BREXIT Flashcards
Brexit created significant economic uncertainty, particularly from the 2016 referendum through to the official departure in January 2020 and beyond. In the years following Brexit, the UK economy continued to experience slow growth, with many industries (especially manufacturing and services) facing challenges related to trade and investment.
Reason:
Uncertainty around trade agreements: Businesses faced uncertainty regarding future trade deals between the UK and the EU, particularly in terms of tariffs, border controls, and regulations.
Investment hesitation: The uncertainty caused by Brexit led to reduced investment by both domestic and foreign companies. Many firms delayed investment or even relocated operations to the EU to avoid future trade barriers.
Exchange rate volatility: Following the referendum result in 2016, the pound depreciated significantly, which increased import costs and created inflationary pressures, further reducing consumer confidence.
Economic Theory:
Uncertainty & Reduced Investment: The negative impact on investment can be linked to confidence effects and business uncertainty. Firms may postpone or scale back investment due to the risk of higher future costs and reduced market access.
Supply-Side Constraints: Reduced investment in key sectors (such as manufacturing and infrastructure) can result in long-term supply-side constraints, limiting the UK economy’s potential output.
One of the most significant economic impacts of Brexit was the change in trade relationships between the UK and the EU. After leaving the EU single market and customs union, the UK faced new customs checks, tariffs, and regulatory requirements when trading with EU countries.
Reason:
New Trade Barriers: The UK left the EU’s single market, which allowed for the free movement of goods and services. This resulted in increased costs for UK businesses that trade with the EU, including customs delays, additional paperwork, and tariffs on certain goods.
Trade Diversion: The UK has increasingly looked to other global markets to diversify its trade relationships. However, this has been challenging due to the complexity of new trade agreements outside the EU, such as the UK’s deals with the US, Japan, and Australia.
Economic Theory:
Trade Diversion and Trade Creation: Brexit led to trade diversion, where the UK had to shift trade away from the EU to other countries with new trade deals. According to the theory of comparative advantage, this can be inefficient if the UK is no longer trading with its most cost-effective partners.
Non-Tariff Barriers: The move out of the EU’s single market created non-tariff barriers to trade (such as customs checks and regulatory divergence), which are more costly than tariffs but still disrupt smooth trading flows.
Brexit led to a significant reduction in immigration from the EU to the UK, contributing to labor shortages, particularly in industries like agriculture, healthcare, hospitality, and construction. This issue became more pronounced post-Brexit, especially with the introduction of the new points-based immigration system in 2021.
Reason:
Immigration Restrictions: The end of free movement between the UK and EU members resulted in fewer EU nationals coming to work in the UK. This was particularly problematic for industries that relied heavily on low-skilled workers (e.g., agriculture and hospitality).
Higher Wage Pressures: With fewer workers available, employers in sectors dependent on migrant labor were forced to raise wages to attract domestic workers or retain staff.
Economic Theory:
Labour Market Frictions: The shortage of labor in specific industries can be seen as a market failure, where the supply of workers is insufficient to meet demand, leading to inefficiencies in production.
Wage Inflation: Higher wages in labor-short sectors can contribute to cost-push inflation, as firms pass on increased labor costs to consumers in the form of higher prices.
