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Consequences of Brexit

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Economics

Brexit means Brexit. The people made their verdict!

-Theresa May (Former Prime Minister of the UK).

On Monday, 11 July 2016, then home secretary Theresa May said the above line while running her presidential campaign. Four years later, Britain exited the European Union on 31 January 2020. This exit is known as Brexit, a negotiation process that took four years. What were its economic consequences? Let’s explore them.

What is Brexit?

To understand how and why Brexit happened, we need to go back to the post-Second World War years.

The war was devastating for everyone. Economies were crippled, cities were destroyed, and the population was starving. The European countries finally learned from their mistakes and understood that they could grow better together.

The first concept of a European trade area appeared in 1950 when the European coal and steel community (ECSC) was established. Later, in 1957, Belgium, France, the Netherlands, West Germany, and Luxembourg signed the Treaty of Rome. This treaty officially created the European Economic Community (EEC) and proposed the progressive creation of a customs union that would eliminate customs duties between these countries.

In 1973, after some failed attempts, the UK joined the EEC along with Ireland and Denmark. Over the years, via different agreements and treaties, the EEC acquired its current form of the European Union. However, the UK always saw the EU as a competitor and never wanted to join it fully. From the beginning, there were Euro-sceptic groups. That's why the country kept its currency and never became part of the Schengen area. In that sense, the UK was always an exceptional member of the EU.

In 2009, the representatives of the EU member states signed the treaty of Lisbon. Article 50 of this treaty gave member states legal rights to leave the EU.

Why did Brexit happen?

In 2015, the conservative party in the UK called for a referendum on Brexit. Those who voted in favour of Brexit thought that membership of the European Union was not providing them what they wanted: a prosperous economy, protection against crime and terrorism, control over immigration, and efficient public services1. In the end, 51.8% of the electorate voted in favour of Brexit.

Let’s see what social and economic factors affected this decision.

But the country didn't reach that point from one day to another. In 2014, immigration to the UK rose by 25% as compared to the previous year. Immigration is an ongoing issue in the country and it started before the UK became a part of the EU.

The areas that saw a high influx of immigrants voted in favour of Brexit.

Older, white, socially conservative, and middle to lower-class voters felt that they were being left behind by the socially liberal class with the money. This group voted for the conservative party and later for Brexit.2

Let’s not forget as well that many in favour of Brexit saw economic opportunity in it. If the country wasn’t a part of the EU, it would be able to sign its own trade deals with other countries. Many in the UK saw the regulatory nature of the EU as a limitation on free-market ideas. Some others wanted to protect the UK’s economy from financial disasters like the Eurozone crisis in 2009 and the 2008 Financial Crisis.

Overview of the consequences of Brexit

In general terms, the UK’s economy has faced adverse effects after exiting the EU, while the EU’s economy has had some mild effects. Brexit demolished all the agreements between the UK and the EU regarding security, trade, governance, and free movement of people and goods.

There ought to be long-term repercussions of Brexit not only on the economies of the UK and the EU but also on the global economy.

Consequences of Brexit for the UK StudySmarterNewspaper cover inviting people to get ready for Brexit, Unsplash.

The consequences of Brexit on the UK’s Economy

In the last years (2018–20), the UK’s economy didn’t perform well due to the combined effect of Brexit and the Covid-19 pandemic. After coming to power, Boris Johnson’s party executed Brexit formalities and signed a Trade and Corporation agreement (TCA) with the EU.

The EU is still an important trading partner of the UK and will remain so in the future given that they are geographical neighbours.

Impact of Brexit on the UK’s financial market

The London stock market was very volatile after Brexit. Three-fourths of its derivative share trading was lost to Amsterdam and New York stock exchanges.

London was known as the financial capital of the world because of its financial services, but post-Brexit, 10% of UK Bank assets moved or will be moving to the EU and about 440 banking and financial institutions have left the UK3.

Impact of Brexit on the UK’s imports and exports

Consequences of Brexit for the UK’s imports and exports StudySmarterFigure 1. UK imports between 2016–20 in billion US dollars. Created with data from the World Bank, data.worldbank.org - StudySmarter.

As Figure 1 shows, the UK's goods imports from the EU declined by almost 30% by January 2020. The UK exports followed the same pattern. Figure 2 shows a drastic fall of about 45%2 in December 2020 and January 2021. By the end of August, the exports had gone down by an extra 15%.

Many big companies are now getting familiar with the paperwork that is required to import the goods to the UK but small businesses on both sides are still struggling.

Consequences of Brexit on the UK’s exports graph StudySmarterFigure 2. UK exports between 2016–20 in billion US dollars. Created with data from the World Bank, data.worldbank.org - StudySmarter.

Impact of Brexit on the UK’s labour market

After Brexit, about 20,000 EU citizens left the UK. This resulted in a massive shortage of workers in fields such as retail, hospitality, and goods transport. Due to a lack of proper immigration status, drivers from the EU were unable to drive fuel tankers in the UK, which resulted in fuel shortages in October 2021.

To learn more about this topic, read our article on the Impact of Brexit on the UK Economy.

How has Brexit affected the UK automobile industry?

The EU is the major importer of cars from the UK. After Brexit, UK car safety certifications are not valid in the EU. Hence, UK car manufacturers have to follow other regulations to sell cars in the EU.

Honda, for example, has shut down their plant in Swindon while other companies have implemented employment cuts.

On the other hand, the import of Tesla electric cars from the US has increased by 16%.

Overall, the automobile sector in the UK has suffered due to a decrease in trade between the UK and the EU.

Consequences of Brexit for the EU economy?

The EU economy initially benefitted from Brexit as many financial institutions moved to the EU. This created a sudden requirement for skilled workers in the financial sector.

However, the UK was one of the major contributors to the EU’s budget. Between 2014 and 2018, on average, the UK contributed £7.8 billion per anum. After Brexit, the EU’s budget is short by 5%. Now the EU has to fill in this gap either via cutting the expenses or collecting more from the other member countries.

Regarding trade, both the UK and the EU are looking for other trade partners. The EU increased its trading with the US (18%) and China (17%) in 2021 as compared to the year 2020.

Consequences of Brexit on the World Economy

The immediate effect of Brexit was the decreased price of the Sterling pound. As the pound fell, investing in foreign markets like the US and China became expensive for UK investors.

Regarding international trade, the UK has now signed new trade agreements with non-EU countries like Australia, China, and the US. This has strengthened the country’s international relationships and UK consumers can now enjoy the products of non-EU countries at lower prices.

Impact of Brexit on Northern Ireland

The Republic of Ireland is an EU country that shares a border with Northern Ireland, which is a part of the UK. During the Brexit negotiations, the transport of goods and people between the Republic of Ireland and Northern Ireland was an important point of concern. Due to the history of these countries and the Good Friday Agreement, they can’t have a border.

As per the current arrangements, goods do not have to go through customs or pay tariffs while crossing these borders.

Consequences of Brexit - Key takeaways

  • The economy of the UK declined as a combined result of the Covid-19 pandemic and Brexit.
  • The UK and the EU have signed a Trade and cooperation agreement (TCA) that provides free trade, mutual market access, and other support mechanisms.
  • The London stock market became more volatile after Brexit. A huge portion of derivatives moved to Amsterdam and New York stock exchanges.
  • The UK faced a shortage of workforce in the service, transport, and hospitality sectors immediately after Brexit.
  • The EU has to find ways to fill the financial gap in the economy after Brexit.
  • Both the EU and the UK have signed new trading agreements with other countries like the US, China, and Australia.

References

1. Paul Whiteley, ‘Insight: Why Britain really voted to leave the European Union’, University of Essex.

2. Rob Ford, ‘Older 'left-behind' voters turned against a political class with values opposed to theirs’, The Guardian, 2016.

3. Ben Chapman, ‘Brexit: Banks and insurers move £1 trillion of assets from UK to EU', Independent, 2021.

Consequences of Brexit

In the last years (2018–20), the economy of the UK did not perform well. This is due to the combined effect of Brexit and the Covid-19 pandemic. 


After coming to power, Boris Johnson’s party executed Brexit formalities and signed a Trade and Corporation agreement (TCA) with the EU.  


The EU is still the biggest trading partner of the UK and will be so in the future.

The EU is the major importer of cars from the UK. After Brexit, UK car safety certifications are not valid in the EU. Hence, UK car manufacturers have to follow other regulations to sell cars in the EU. 


Honda has shut down their plant in Swindon while other companies have implemented employment cuts. 


On the other hand, the import of Tesla electric cars from the US has increased by 16%. Overall, the automobile sector in the UK has suffered due to a decrease in trade between the UK and the EU.

The immediate effect of Brexit was the decreased price of the Sterling pound. As the pound fell, investing in foreign markets like the US and China became expensive for UK investors.


Regarding the international trade, the UK has now signed new trade agreements with non-EU countries like Australia, China, and the US. This has strengthened the country’s international relationships and UK consumers can now enjoy the produce of the non–EU countries at a lower price. 

During the Brexit negotiations, the transport of goods and people between the Republic of Ireland and Northern Ireland was an important point of concern. Due to the history of these countries and the Good Friday Agreement, they can’t have a border.


However, as per the current arrangements, goods do not have to go through customs or pay tariffs while crossing these borders.

The EU economy initially benefitted from Brexit as many financial institutions moved to the EU.


However, the UK was one of the major contributors to the EU’s budget. Between 2014 and 2018, on average, the UK contributed £7.8 billion per anum. After Brexit, the EU’s budget is short by 5%. 


Regarding trade, both the UK and the EU are looking for other trade partners.


Final Consequences of Brexit Quiz

Question

When was the Brexit referendum passed?

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Answer

On 23 June 2016.

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Question

When was the Brexit referendum voted? 

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Answer

On 23 June 2016.

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Question

How many financial institutions have left the UK and moved to the EU post Brexit?

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Answer

About 440 banking and financial institutions have left the UK and moved to the EU.

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Question

What city replaced London as the primary location for European share trading?

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Answer

Amsterdam

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Question

London’s derivatives trading lost ¾ of its euro volumes to which cities?

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Answer

Amsterdam and New York.

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Question

What was UK’s total GDP in the year 2020?

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Answer

The total GDP of the UK was USD 2764.20 billion.

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Question

What was the EU's total GDP in the year 2020?


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Answer

EU's total GDP at 15,292.10 tn USD. 

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Question

Which three sectors are most important for the EU’s imports and exports with the UK?

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Answer

For the EU, wholesale services, automobiles and chemicals are the top 3 sectors for the exports and import trade with the UK.

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Question

What was the trade between the UK and the EU increased to post-Brexit?

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Answer

Post-Brexit trade between the UK and the EU in 2021 increased by only 2% to £308 billion.

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Question

What was in the Withdrawal Agreement?

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Answer

A withdrawal agreement allows free movement of EU citizens to the UK and UK citizens to EU countries until the transition period is over. 

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Question

What was the rate of inflation for the UK and the EU in the year 2020?

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Answer

In 2020, the UK inflation rate was around 0.99%, while the EU inflation rate was 0.5%.

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Question

What percentage of the population of the UK voted to leave the EU? 

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Answer

51.8% of the population.

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Question

What are some positive impacts of Brexit for the UK?

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Answer

Some believe that one of the positive consequences of Brexit is that the UK can now trade more with other non-EU countries. 


With the decreasing value of the pound, it became cheaper to import goods and services from the international markets, which may make it a more lucrative market to buy goods from. The decreasing value of the pound also means that the current account balance improves as well as the net foreign debt position.  


Thanks to Brexit, the trade relationship with other countries like China, Canada, and India improved which in turn helped increase economic growth.


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Question

What are some negative impacts of Brexit on the UK? 

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Answer

Even before the final exit of the UK from the EU, the country faced a decline of about 1.5% of the economy. The reason for that was the reduction in business investments, and transfers of businesses to the EU due to the expected higher trade barriers. 


The UK also faced a decline in the number of workers in the economy, as many of them came from EU countries and now couldn’t or wouldn’t stay in the country. 


Brexit also negatively impacted the UK's service trade balance and its goods trade balance as some goods which were freely traded before Brexit now require strict checks and approvals.


Foreign direct investments were also negatively impacted. Investors had to think of new ways of getting into the EU as the UK is no longer a gateway point to EU single market.

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Question

Who replaced London as the European share trading location?

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Answer

London was replaced by Amsterdam for European share trading.

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Question

What declarations and checks are mandatory from January 2022?

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Answer

From January 2022, it may be required to do a customs declaration for imports from the EU and it will be required to perform more physical inspections of food products. This may result in further reduction of trade between the UK and the EU. 

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Question

Which are the countries with which UK's trade relations improved post Brexit?

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Answer

UK's relations with the other countries like China and USA for improved trading due to the lower pound rate and comparatively lower tariffs.

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Question

How many workers from the EU left the UK by 2020?

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Answer

About 2,00,000 EU nationals left Britain by 2020 

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Which sectors in the UK were highly affected due to shortages of labour?

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Answer

Sectors like retail, drivers, and hospitality.

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Question

How did the UK's non- EU trade increase post Brexit?

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Answer

The UK's non-EU imports have increased to 16% due to the import of Tesla cars from the US and China. 

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Question

What is Brexit?

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Answer

The ‘Exit’ of Britain from the EU.

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Question

What governs the relationship between the EU and the UK after Brexit?


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Answer

The Trade and Cooperation Agreement (TCA).

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Question

How did the EU’s financial sector benefit after Brexit?


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Answer

Many financial institutions moved from the UK to the EU. It created new business and job opportunities for the financial sector in the EU.

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Question

What was the main challenge for small importers after Brexit?


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Answer

Small importers on both sides have to comply with new laws and regulations and fill in heavy paperwork, of which they have no experience.

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Question

What caused the fuel crisis in the UK in 2021?

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Answer

The shortage of HGV drivers caused the fuel crisis. After Brexit, it became difficult for the EU HGV drivers to work in the UK due to changes in tax requirements and immigration laws.

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Question

Is there a free movement of goods between the borders of the Republic of Ireland and Ireland after Brexit?


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Answer

Yes, goods do not have to undergo customs and tariffs requirements while crossing the border.

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Question

What are the economic benefits of Brexit for the UK?


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Answer

The UK can now trade with non-EU countries more freely. The UK will save almost £7.8 billion in contributions to the EU. As the pound fell, goods produced in the UK became cheaper in international markets. 

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Question

Why did Britain vote for Brexit?

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Answer

Those who voted in favour of Brexit thought that membership of the European Union was not providing them what they wanted: a prosperous economy, protection against crime and terrorism, control over immigration, and efficient public services. 

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