Possible Changes To External Environment For UK International Businesses After Brexit Essay.

Examine and critically evaluate the possible changes to the external environment in which UK international businesses operate after Brexit. 

Changes in Exchange Rate and Immigration Policies

In 2016, people of Britain have voted to withdraw the name of United Kingdom from the European Union (EU). However, this step taken by Britain has raised questions regarding the future of U.K among citizens of this country and among the world as well. In this context, a brief discussion about the European Union can be beneficial for understanding the impact of Brexit on international businesses of this concerned country. The EU is an international organisation, contains 28 countries of the Europe (Kulik et al. 2018). Those countries have followed some common policies regarding political, social and economical issues. This union has come to exist after the Maastricht Treaty, which has been formed to enhance economical and political integration of European countries through creating a common currency, that is, the Euro. Hence, within this union, member countries have followed minimum trade restrictions for exporting and importing products with each other. Other factors like people and capital have also moved freely. However, the United Kingdom has taken decision to withdraw its name from this union and this in turn has increased debates among people that whether this decision is going to be good for the international businesses of this country or not (Hartmann and Leug 2017). Hence, this essay has intended to focus on this issue by analysing various external socio-economical and political factors related to Brexit.

After the referendum of Brexit, the U.K has experienced higher rate of inflation. Moreover, the value of currency has also decreased significantly inter, of the U.S dollar. This implies that, to exchange one unit of dollar, the country needs to pay higher amount of pound compare to before (Caporale, Gil-Alana and Trani 2018). This in turn has led the real wage rate of this country to decrease by large amount.

Figure 1: Exchange rate of U.S. dollar for 1 unit of pound

Source: (Fred.stlouisfed.org, 2018)

According to above figure it can be said that the exchange rate of U.S dollar has decreased after 2016. This implies that, to purchase 1 unit of pound less amount of U.S dollar is required. This decreasing value of pound has generated inflation within the country. This has affected exporters and importers in both positive and negative directions. Importers have experienced loss due as they have paid higher amount of pound to purchase products from foreign countries. this in turn has led the prices of imported products to increase further. Consequently, the economy has experienced inflation within the economy. On the contrary, exporters have experienced positive outcomes through this result (Steinwender 2018). In foreign market, prices of exported commodities of U.K has decreased bay large amount and this in turn has helped the country to increase the demand its exported output in international market. After Brexit this situation can be seen by large amount. In addition to this, through Brexit, immigration has been restricted. Consequently, people of other countries have left Britain (Bootle et al. 2018). For this, teh country has experienced shortage of skilled workers. This phenomenon has adversely affected the production system of this country. On the other side, people of U.K, who have lived in other countries of the EU have started to come back in their domestics country. As a result, the labour supply in U.K has increased by large amount.

Impact on Foreign Direct Investment

In this context, it can be said that the Brexit may help the U.K to implement new trade policies for other non-European countries. For instance, the concerned country can implement a free trade policy with some largest Asian countries and with the U.S as well. this in turn can help the UK to promote its export and import relations toward a new direction. However, according to some economists, this advantage may not fulfil the loss, which the country is going to incur after Brexit. The EU is the largest neighbour market of this country. Hence, a huge amount of products have been imported and exported within those countries along with capital and labour. (Bagwell 2018).  However, after Brexit, this amount may decrease significantly. This is because, the UK may not utilise the common trade law of the EU after withdrawal. Consequently, higher amount of tariff may influence the U.K to export by small amount in those European countries. In this context, it can be mentioned that the magnitude of U.K’s market in terms of GDP is small compare to the EU. As a result, the U.K may experience less power to negotiate with the EU for tariff. Higher amount of tariff can adversely affect the country to export more amounts of output in this market. For this, the country can experience huge loss and this amount may not be compensated though trade with other nations.

The concept of foreign direct investment (FDI) can also be considered in this context. The country has received higher amount of FDI for being the member of the EU. The financial services of the country have depended by huge amount on FDI. Under Brexit, foreign financial institutions have operated their businesses in any part of the EU without any restrictions (Liingston 2018). However, after withdrawal, foreign European bank may not perform their business in Britain. This further can adversely affect the financial market of the Australia by large extend.

Under this situation, some important sectors of business can be considered. Those sectors have employed huge number of employment and export products by large amount in foreign market, especially in the EU.

Initially, it has been found that the financial services and insurance sector have deployed nearly 3.6% of the labour force of the concerned nation. The financial services sector has contributed 9.6% of the overall export of the nation, out of which exports amounting to 41% are made to the EU. Moreover, there is significant contribution of the insurance sector, which is nearly 4.3% of the overall UK exports (Bailey 2017). Out of this, 18% is exported to the EU. Hence, it could be cited that the insurance sector has occupied a considerable position globally, which has assisted the related sector in minimising the level of risk after Brexit. The financial services sector might find it difficult in negotiating a deal and hence, there might be compulsion on the nation in choosing between a third country having the status of WTO-style or it might stay  in the form of a member in the single EU market (Kenward 2016).

Effects on Different Sectors of UK Economy

Secondly, Brexit would have significant effect on the automobile industry. This sector has provided employment opportunity of nearly 0.42% of the nation’s total labour force, which has helped in acquiring 4.9% of the total exports of the nation. Out of this market share, 35% is exported to the EU. However, after the departure of UK from the EU market, the car tariffs might rise by 10%; in case, the UK government does not negotiate deal with the EU. If no negations are there between EU and UK, the rate of tariffs on the pharmaceuticals and manufacturing sectors would rise by 4.6% (Ziv et al. 2018). 

Thirdly, the manufacturing sector and capital goods sectors have generated 0.61% opportunities of employment to the overall workforce of the nation and they own 8.6% of the total export volume, from which 31% is exported to the EU. In the absence of trade negotiation, there would be increase in the tariff rate to 4.5% from 1.7%. On the other hand, the impact would be significant on the tobacco and food and beverage industries in contrast to the other sectors. The UK food sector has provided employment to 3.7% of the total workforce having market share of 3.7% of the total exports of the nation, out of which 61% is exported to the EU. If no negotiations are there between UK and EU, the processed food tariff would rise by 15% (Schoenmaker 2017). In case of other products of the above-stated sectors, the rate could be as high as 30%. Finally, it is to be borne in mind that the impact of Brexit on the professional services sector would be significant as well and this necessitates the need for the UK government to enter into trade agreements with the EU (Kreindler, Gilbert and Zimbron 2016).

Based on the above evaluation, it could be cited that UK might encounter complexities about the export of products and services to the EU after Brexit. Hence, for overcoming the adverse trade implications, the nation would make trade agreement with the biggest single market. In addition, greater tariff amounts could result in the export price products by huge amounts. As a result, it would have negative repercussions on the UK exporters for minimising the export amounts in this big single market because of the greater prices of those industries after tariff imposition. Finally, this phenomenon could minimise the employment opportunities of the nation.  

Advantages and Disadvantages

Considering this, discussing the possible results of the Brexit from the perspective of the international business of the UK, this essay will focus on various disadvantages and advantages from the socio-economical as well as the political perspective of the business sector (Dhingraet al. 2016).

People who have chosen Brexit have considered that leaving the EU can provide aid to the concerned nation to lower their cost, which the nation has provided to the budget of the EU. During 2016, total amount of the UK contribution has maintained at £8.5 billion. Contrary to this, it is essential to compare this value of cost savings with the financial advantage with the free trade barriers that the country have gained as a member of the EU. Net to this UK may lose its power of negotiation after Britain exit from the collaboration, however it can establish trade agreement for different nation post the Brexit scenario depending upon the requirement. In addition to this, concerned nation can have the change to build up good political as well as social relationship with the countries and this in turn can aid the UK economy to achieve significant amount positional profit around the world. On the negative side, it can affect the investment portfolio of the nation adversely because there will be fall on the market believe on the market as the Britain exit from the world’s largest and long holding intern governmental cooperation.

Figure 2: UK budget contribution to EU

Source: (Sheldon 2016)

Considering the diagram 2, it can be seen that the contribution of the UK to the EU budget has increased over the time significantly. Moreover, as the trend highlights during 2010 to 2015, budget contribution has increased largely and according to the estimation, the budget share of the UK to the EU budget will rise by 14% by 2021 compared to the present situation (Dhingraet al. 2016).

Considering this economic discussion, different economic performance can be perceived for the UK market. Initially the business flow of the UK can change drastically after UK exit from the EU. It can lead to the fall in the business for the country, which will further lead to fall in the exchange rate of the UK leading to change in the trade balance. Due to the rise in the exchange rate of the UK compared to other nation, there will be fall in the imports of the good while the export will be enhanced (Wadsworth et al. 2016). It will aid the country to produce more volume of the importable good while the exportable goods will face reduction in the production. It will affect the economy because, eventually lack of the importable in the UK will cause the country to have fall in their trade balance due to the fall in their trading. It will lead in the fluctuation in the labor market as well because some product market will require higher number of labor which will cause rise in the price of the wage in those sector and on the other hand there will be fall in the wage rate in the other sector (Srovnalikova and Razinskaite 2017). It will lead to fall in the employment of one sector, which is related to the exportable, and the sector related to the importable will face boom.

Conclusion

To conclude it can be mentioned that the Brexit has considerable amount of debatable outcome. UK may face positive outcome in the case of their international trade policies, whereas the country can face fluctuation in their economy due to the fall in their trade (Powdthaveeet al. 2017). There will be scope for the nation to build strong trade relationship with the countries like china and USA and contrary to this, there will be less amount of investment for the nation. 

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