International Business and Entrepreneurship Implications of Brexit - Example

LАINS HОW THЕЕХISTING ЕСОNОMIС THЕОRIЕS BЕСОMЕ HЕLРFUL TО UNDЕRSTАND THЕ СОNSЕQUЕNСЕS ОF‘BRЕХIT’, IN РАRTIСULАR, “WHАT WОULD BRЕХIT - А BRITISH ЕХIT FRОM THЕ 28-NАTIОNЕU - LООK LIKЕ?” WЕ HОРЕ THАT THIS АSSIGNMЕNT WILL ЕХРАND THЕ HОRIZОN ОFYОUR THОUGHTS Student’s name Course & code Professor’s name University City Date Introduction The Brexit discussion and referendum that took place in June 2016 are intended to ensure that UK withdraws from the EU. Presently, there are no established withdrawal terms even after the exit vote having gained 52% in favor. As such it is necessary to analyze the implications of the Brexit to the present and future economy (Allen et al 2015). This retrospect paper seeks to analyze the Brexit experience by analyzing the economic and political implications on the United Kingdom, European Union and the world in general using Australia as a case scenario. Discussion Following the incoming of the British Prime Minister, David Cameron, British has edged closer to Brexit (The Guardian 2016). This Brexit has a number of impacts on United Kingdom, European Union and the world economy in general. One of the dimensions that the Brexit will impact United Kingdom is in a sense of the broad economy. This revolves around the kind of business negotiations that can be negotiated by Britain as a country after isolating from the EU. One wave of the critics argue that the isolation from EU means that British will be free from economic constraints and rules that are associated with being a member of the EU and rather make Britain a sovereign state that has the capability to make her own decisions. Another wave of economic critics point out that the Brexit will create great losses for the British economy considering the weakened investment and trade within UK after exiting from EU which serve to cement most of the trade ties for British (Allen et al 2015). The anti-Brexit wave starting from 2004 had put an estimate of 2.25% GDP reduction which will most probably result from reduction in foreign investment (Blockmans & Weiss 2016). However, the global economy having changed considerably for the past decade as pointed out by Jonathan Portes, a more recent estimates indicates a possibility for between 6.3 and 9.5% GDP fall (Allen et al 2015). This, according to Centre for Economic Performance will certainly be brought about by the inability for British to negotiate favorable terms of trade. As pointed out by Cumming & Zahra 2016, of concern is how the optimistic wave of critics view the Brexit situation. This group points out that British striking a deal with EU would boost the UK economy by 2.2% by 2030. On the contrary, basing on the statistics regarding the UK economy in 2012 according to Bootle, the financial figures that forms up to 0.6% of nominal GFDP for UK does not have great impact on a country’s economy considering how large British economy is (Allen et al 2015). This is further echoed by Tim Congdom who posits that the EU membership has done British enough disservice by over regulating the trade activities for UK which has cost Britain 11.5% of GDP each year which sums up to £185bn a year which would be saved if Britain could have been a sovereign nation. Another dimension that will likely be impacted upon by the Brexit is the job sector. Basing on an interview between Nick Clegg, former leader of Liberal Democrat, and Nigel Farage, Clegg posits that the EU membership provides market access for 500 million consumers that point to 3 million jobs within the UK. These jobs are at a risk of reducing considerably due to the possibility of withdrawal of some companies in the event that Brexit takes place (Kierzenkowski et al 2016). These include Nestle, Hyundai, Ford, and Goldman Sachs, a US investment bank. On the contrary, as noted by Ryan Bourne, the job market being dynamic has the ability to adjust. This is considering that previously before the Brexit crisis, it has been established that 4 million job have been created yearly and 3.7 million have been lost yearly indicating that the job market may least be affected by the Brexit since it appears to have other factors determining it (Koutrakos 2016) This, according to the law of demand and supply, indicate that the UK market is likely to face deficits in the human labor which will be a result of the acceleration by withdrawing from EU (Simionescu 2016). This is because many Brits require job opportunities and yet UK will not be in a position to provide enough jobs for the citizens. According to Allen et al 2015, regarding trade, there has been arguments indicating that the Brexit will most probably lead to British getting locked out of important market like EU besides other global markets affiliated with EU. On the other hand, Farage points out that the Brexit will allow Britain to form stronger connections with EU as partners compared to being a member. Recently, surveys reveal that 57% of the 3500 businesses that were subjected to the survey propose for Britain staying as a member of the EU whereas 28% prefer UK exiting EU but the EU-UK free trade agreement be formed. It is to be noted that 13% of these are comfortable with UK withdrawing without the FTA. Source: Allen et al 2015 In the view of business attitudes, the critics analyses both the pre and post-Brexit situation in UK. In 2014, exports to EU were £147.9 billion whereas in 2013 the exports were £154.6 bn. Similarly the exports to non-EU members were worth £152.2bn in 2013 and later dropped to £144.9 billion in 2014. This can be demonstrated by the chart below: Source: Allen et al 2015 The exports within the EU and to non-EU members forms part of the central business for UK. As such considering the export of services and goods, the proportion exported to EU region form up to 40% of the trade activities for UK and is likely to fluctuate with the Brexit. This can be summed up by the following charts. The article, as presented by Allen et al 2015 discusses the possible impacts of the Brexiton the economy of the United Kingdom. Basing on the facts presented, it is evident that the idea proposes for UK not withdrawing from the EU. Source: Allen et al 2015 As demonstrated by the game theory (Myerson 2013), the EU was formed on a basis that the decisions made by the EU member states could be applied uniformly and indiscriminately for all other members. The creation of the EU was hinged on various reasons most of which served to drive the founders t forming a union that would address both the short term and long term needs within the European countries. Between 1945 and 1959, the union was aimed at creating a peaceful Europe after the Second World War (Telegraph.co.uk. 2016). This was attained by creating a common market that united the European states through economy and politics creating lasting peace. Having created a common market, the EU aimed at making a market that allowed free movement of goods and services within the EU. This is not only limited to the material trade but also allowed for human resource and capital exchange between and among the member states which facilitated the growth of economy in Europe (Telegraph.co.uk. 2016). Just as demonstrated under the game theory, the establishment of the EU considered the three key components of the theory, that is: players, strategies and payoffs (Myerson 2013). As such in order to explain the possible outcomes the organization, it is important to consolidate the three components create a common meaning as it was intended by the EU founders. Considering the facts presented under the original reasons for the creation of the EU, it is evident that the objectives for the union have to a larger extend ben achieved (Telegraph.co.uk. 2016). This is further backed up by the fact that apart from the minor cold wars within the EU members, there has been no actual war since the formation of the EU. Besides, the World Bank demonstrate that EU is the second WTO member having the second largest trading capabilities after China. This indicates that the EU has improved the economic abilities of European states as it had aimed during the formation (Allen et al 2015). In the view of the article, it is demonstrated that exiting EU will leave UK exposed and only depending on the national rules. In relation to the reasons for the formation of EU, UK will be in a vulnerable position as an independent state than being a member of the EU. As such, political and economic threats can easily be leveled against her, leading to destabilization of a rather important economy in the world (Dorling 2016). This, in the view of the perfect competition as presented by Makowski 2014, demonstrates that the bargaining power for UK will be lowered due to the lack of the market power. Due to this, regulation of prices in the British market will present a challenge because for an economy to survive on its own, it has to establish a price slightly higher than the equilibrium and therefore doing so will reduce the number of trading partners with UK. Moreover, the economic ties that UK has with other countries worldwide are intertwined with the EU. As such, for Britain to survive as a sovereign state, she has to start from the scratch forming new alliances with other countries (Koutrakos 2016). This will possibly take a considerable amount of time since many countries prefer forming alliances with unions so as to access larger market zones compared to bilateral trading zones. Basing on the facts presented in the article, it is evident that Britain is one of the stronger members of the EU. That said, there is a record of the immigration into UK from EU indicating that about 624000 immigrants to UK in 2014 and 530000 in 2013 (Allen et al 2015). Considering these figures, it has even indicated that the majority of the increment in the immigrants came from the EU. Thus incase Brexit takes place successfully, it is possible that the number of immigrants to UK will be greatly lowered. However, according to the economics law on confusion from association and causation, it should not be assumed that Brexit will automatically lead to reduction in number of immigrants to UK (Hirsch 2015). Source: Allen et al 2015 As argued by Philip Oltermann, the restrictions on the immigrations currently are kept in check by the EU (Allen et al 2015). This indicates that the number of immigrants to UK keeps rising due to the fewer requirements imposed on the immigrants by EU allowing the EU members to gain access to UK easily (The Guardian 2016) On the contrary, basing on the example demonstrated by other countries like Spain who demand that the immigrants speak fluently the host’s language, it is possible that Britain will impose the same on the immigrants before granting them residency (Kierzenkowski et al, 2016). The argument brought forth by Steven Peers indicate that most of the countries within the EU prefer Britain staying as a member for EU because they feel that EU protects the member states from being discriminated against by other larger economies (Simionescu 2016). The intended reforms at the immigration sector demonstrate that Britain is likely to fail observing the EU regulations since currently, EU allows the immigrants to gain scholarships and student loans in whichever country they are within the EU. However, Britain is likely to introduce a rule forcing such students to pay their full tuition fee at the universities. Another indicator that Britain may fail to cooperate with EU is that, EU treats all member states equally allowing them equal access to other countries and job market within the EU (Blockmans & Weiss 2016). On the contrary, Brexit will grant Britain power to choose which countries will be allowed to get visas to enter Britain. As such, such countries as Romania and Bulgaria will be forced to observe strict immigration regulations compared to larger economies like Germany and France. Generally, the Brexit is expected to have considerably impact on the global economy. This is brought about by the fact that EU is an international trade organization which controls most of international trade activities for many countries in Europe. Since 1998, UK has been the third trading partner after China in the first place and EU in the second place. Presently, it has been noted that UK is the largest foreign investor in Australia forming $145 billion of the investment (Austrade.gov.au. 2016). Similarly, Australia has been ranked the UK 6th largest foreign investor with £6.5 billion. In addition, EU being the second trading partner for Australia after China, EU has established companies in Australia that have created around 500000 jobs in Australia (Austrade.gov.au. 2016). This is also noted in that in 2008 and 2009, EU invested €11.6 billion and €2.8 billion consecutively which made EU the largest source of foreign investment in Australia (Trademinister.gov.au. 2016). Of major interest is that UK controls most of the regional activities for the manufacturing sector in Australia. This is evidenced by the fact that three quarters of EU sourced investment in Australia is owned by UK creating around 250000 job opportunities for Australian citizens (Trademinister.gov.au. 2016). Source: analyzed data As a form of regional gateway, Australia view UK as a means to accessing the business in the EU. This is also facilitated by the fact that half of the companies established in Australia as EU companies and headquarters are owed by the UK (Cumming & Zahra 2016). Moreover, there has been arrangements by the British government to make Australia a financial and global trade Centre. As posited by Myerson 2013, regarding the game theory, it can be noted that every country forms bilateral and multilateral treaties, they focus on the payoffs that are associated with the union. Basing on the established linkages between Australia and Britain, it is important to note that most of these transactions are hinged on the fact that UK is a member of the EU (Koutrakos 2016). As such, the business agreements between UK and Australia have been made considering the possibilities of UK as being the gateway to EU. Therefore, UK exiting from EU has great economic impact on the Australian economy. The most obvious threat is the fact that it is not certain that British will continue to have ties with the EU or not. This implies that EU-UK companies that have been established in Australia will most probably fail since the UK-EU disagreement on who is the rightful owner will most certainly lead to the collapse of most of those companies. Therefore, the 500000 jobs created by EU and 250000 jobs associated with the trade relations with UK will diminish due to reduced supply of funds from either the EU and UK. In an article, The Guardian 2016, it has been established that Britain is at the core of major international trade organizations. In a report by the guardian, the G20 group recommends that the UK remains in links with EU even after exiting (The Guardian 2016). The economic situation of UK and the world in general is filled with many uncertainties after the 2016 June referendum vote that supported the Brexit. This is in the view that most of the countries UK has links with have done so because of her link with the EU (Austrade.gov.au. 2016). In a report by IMF, it has been estimated that the global financial growth between 2016 and 2017 is likely to go down by 0.1%. This is also coupled with the negative outcomes that are yet to unfold according to IMF staff statement. Source: analyzed data Moreover, in this era, UK is likely to experience terror and geopolitical conflicts which will result from the fact that it lacks the protectionism from the EU after exiting. As such, most of the countries including the G7 will have to provide funds to combat the threats and reestablishing the UK leadership if that happens (The Guardian 2016). According to Michael Sapin, French finance minister notes that terrorism is a great economic risk (The Guardian 2016). He proposes that the uncertainties resulting from threats to individual countries can be countered by stabilizing regional linkages. As such, Britain exiting the EU will imply that more funds are spend on trying to establish new mechanisms for ensuring the stability of the UK which adversely influences the global economy. Considering the example of Australian economy, it is evident that the EU provides around 500000 jobs for the Australian citizens. As such, the Australian job market will be negatively impacted because UK withdrawing for EU leaves a gap of 250000 jobs since it provides the other 250000 jobs in the manufacturing industry. According to the laws of economics regarding economic way of thinking, it is possible that while UK exits EU, other economic conditions can remain the same. This, as explained by Nicholson & Snyder 2014, according to cetris peribus, demonstrate that it is not all instances where one thing changing changes the rest. As a result, contrary to what most states may presume, it has been argued by Samir Saran, an Indian political analyst in Delhi, that it is better to deal with a country as an independent body rather than dealing with a union like EU (Nicholson & Snyder 2014). As such, it implies that UK is likely to create more bilateral agreements which will serve to boost the global economy in general. However, this view is not to be celebrated as there are many uncertainties surrounding the possibility of such a single country playing a major global role as that played by EU which is viewed by China as the biggest market according to Feng Zhongping (The Guardian 2016). Conclusion To sum up, the idea presented by the article is that though the Brexit might have positive impact on the UK and EU economy not forgetting the rest of the world, it is evident that the uncertainties associated with the likelihood of demerits supersedes the merits (Allen et al 2015). As such, many economies globally are likely to be stagnated not to mention the possibility for collapse of certain investments in UK which are built on the EU membership grounds like the Ford automobile company. References Allen, K, Oltermann, P, Borger, J & Neslen A 2015, Brexit – what would happen if Britain left the EU? [Online] the Guardian. [Accessed 31 Aug. 2016]. Available at: http://www.theguardian.com/politics/2015/may/14/brexit-what-would-happen-if-britain- left-eu-european-union-referendum-uk Austrade.gov.au. 2016 Australian Trade and Investment Commission – United Kingdom – for businesses in the United Kingdom - Austrade. [Online] [Accessed 31 Aug. 2016].Available at: http://www.austrade.gov.au/Local-Sites/United-Kingdom Blockmans, S & Weiss, S 2016, ‘Estrangement Day: The implications of Brexit for the EU’, CEPS Commentary, 27 June 2016. Cumming, DJ & Zahra, SA, 2016, ‘International Business and Entrepreneurship Implications of Brexit’, British Journal of Management, forthcoming. Dorling, D 2016, ‘Brexit: the decision of a divided country’. Hirsch, WZ 2015, ‘Law and economics: an introductory analysis’, Academic press. Kierzenkowski, R, Pain, N, Rusticelli, E & Zwart, S 2016, ‘The Economic Consequences of Brexit’. Koutrakos, P 2016, ‘Brexit and International Treaty-making’, European law review, vol. 1, pp.1- 2. Makowski, L 2014, ‘Perfect Competition, the Profit Criterion, and the Organiza-tion of Economic Activity’, Journal of Economic Theory, vol. 22, pp.105-25. Myerson, RB 2013, ‘Game theory’, Harvard University press. 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