Brexit's Impact On Trade, Investment, And Finance: A Commonwealth Essay.

1) What are the key trends in trade of goods and services between Commonwealth countries?

2) What is your assessment of the impact of Brexit on trade and investment within the finance sector in the UK

3) Critically evaluate the possible challenges and opportunities of a multinational enterprise (MNE) in the finance sector on post Brexit within the context of a changing global trade landscape

Impact of Brexit on UK and EU

Brexit stands for the Britain’s decision of exiting the European Union taken in June 23, 2016 through referendum. This decision was taken through public vote due to the limitations faced by the UK population in their free movement. Value of the free movement of the immigration resulted in limiting the accessibility in the countries under the union. This had over powered the monetary benefits received by UK. The parties are under two years of negotiation for determining the relation of UK with the EU for the post Brexit period, which is scheduled on 29^th of March, 2019 (Hunt and Wheeler 2018). The decision was indeed shocking for the political elite of UK, leaders of EU and the EU bureaucracy itself. Moreover, this event is likely to draw some consequences for both UK and EU. The first consequence that can be identified is the political unrest between both the parties. This can lead to an acrimonious tug of war between them from the political stance. The financial market on the other hand will be effected and make it vulnerable for over 19 nations under EU. This can be directly related with the trade. The exit will redefine trade policies between UK and other EU members as the EU members enjoy free tariffs on import and export of goods (independent.co.uk. 2018). Moreover, a large number of populations of both the parties are living across the member states. Brexit is likely to cause immigration of the population to their origin, which has further implication on the financial sectors of the parties. This will also cause a recession in the market, as the people are likely to lose their jobs. Over three million EU populations is employed in Britain alone, who are likely to lose their job if the trade and investments are ceased between EU and UK after Brexit. This report will further identify the trade of goods and services between the commonwealth countries and the possible impact of Brexit on the trade and investment in finance sector of UK. The challenges and opportunities for the multinational trade finance organisations will also be evaluated in the report.

Fifty-two countries around the globe that are geographically dispersed represent the Commonwealth. Trade between the commonwealth countries are expected to be beneficial and convenient compared to the trade outside the commonwealth. The FDI inflow between the commonwealth countries are greater compared to the others. This supports the fact of stronger effect of commonwealth trading, which is considered to have greater benefits for the countries.

Impact on the Commonwealth

The commonwealth countries have recovered from the global recession and are in a growth phase. The intra-commonwealth trade reflects a figure of $592 billion as per 2013 commonwealth report, which they have achieved through an annual growth of 10% every year since 1995 (Thecommonwealth.org 2018). The commonwealth reports expect to overshoot $1 trillion by 2020 (Thecommonwealth.org 2018). Moreover, the developing countries of Asia represent the larger share in the product export with a percentage of 55 in the intra-commonwealth activities. The major countries that contribute in the exports are India, Singapore and Malaysia, which cumulatively exports more than half of the export done by Asia. Other major exporters in the remaining intra-commonwealth goods trade are UK, Australia, Nigeria and South Africa. The report further identifies one-third of the total trade coming from the developing members of commonwealth.

The intra-commonwealth good trade reflects a significant growth of 5% in their exports since 2000. This growth trend of intra-commonwealth export is largely represented by the small states and the largest share in the respective matter is held by Swaziland, Grenada, Dominica, Botswana and Barbados. The total of intra-commonwealth service export on the other hand according to the estimation reached $139 billion, out of which, UK, Singapore, India, Australia and Canada cumulatively represents 80% of the total (Thecommonwealth.org 2018).

The flow of foreign direct investment between the commonwealth countries is greater compared to the general FDI inflow. This represents one third of the total FDI inflow in the commonwealth countries. The inflow had achieved the figure of $80 billion right before the global financial crisis stroke in 2007. The recent commonwealth report reflects an accumulative stock of $716 billion of the seven largest commonwealth members (Thecommonwealth.org 2018). This reflects a greater transaction between the commonwealth countries.

UK has always been one of the largest players among the commonwealth members. The import and export in 2015 surplus US$91 billion. The figure is a result of cumulative trade flow of the goods and services with the other commonwealth members (thecommonwealth.org 2018). This is due to the trade slowdown took place after 2012 when the figure reached its peak of US$120 billion.

UK with an import of 18% of the total import to EU holds the fourth position among the commonwealth members right after USA, China and Japan. This means, UK is one of the largest importers of goods in intra-commonwealth trade. UK holds above 10% of the total export made by some of the commonwealth members around the globe (thecommonwealth.org 2018). This puts these countries under considerable threat due to the event of Brexit, where the situation is likely to take harsh turn. Moreover, the report also identifies that thirty per cent of the export of twenty-four commonwealth to EU goes to UK alone. On to it, among the twenty-four countries, Tuvalu and St Lucia sends their 70% of EU exports to UK alone. These primary members of commonwealth are directly exposed to the Brexit and are likely to have significant effect of Brexit (thecommonwealth.org 2018).

Trade and Investment Opportunities in Finance Sector

Moreover, UK alone imports 80% of the total sugar import of EU. The primary exporters of sugar to UK are Belize and Fiji. Kenya on the other hand exports 95 per cent of the vegetable to UK that are destined for EU. UK holds significance in importing a huge portion of expensive materials from Canada. All together, UK imports above 5000 items from the commonwealth members worth US$9 billion. Largest share in this export is shared by Canada, South Africa and Singapore.

The existing trade links between UK and rest of the commonwealth countries are strong, which is again being strengthened by mobilising pro-active policy support. It will help them in expanding further trade.

Brexit will have significant impact on the developing and developed countries due to the alteration that will be made between UK and EU with the other commonwealth members depending on the trade relation. The Brexit have significantly altered the value of pound and caused a depreciation of 10 to 20 per cent. This means that the trade with UK after Brexit will generate less revenue for the exporting commonwealth members. Market access on the other hand is another concern for the commonwealth countries as they receive duty-free and quota-free access in the EU market. UK’s Separation from EU is likely to alter the situation that might affect the export of the developing commonwealth countries. The commonwealth report reflects a total of US$800 million duties if the UK takes away the EU benefits from the least developed countries (thecommonwealth.org 2018). Hence, it will be of absolute necessity for UK to provide similar facilities to the least developing commonwealth countries after their divorce from European Union. This will facilitate the countries to hold their continuous economic growth and international expansion. The service trade on the other hand is under direct threat as the value of pound is likely to remain similar for considerably long period if not face further depreciation. This will result the result into less revenue from UK for the export of their services. Moreover, Brexit is likely to dampen the demand for import from the developing countries due to the lower economic growth as anticipated. This will cease the import from the under developed countries, hence effecting the economy of those commonwealth members.

Brexit or Britain’s exit from the European Union is likely to have its impact on many of the business sectors. However, the impact assumed for the finance sector of UK is significantly high, which has already started reflecting its effects. The value of pound has received considerable fall of 10 to 20 per cent, which is the worst scenario in recent decades (Chapman 2018). The impacts on finance organisations based in UK market are likely to have greater effect compared to the ones in EU. Three determinants will contribute in directing the impact. These determinants are the resilience of UK financial sector to Brexit, using its greater international relation and position; shift of the UK finance organisations’ operation around EU before the exit on 2019; and withdrawal agreement adequacy between EU and UK.  

Challenges in Multinational Trade Finance Organizations

The single market of EU allows the financial organisations of the member countries operate around the EU using their home country licence. The union rejects the need of separate licensing for operating within each of the target market under EU (Emmerson, Johnson and Mitchell 2016). The area is referred as European Economic Area and the process as referred by the Union is passport. UK leaving the union will require the financial organisations of UK to produce separate licence for continuing their operation around the member states of EU. Some of the possible scenario that might take place after the end of the negotiation period is highlighted below.

WTO Rules – Access of UK finance sector in the EU market will be regulated by the WTO norms under most favoured nation terms. This means that UK will have no preferential treatment in the EU single market. Moreover, the General Agreement on Trade in Services will regulate the financial operation of UK in the EU province (Daugbjerg and Swinbank 2015). UK under this regulation has to open subsidiaries in the target market of EU member states for avoiding the discrimination and to concede passport rights. However, the countries can discriminate UK’s financial services using justified prudential regularity purposes that will surely threaten the profit of UK made from the EU market.

MiFID 2 – This asks the third country regulatory authorities to cooperate with ESMA under cooperation agreement. The third country in that case has to agree on the terms of supervising subsidiary in EU and have to open subsidiaries in all the EU countries in order to gain operation permission. In addition, the subsidiaries opened have to be larger in size, which requires greater capital investment and separate capitalisation (Batlle, Mastropietro and Gómez-Elvira 2014). Moreover, UK then has to have equivalent regime. This means that UK will then have to set regulatory framework similar to that of EU. This can be considered as a burdensome process for UK and considerably limit the profit margin. Moreover, this will likely to increase the barriers to trade in EU market.

Free Trade Agreement – This will provide opportunity to UK for gaining duty free access into EU. However, the products must have benefit (Wouters et al 2014). However, this is limited to the products and does not comply with the services.

European Economic Area – UK can establish relation with EU under the EEA regulation. This will enable the financial sector of UK to free trade with the members of EU. Furthermore, UK will be able to enjoy the more or less similar trading facility as pre Brexit terms (De Vries et al 2014). However, UK then will have to significantly contribute in EU’s financial budget and obey a large number of EU regulations that are considerably costly.

Determinants of Impact on Finance Organizations Based in UK Market

Customised Relationship – It is possible for UK to customise their relationship with EU regarding to the trade of finance sector that will be newly modified for continuing trade relationship between the parties. However, the possibilities in this scenario is hard to assume as this will purely base on the negotiation made between the parties (Pisani-Ferry et al 2016). However, this is inevitable that the financial sector of UK will face barriers in multiple dimensions that will considerably limit the profit margin and free operations.

Hence, it can be stated that the UK’s financial sector’s operation in the EU single market is likely to be hampered due to the event of Brexit. The companies will face significant challenge in making profit in the EU market while requiring greater investment on the same.

The event of Brexit as identified in various grounds in the earlier section of the report is likely bring turmoil on the international trading as it will change the relation of multination organisation with both UK and EU in case of trade relation. The import–export policies of UK is likely to change that will influence the trading of goods and services with other countries (Begg and Mushövel 2016). This will further effect MNCs considering expanding their business in the UK. Finance sector is anticipated to receive significant impact. Some of challenges and opportunities are critically evaluated below.

As stated by Chu 2018 economic slowdown of UK economy is the most common anticipation in the future international trade market. This will have significant implication for the financial service providers, as they are likely to lose confidence for further investing in Britain. However, Dhingra et al (2016) identified this as an opportunity for the finance companies as UK is likely to lose their negotiation power. This will force UK to offer preferential market for multinational finance organisations. Moreover, this is likely to create a huge gap in the European Union, as UK was the primary moneylender to EU companies and government as well. Moreover, a considerable portion of the EU staffs is employed in London. This will provide opportunity for the multinational financial organisations to fill the gap and extend their financial support to EU. Hunt and Wheeler (2017) further argued that UK is likely to be restricted in all of its economic and financial sanction until or unless they come up with new UK sanctions legislations according to European communities Act. However, Wadsworth et al (2016) finds it as an opportunity to hire employees for a lower wage. The immigration will create employment issue in both UK and EU market. However, European Union is likely to receive greater blow from the separations as UK shelters a significant number of EU citizens in the UK finance sector. These people are likely to lose their jobs and return to their home country. This will create an employment crisis. Expansion of financial institutions in EU market not will only support the businesses in the market with monetary loan as identified by the earlier author, but also creates job opportunity and balance the dilemma. Hence, this provides greater opportunity in the international expansion.

Lea (2016) on the other hand argued that despite of the Brexit event; London is likely to remain the centre of world’s finance. Additionally, most of the Arab banks have expanded their businesses in the London market due to the attraction in the destination and it is unlikely to change after the Brexit. The nation has developed most advanced Arab banking, to be precise Islamic banking. This reduces the chances of significant alternation in the banking relationship with Arab.

Moreover, Kierzenkowski et al (2016) has stated that it is possible to assume a significant fall in the value of pound in post Brexit period. This assumption is already taking shape and a fall of 10 to 20 per cent of the value is evidenced in the recent years after the announcement of Britain’s divorce from European Union. Hence, it can be assumed that the value is likely to go way beyond this in 2019, after UK officially leaves EU. Hence, this will likely to have affected the export their financial services outside the country. Similarly, import of financial services from outside the country will likely to charge extra due to the drop in exchange rate of pound. Another opportunity as identified by Freedman (2017) is the benefits of taxation. The Brexit will provide opportunity to UK for becoming tax heaven for the multinational finance industry and other sectors as well. Further relaxation of tax incentives is likely to take place for the foreign investors. It will work as a magnet for the international finance service provides to expand their business in t he UK market. However, this can be dangerous for the for the nation and needs long-term consideration for sustainable environment in supporting foreign investment.

Recommendation and Conclusion

Brexit is likely to alter the global trade and affect a number of foreign companies that have built import and export relation with UK. The Commonwealth countries of third world countries are the ones, which are likely receive greater blow of Brexit as their economy largely depends on the export being conducted with UK. The Britain has to maintain the trading policy for the commonwealth developing countries to ensure the ongoing trade. This recommendation will provide opportunity for the developing countries to ensure their growth. This further facilitates Britain continue importing the necessity goods from the commonwealth countries, as failure of which might have further effect on the country’s economy.

Moreover, the finance sector of UK is under direct threat of Brexit due to their integration and expansion in the EU market. The membership of EU offered them a free trade opportunity with the other member states of EU that saved a considerable amount of tax they now will have to pay to the Union. Hence, UK has to come up with new compatible trade policy and develop new relation with EU for maintaining their trade relation with EU members. However, incorporating the EEA will limit the operations of UK, which will again dilute the benefits expected by UK in leaving EU. Hence, it will be ineffective for UK and they are recommended to customise new trade policies with EU for continuing their operations in the existing market.

More to it, the exchange rate are already reflecting a decline that is likely to grow in future. This will likely have negative impact on the global finance sector. This can be tackled with the taxation policy that will be formulated in the post Brexit period. Greater tax relaxation will draw greater international finance organisation.

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