the economics of it will likely settle out after a few months and may ultimately be a positive move for America. You may actually gain personally from the UK’s return to a more nationalistic economy. So, go ahead with your plans for buying that 2017 Jaguar!
My next post will take us back to the basics of supply and demand. Don’t miss it.