Any topic (Writer’s choice)

Executive Summary

The reality of Britain’s exit from the European Union is slowly dawning on the world. What seemed like an impossible move became a reality as the country voted, albeit slightly over half, t exit the union. The impact that this exit has on Britain is massive. The country, according to the champions of the exit is, however, ready to face all the implications and come out strong. However, as anticipated by economists and other analysts, the move has had various forms of effects on the country. Ranging from economic, political and social implications, Britain is now feeling the effects of the choice. The effects of Brexit, (a word coined from BRitain and EXIT), is however not in Britain alone. There are concepts that arise from the exit that has far-reaching consequences. The effects are being felt in almost every aspect of life in the world and every nation. This is because Britain and the European Union are very important factors of global trade and economy. Issues such as immigration, changes in currency strengths, breaking of trade ties and changes in FDI trends are expected to characterize the real exit and implicate on the global trade and economy even years after the exit.

In this paper, the realities of the Brexit and its effects on the world, and more specifically on the US have been explored. From the paper, it is clear that Brexit effects are already being felt in more than one market and industry around the world. The world will experience changes in the trade blocs and the strength of FDI and its influx in the developing and developed countries. Changes in the strength of the dollar as well as the immigration trends are just among the few effects that are specific to America. The real magnitude of these effects is, however, net yet clear especially with the change of guard in America and the anticipated turn of events following the just completed general elections and the post-election situation in the country. This paper recognizes the fluidity of the situation and possible changes in the mentioned trends as countries institute strategies to cushion themselves from the negative effects of the Brexit.

Introduction

The world was recently treated to a much-unexpected turn of events. In an overwhelming majority, the Britons voted to exit from the European Union after a period of years in the union. The exit of Britain from the union was rather unexpected due to the popularized effects of the exit by the mainstream media and also the pressure from the political leaders. However, the faults of the union, as politicized by the political leaders who fought for the ‘leave’ campaign seems to have gone rather well with the thoughts of the people who believed in the ability of the nation to prosper more as a nation outside the European Union (Gillespie, 2016). The elites and the ruling class in Britain had tried to use facts and figures to show the negative impact of the proposed move and convince the people to vote for remaining within the union where their status was more assured. However, the public perceived this as a political move to maintain status quo and chose to explore newer opportunities with a vote to leave the union. Even with the exit, most people have not pondered seriously about the main impacts of the move. Many people have not seriously considered the political, social and economic cost of the exit(Winkel & Derks, 2016). This paper will explore the realities of the Brexit and the economic effects of the move to the world and more specifically to the United States of America. The paper will look at the economic and other costs of the exit and how these relate to the economy of America and the world at large.

 

 

The Realities of Brexit

Immediately after Britain voted to leave the European Union, the country experienced a heightened volatility in the financial market. Although the volatility is reported to have receded rather quickly as the economists and stakeholders initiated regulatory reforms, the impact was far-reaching as many trade partners found a major uncertainty in the market. Consequently, even after the financial market appeared to have withstood the event, sharp falls in most of the UK asset prices including the Sterling Pound and equity prices of the banking sector was experienced. This depreciation of the pound was particularly evident in Europe(Henderson et al., 2016).

The exit of UK from the European Union is expected to reduce the links between the country and the union as well as with other countries which remain part of the union. According to economists, over 65% of the international trade that the UK performs involves directly or indirectly the countries within Europe and members of the EU. If therefore, the countries are to cut links with the UK, the economic impact of the move will be both short and long term. However, the magnitude of this impact will depend directly on the degree to which UK decides or is forced to cut ties with EU and its member countries. All in all, the economic situation of the UK and its partners will be negatively impacted in the short and long term (Schmidt, 2016).

The mere exit of Britain from the European Union is seen to have had more than the basic meaning. The reasons that the UK have cited for the desire to exit include the inability of the union to hold the region together and lead to mutual benefit between the nations. These are sentiments that have also raised major concern in other countries members of the Union. This has since threatened a similar trend being taken by other countries such as Germany who may feel able to take care of themselves(Annette Kroll & Leuffen, 2016). The result threatens the economic stability of the region and increases the global economic concern.

Fears over the Future of European Union

The European Union is one of the major target markets for countries around the world. As indicated by the export reports from various regions in the world. It is the largest trading bloc in the world and a major partner in trade for countries such as China and the USA. With the exit if the UK, analysts predict a future exit of several other nations from the union. Such an exodus is likely to weaken the economic power of the region, negatively affecting the trade between Europe and its global trade partners(Oliver, 2016).

However, there are still some analysts who find this threat as overblown. According to them, the desire to pull out of the European Union for Britain did not start with the recent reports of dissatisfaction with how the union ran the international relations issues. Britain already foresaw the move when they reversed back to the pound years ago while the rest of the countries in the Union continued to use the euro. For the rest of the countries, exit would still need to take quite a while to be realized although there are existing doubts about the future of the union and the direction that it is expected to take the exit of Britain is implemented(Fichtner, Steffen, Hachula, & Schlaak, 2016).

The existing trade uncertainty will negatively affect the economic relationships between the trade bloc and the rest of the world. Most of the countries whose main trade target was the EU would be forced to undertake new negotiations especially if the major consumers of their products was Britain. For Britain itself, new trade tariffs are likely to characterize its export-import trade which will impact on the exchange of goods and services between itself and other countries within the EU and outside the EU (Champion, 2016). United Kingdom has for many decades been a close ally of the USA in logistics and trade. For America, the trade to the EU will obviously be affected as the exit becomes implemented. Goods whose destination or origin is the UK will now have to face new regulations that did not exist with the EU as the target trade bloc. This may, however, be a very good opportunity for America to establish direct trade and diplomatic links with the UK, this will, however, be affected by the change of leadership expected to take place in the USA after the just ended general elections(Dhingra, Ottaviano, Sampson, & Van Reenen, 2016).

Market Volatility to Slow Economic Growth

In the USA, as is in most of other growing and established economies, the local consumers make up for the majority of the economic activity. This implies that as the consumers spend, the economy grows. The spending of the people is directly dependent on the market stability. People will, therefore, spend more in an economy that is stable and moving. With the Brexit, the world has experienced weeks of massive financial market volatility across the markets (Figure 1).

Figure 1. UK Financial Market Volatility. Source: Bloomberg

This kind of Volatility is expected to run on until the UK clears its own problems with decision making. As the situation stands now, a complete exit from the European Union is not expected until 2018. The period until then is characterized by massive uncertainties in the financial market. The implication of this is that there will be increased the volatility of the market and increased fear for the consumers around the world to spend. As the consumers around the world reconsider their spending plans, the economic growth in the countries will continue to slow down(Moore, 2016).

For America, the growth of the economy will be highly dependent on the financial market volatility will cause a major tumble in equities to the extent of affecting the relative consumers’ confidence with the systems and hence impacting on their local and international spending. With the prevailing political environment in the country, such a situation is quite inevitable, and the impact on the economy is likely to be massive (Chakravorti, 2016). As the major consumers in the US as well as in the rest of the world attempt to reduce their spending, there will be the subsequent reduction in the jobs gain, employment rates and the living standards of the people. When such a situation is prevalent for a long time, a global economic crisis will be the result.

Appreciation of the Dollar and its Impacts

Since the Brexit, the dollar has been steadily strengthening compared to rival currencies. The US dollar is the most commonly used currency for international trade and its strength and value compared to other currencies is a very important indicator of the market trends for the present and the future. In just one day after the referendum results, the dollar surged 6.5% stronger, an all-time highest surge since 1967. From the surface view, the strengthening of the US dollar against other glob al currencies is seen as an improvement of the US economy(Fichtner et al., 2016). However, when the surge results from external influence as is being experienced with the fall of the pound after the exit of Britain form the European Union, the economic situation is hurt (Figure 2)

Figure 2. Changes in Dollar Strength 2016. Source: Tradeview

As a matter of fact, a strong dollar will benefit all the visitors and people seeking to do business in the United States. However, the economy in the USA is largely dependent on exports. A strong dollar is, therefore, bad for the businesses in the US that sell their products and services abroad. This is because the products and services are perceived to be more expensive to the target customers and hence less attractive to the buyers from outside the country. For companies such as Apple, Microsoft, Caterpillar and Nike, a strong dollar decreases the demand for products and reduces the ease of doing business. The industries, therefore, turn to an earning recession and a period of reduced profits is experienced(Vasilopoulou, 2016).

To the rest of the world, especially in regions that depend on more on imports than exports, a strengthened dollar will increase the cost of imports and hence the relative cost of purchase of commodities and inputs within the countries. This will mean that the average cost of living will increase as many people, with unchanged earning structure will have reduced economic power to purchase important commodities. However, for countries that export products and commodities to the American market and the European market, there will be a period of increased earnings(Henley, 2015). This will be a short-term benefit to the exporters from these regions who will in the long-term be affected by the prices of important commodities in their environments.

Brexit and Economy of Developing Nations

Most of the developing countries in the world are dependent on a stable and improving economy. The global economy is run and manned majorly by the strong currencies and economies. The destabilization of these economies, as well as the fluctuation of the financial market, affect every aspect of the lives of the people in the developing countries(Liddle, 2013). Brexit as a new and emerging issue is likely to cause major realignments of the world market and the relationships between countries and the UK as well as the European nations(Schoof, Petersen, Aichele, & Felbermayr, 2015).

The exit of Britain from the European Union is not expected to be immediate. It is a strategy that will take at least 18 more months to become a reality. However, the mere announcement of the intention to exit from the union causes changes in the markets. All over the world, the Brexit referendum caused immediate reactions of the stock and currency markets(Sen, 2016). Some currencies such as the dollar appreciated while others depreciated, some falling by over 25%. However, the financial market quickly recovered with the intervention of the concerned governmental forces in the respective countries. Ever since most of the macro-economic fundamentals in the developing countries are better positioned. The urge to remain observant and cautious for the developing economies is necessary for areas of domestic product, foreign direct investment, and exports(Henley, 2015).

On gross domestic product, Brexit has resulted in an increase in the ability of the communities in the developing countries to do business within themselves. The strengthening dollar has resulted in an inability to purchase products from the international market for most of the people in the developing countries. To survive, the internal business environment is expected to tremendously improve, and this will be a boost to the gross domestic product as many people will be investing within the countries. In India for instance, the latest economic survey indicates that the media growth in GDP for the fiscal year 2016-2017 will be at 7.8%(Ottaviano, Pessoa, Sampson, & van Reenen, 2014).

In trade and exports, the European Union has for long been a very important trade partner for many of the developing countries. For countries such as Brazil, Kenya, India and South Africa, the exports to the European Union as a market has for long been more than thrice the average export to the UK itself(Winkel & Derks, 2016). The trend is the same for most other countries in this bracket, and there has been a continuous decrease in the amount of export targeting the UK market(Lanchester, 2016). With the Brexit, the expected instability in the political and economic environment is highly likely to amplify the trend and worsen the trade between the developing countries and the UK. In addition, the EU as a target market is likely to be overly saturated, and following the laws of supply and demand, the profitability of the export market will reduce. The countries that depend on tourism as a major boost to the economy are however likely to benefit from an unstable and appreciated dollar due to the resultant foreign exchange. The changes in trade patterns with the Brexit will be affected largely by the currency movement of the pound and the comparative strengths of the currencies of the countries competing in the UK and EU markets(Annette Kroll & Leuffen, 2016).

Brexit and Immigration

The European Union has for many years been adamant to restrict movement between the member nations. The free entry of immigrants into the UK is one of the major issues that have triggered the intention to leave the union, for Britain, with the view of having more control of its borders. To the United States of America, the expected reduction in the number of immigrants getting into the UK will result in America being the next favorite destination for immigrants. Already, the US government is having problems manning its borders to prevent the entry of immigrants into the country. The expected changes will increase the immigrants’ determination to get into the US and worsen the immigration problem (Reeves &Carlsson-Szlezak, 2016). However, there is also a positive side for the increase in the immigration. As the UK experienced a reduced growth in the labor force, America will probably be gaining skills and expertise from legal immigrants who will be leaving the unstable environments in the UK. The benefits, however, will not be realized unless there is adequate planning for the admission of immigrants(Henley, 2015).

In addition to its effects on the USA, the changes in immigration laws are likely to impact in other countries both positively and negatively. For those immigrants who will be turned back to their home countries, they are either likely to contribute to economic growth or increase the levels of unemployment in these countries which will then relate to an increased level of crime and insurgencies. Further, those who have the technical ability learned in the developed nations will have a positive impact on the economic, technological and the overall social development of the developing nations(Liddle, 2013).

Brexit and FDI

Foreign direct investment is the acquisition of businesses and its stakes by a company in a foreign country. Britain is both a major source and target for foreign investors. With the exit of the UK from the European Union, major changes are expected regarding FDI. First, most of the companies that have stakes in the UK are expected to reduce their operations and investments in the country as the instability being experienced is impacting on their confidence levels(Fichtner et al., 2016). There is expected to have an arrest in the outflow of investments targeted for the UK. This reduction in investments is likely to cause an increased inflow of FDI into the developing countries which have been in the process of economic restructuring to attract more FDI in the recent past. The implication of this is that most of the countries which will take advantage of this will strengthen their position in the global investment radar and this will improve the local economies(Moore, 2016).

To America, the FDI issues related to Brexit will have several effects. First, the reduced confidence level of investors to the UK will lead to America being a favorable destination for investors, especially in technology and manufacturing. The influx of FDI to America will increase the opportunities for employment for the American youths, and this will improve the economic and living standards of the people. Secondly, the increased influx of FDI will also cause an imbalance in the American economy will be saturated(Oliver, 2016). Immigration will increase as the corporations will recruit people from outside the country causing major problems in security. However, the failure of investments in Britain will affect many American corporations that have already invested in the country. Their return into the country will affect the position and the competition in their respective industries and also threaten new entry. The economy will, therefore, be dependent on the old establishments and not on new inventions (Mukunda, 2016).

The Future withBrexit

Brexit has affected the world through trade, investments, migration, and regulations. According to recent reports, the intention to exit from the European Union has already caused major imbalances in the financial market and affected the investment confidence of global corporations. In addition, the exit has soared the relationships between the UK and other countries in the European Union, as well as the UK and most of its trade partners.

Major companies are also avoiding investments into the UK due to the anticipated political and economic instabilities after the referendum. These countries, including the United States of America, are worried about the future if the UK market and its channels of establishment and operations. Migration of people into Europe is one of the issues that has necessitated the need for exit by Britain (Castello, 2016). However, the immigrants are believed to be the most important component of the country labor force. The regulations against immigration are therefore very likely to cause adverse effects to the UK economy. What this implies to the US and the rest of the world may no longer view the UK as an impacting investment partner. Restructuring of the economies and trade channels is expected in almost every country after the Brexit. This is especially real in the period preceding the actual detachment of the UK from the European Nations. Within this time, countries will be focusing on establishing linkages with the European Union itself and other trade blocs. This is likely to lead to impulse trading and treaties between countries and corporations(Ottaviano et al., 2014).

Conclusion

The exit of Britain from the European Union has been triggered by a long list of complaints that Britain feels have not been handled adequately. Over the last three or four years, Britons have been experiencing heightened political pressure on the issue which culminated to the referendum that suggested an exit from the European Union. The exit, according to economists and social analysts is likely to cause major changes in almost all domains of international relationship involving Britain and the European Union. Majorly, trade and global economy will be the most affected. The effects on America, as for any other nation in the world are both positive and negative. However, from the analysis, one constant observation is that Brexit will lead to massive fluctuations in trade and relationships as well as economic uncertainty in the next few years(Moore, 2016). The impact that this has on America and the rest of the world is massive but still unrevealed. What is real is that all countries and systems will be affected and caution is necessary. With the expected change of leadership in the USA, for instance, the impact this and the Brexit have on America remain to be seen.

Get a 10 % discount on an order above $ 100
Use the following coupon code :
SKYSAVE