Brexit – What Would Happen If Britain Left the Eu?

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It is assumed that both parties would act like a firm – that is, rationally and with the intent of maximising economic profit. Therefore it is in the best interest of both the UK and EU to cooperate to achieve favourable outcomes for both parties.

It is in the best interest of Britain to cooperate with the EU, since trade with the EU accounts for approximately 45% of UK exports and more than 50% of UK imports (HM Revenue & Customs 2016). Since the EU is the largest trading partner of Britain, if access to the EU markets was more restricted the British consumer surplus and producer surplus would be significantly affected, subsequently impacting the UK GDP. It will also affect any comparative advantage that the UK has.

4. Does Brexit have any impact on Australian Economy? Explain. [8 marks]

If the new trade deals negotiated with the EU are unfavourable it will affect the supply of goods. Both the EU and the UK are likely to make up some of demand with other trading partners. There is the potential for Australia to capitalise on the change in supply and demand, therefore boosting the Australian economy. Presently, Australian exporters to the EU and UK are disproportionally disadvantaged relative to their competitors within the EU, because tariffs and trade restrictions are lower for those within the EU than for Australian companies. If trading was equally regulated between the UK and the EU as it is for Australia, this would benefit the Australian economy by increasing the competitiveness of Australian exporters in both the UK and EU marketplaces.

Australia may also benefit from increased tourism as a result of Brexit. Tourism in Australia is a significant industry, accounting for 3.0% of Australian GDP in 2015 (Australian Bureau of Statistics 2016). In 2015, the UK had 36 million international visits, of which 24 million were from the European Union (Office for National Statistics 2016). During the same period, residents of the UK had 66.7 million visits abroad, of which 48 million travelled to the EU (Office for National Statistics 2016). Current immigration laws allow relatively free movement between citizens of EU members compared to citizens from countries that are not members of the EU. However, this may change depending upon the laws that are introduced post-Brexit. If it is more difficult for both UK citizens to visit the EU, as well as more difficult for EU member citizens to visit the UK, some of these people may look to travel elsewhere – including Australia. About 1.5 million European tourists visited Australia in the 2016 financial year, of which approximately half were from the UK (Tourism Australia 2016). In the event of unfavourable travel restrictions between the UK and EU, the number of tourists coming to Australia is likely to increase.

Alcohol is Australia’s third largest export to the UK (Department of Foreign Affairs and Trade 2016). The Australian wine industry stands to make significant gains when Britain leaves the EU. Presently, the majority of Australian wine exported is to the UK, with 247 million litres exported in 2015 - this accounts for one third of Australian wine exports (Wine Australia 2016). Additionally, Australia is the second largest source of wine imported into the UK, behind only Italy (Wine Australia 2016).

Import tariffs apply to wine imported into the UK from non-EU member states, whereas EU member states are excluded from the import tariff (Wine Australia 2016). In the event of Brexit, these exclusions will no longer apply and therefore Australian wine exporters will benefit from increased market competitiveness due to a more equal market.

5. Do you think that the global economy might slow down because of Brexit? Explain. [8 marks]

As mentioned before, the impact of Brexit on the global economy is predominantly dependent upon the outcome of trade deals / restrictions that are re-negotiated between Britain and both the EU and non-EU countries.

If Brexit results in more taxes and/or tariffs than the current circumstance, it will have a negative impact on the global economy. This is because taxation increases deadweight loss, as well as reducing both Consumer Surplus and Producer Surplus. All of these losses are borne by society –although the rest of the world will share a part of these losses, a disproportionate share will be borne by Britain in this case. All countries, mainly those in the EU and especially the UK, will also suffer from a reduced competitive advantage.

Conversely, if trade and immigration policies become less restrictive, the opposite of the above should happen – an increase in competitive advantage and a reduction in deadweight loss. This can result in overall positive outcomes for both the UK and EU, as well as the global economy as a whole.

In the short to medium term, the uncertainty created by the Brexit referendum result has already hit the global economy, with Morgan Stanley economists estimating this will cause an overall reduction of global GDP of 0.5% within the next 18 months (Morgan Stanley 2016).

It could be several years until a Brexit actually takes effect. Due to the German and French elections in 2017, as well as the Italian constitutional referendum later this year, it is expected that Britain could take up to 5-6 years before actually departing from the EU. Because most companies and investors are risk-averse, this will affect the UK based upon the Long Run Production Function principle – since investors are likely to postpone investments until after the effects of Brexit are better understood, the variability of the Capital part of the Long Run Production Function will be constrained, resulting in a smaller Quantity produced. This will have a flow-on effect to the GDP of Britain and to a lesser extent, to the rest of the world.

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REFERENCES

Allen, K, Oltermann, P, Borger, J & Neslen, A 2015, Brexit – what would happen if Britain left the EU?, The Guardian, retrieved 11 August 2016, http://www.theguardian.com/politics/2015/may/14/brexit-what-would-happen-if-britain-left-eu-european-union-referendum-uk>.

Australian Bureau of Statistics 2016, 5249.0 - Australian National Accounts: Tourism Satellite Account, 2014-15, Australian Bureau of Statistics, retrieved 19 August 2016, http://www.abs.gov.au/ausstats/abs@.nsf/mf/5249.0>.

Chessell J 2016, Brexit: Merkel warns UK it can't cherry pick EU rules, Australian Financial Review, retrieved 2 September 2016, http://www.afr.com/news/world/brexit-merkel-warns-uk-it-cant-cherry-pick-eu-rules-20160628-gpu3qi>.

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