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Brexit Was One Of The Most Controversial

Brexit was one of the most controversial and shocking political development in recent history. It all started when the previous U.K. prime minister, David Cameron promised that his Conservative government would hold a referendum if they were re-elected in 2015. After David Cameron was re-elected for the second term, he kept his promise, and held the referendum. However, because he was an advocate of remaining in the European Union (E.U), once the majority of the people voted for the exit of U.K.(51.9% of the country voted leave, 48.1% voted stay), he announced his resignation almost immediately after the results came out (Iyengar, 2016). While most of the world was not happy about the results, the results of the referendum sparked interest in some European countries to leave the E.U. as well (Bentham & Mcdonald-Gibson, 2016). There were many factors contributing to the results of the referendum, however, the few most notable reasons for Brexit is that some of political class in the U.K. felt “left behind” economically, some felt uncomfortable with the social changes in the U.K. for the past decade and other political reasons (Chu, 2016).

The threat of Brexit before the referendum was not very convincing in the beginning until the results of the referendum was announced. Therefore, when the results of the referendum were announced, it shocked the entire world, and there was immediate negative impact on the U.K. economy. According to former Golden Sachs economist Mark Carney, prior to the referendum, the U.K. economy was the best performer in the G7, but became among the worst after the referendum (Chapman, 2017). In addition, the FTSE 250, which compromises more domestic companies than FTSE 100, experience loses but recovered the day after the referendum was announced. Furthermore, the value of pound had depreciated drastically, hitting new lows against the US dollar since the 1980’s and also became the world’s worst performing currency in 2016. Other factors such as the economy and trade deals has been negatively affected, with U.K. economy shrinking, inflation rate rising and no new trade deals happening as countries are concerned about future impact of Brexit (Belam, 2016).

The EU is the most structurally complex and extensively developed of all the world’s regional economies. Although it was initially established to foster economic cooperation between countries in the union, it has evolved to become a political project as well. One of the main benefits of being in the EU is the ease of trading within the union (Dicken, 2015). This can be a huge problem for the UK when Brexit happens, as there will be trade barriers that could increase the prices of goods and services that is imported from countries within the EU and force UK companies in the EU to increase the price of goods and services which could deter customers in the EU from choosing UK goods and services. This is known as the transition effect (HM Treasury, 2016). However, the UK has merchandise trade deficits, which means Brexit might force the consumers in the UK to opt for local goods, but in terms of commercial services, it will damage the UK as they have trade surplus from this area (Dicken, 2015). Furthermore, this would force businesses and households in the UK adjust their business and finance strategy as they would need to reduce investment spending, cut jobs, adjust to lower external demand and financial investments especially from the EU as trading would be flexible (HM Treasury, 2016).

Another huge potential consequence of Brexit is the UK’s GDP. According to a study done by Chen et al. in 2018, on the economic exposure of Brexit, they found out that the major exposure for the UK’s GDP of European regions are ironically found in majority of the UK’s non-core regions in the North of England and the Midlands which is where most of the Brexit voters came from as shown in figure 1. Although the exposure rate is high for London and Scottish regions, it does not compare to exposure in the Midlands and the north. This means that most of the GDP will be negatively affected as there will be more barriers when trading with countries in the EU (Chen et al., 2018). Moreover, another factor that would negatively impact the GDP of UK is the uncertainty of new relationships with the EU and non-EU countries alike. Doubts between most of UK’s domestic regulatory framework and relationships with EU and non-EU countries will arise, which will impact the GDP adversely because according to Figure 2, the UK GDP and uncertainty is negatively correlated, therefore, when uncertainty goes up, GDP decreases (HM Treasury, 2016).

Lastly, another potential negative impact of Brexit in the UK is the foreign direct investment (FDI). One of the main reason why many investors invest in the UK is because of the access to the EU single market, therefore, with Brexit happening, there will be a reduced access to the market, which ultimately would make the UK a less attractive destination. Studies have found that Brexit would lead to a fall in the FDI of the UK by over a fifth and this this fall would reduce the GDP by around 3.4 percent (Van Reenen, 2016).

Although there are many potential consequences for Brexit, there are a few possible positive effects that Brexit would benefit the UK economy. The first positive effect would be migration. Migrants from some countries send some of their income which means it is a loss of income for the UK economy and migration also puts pressure on housing and public services. Therefore, Brexit will help reduce overall migration in general especially from the EU (Begg and Mushövel,2016). Another positive impact of Brexit which relates migration as well, is the possible increase in wages of native UK citizens. A study found that there might be a 0.12% increase in native wages by 2020 and 0.51% by 2030. However, this does not mean workers will do better overall (Portes & Forte, 2016). Thirdly, Brexit would also improve the flexibility of regulations in the UK. Under the EU, there are some decisions that must be passed the EU committee for UK to carry out an activity (Van Reenen, 2016). Lastly, Brexit would help the UK save public finances that would be paid the EU budget. According data in 2014, UK would save £280 million per week, which the UK can reinvest in other areas such as the NHS and other priorities (Begg & Mushovel, 2016).

In conclusion, based on the many studies and research done so far, there are a lot of negative consequences that Brexit is going to bring to the UK economy with few redeeming impacts. Brexit will have a negative impact on the competitive position of the UK because one of the biggest advantage being in the EU has is the ease of trading within EU countries. The UK government must make sure the negotiation of Brexit still retains some of the convenience of trading with countries in the EU to reduce the negative impact. However, Brexit might help the UK forge new relationships with other big economies such as China and the US which can help the economy.