An Analysis of the Worst Case Scenario for Britain

Britain after Hard Brexit

An Analysis of the worst case scenario for Britain

Introduction:

On January 01, 1973, midnight Britain had joined EU. The United Kingdom finally becomes a member of European Economic Community (Precursor to the European Union EU) along with Denmark and Ireland after a long year negotiation. It was a momentous decision for EU as they had welcomed in their group one of the largest economies in the world, a nuclear powered and a permanent member of the United Nations1.

More than 40 years later, in 2013 during the election, the then Prime Minister Mr. David Cameron promised to hold a referendum by 2017 on the European membership within Britain, as the topic of EU had created a rift within the British community. He had expected a clear majority win for continued membership within the EU. But on June 23, 2016, British population gave a shock verdict of narrowly defeating the referendum and voting to leave the EU. This event was termed as “Brexit” by the media.

Brexit required negotiations within the European Union to be carried out within two years of triggering article 50. This article was triggered by the British Prime Minister Theresa May on March 29, 20172.

What Is Going On Now?

As UK and EU entered the second week of negotiations in July, two broad issues hampered the progress. UK is not clear where it stands on citizen’s right and the amount it should pay to EU to leave the bloc the so called “Divorce Bill”. On the front of citizen’s right, both parties could only reach a partial agreement and full holistic agreement is under discussion.

Next issue of contention was the “Divorce Bill”. Even though Britain is ready to meet its financial obligations which will arise as a result of the exit, like the cost of relocating EU agencies based in London and pensions of EU officials, it has steered clear of what it is willing to pay as compensation. There has been disagreement between the sides on how to value relocation and other costs with some European estimates putting the final bill at more than €100 Billion5 by some estimates.

Economic Realities:

In 2016, EU represented 43.9% of exports and 53.4 % of imports of UK’s total trade in goods and services. The top destinations for UK exports are United States (14.8% of total exports), Germany (10.7%) and France (6.3%). The only non-EU nation apart from the USA, featuring in the top ten is China, which accounts for 4.4% of total UK exports displaying the importance of EU for British goods. On the side of imports, Britain imported most heavily from Germany (15% of total UK imports), followed by China and USA.

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Source: Office for National Statistics, UK

The Rotterdam Effect

The statistics representing trade with EU have recently come under scrutiny. There is a notion that these statistics might be inflating the present trading position because of what is known as the ‘Rotterdam Effect’. Certain exports from the UK are shipped to the Non-EU countries via ports in other EU states.  But those goods are still counted as exports to the EU nation and not the country they finally end up in. For example, goods taken to Netherlands to be shipped to other countries will still be counted as exports to Netherlands, thereby inflating the figures. The Rotterdam Effect is difficult to quantify but Office for National Statistics indicates that it affects almost 50% of goods shipped to Netherlands. While this translates to almost 2% of goods exported to EU nations, it doesn’t significantly inflate the Government statistics on trade with EU since it affects only goods and not services.