Brexit decision not likely to have a big U.S. trade impact

Date:09-05-2016

On June 23, the United Kingdom held a referendum to determine whether the country would remain a member of the European Union or leave. After a 52 percent majority voted to leave, it was determined that the U.K. would begin arrangements to separate from the EU.

Vincent Amanor-Boadu, professor of agribusiness economics and management at Kansas State University, said there are economic implications within financial and trade sectors as a result of the vote, commonly called Brexit, but that significant impact within the U.S. agricultural sector is not likely.

Background

David Cameron, then the prime minister of the U.K., pledged while campaigning for the 2015 general election that he would hold a referendum if the Conservative Party were to win. According to Amanor-Boadu, controversy around immigration within the EU played a role in the decision.

“The U.K. felt they had lost control over immigration policy, that Europe was too lenient on letting people in,” Amanor-Boadu said. “Europe will tell you a very different story and say that they are very careful about who they let in and that they see the refugee crisis as a necessary activity that they had to deal with, that they couldn’t just turn people out when they had nowhere to go.”

After the majority of Britons voted to leave, Cameron, who was in favor of remaining in the EU, resigned as prime minister and Theresa May was elected to replace him. In order to formally leave the EU Britain must invoke Article 50 of the Lisbon Treaty, which gives the two parties two years to negotiate terms of the exit. May has said she will not enact Article 50 before the end of 2016.

Possible economic effects

Long-term economic consequences are possible but not necessarily definite as a result of Brexit, according to Amanor-Boadu.

“Let’s face it – the people of Great Britain are still consumers,” he said. “Their standard of living is not changing overnight. Could there be economic implications over time? Possibly, but it could go either way.”

He said doesn’t think either side thought through the issue deeply enough to recognize there would be economic implications. Immediately after the Brexit vote the value of the British pound fell against the U.S. dollar, as did stock prices on the London Stock Exchange FTSE, and the rating agency Standard & Poor’s  downgraded Britain’s AAA credit rating to AA. In the month following the vote, stock prices in the U.K. have recovered, although the pound remains at its lowest level since 1985.

The effects on the market in the days following the vote could have happened after any significant event, Amanor-Boadu said, adding that unless a problem is financially driven the market is resilient and can handle it. Other effects such as banks changing headquarters are just strategic moves.

“I’m not particularly worried about the long-term economic implications for the global marketplace, because let’s face it – the British economy is not as big as that of Europe altogether,” the K-State economist said.
Economic ties between the U.K. and Europe – such as trade, investments and taxes on EU properties outside of the UK that are owned by British citizens – are what will likely create the most challenges from Brexit.

“Forget the macroeconomic issues about finance and banking, but looking at individuals – how do you now deal with your taxes?” Amanor-Boadu said. “How do you deal with investments? Unfortunately, the complexity of the problem was glossed over in favor of a political gimmick and it backfired.”

Impacts on trade

Amanor-Boadu said he doesn’t think there will be radical changes in trade within the U.S. agricultural sector because of the Brexit decision. The U.K.’s rules of exporting will move from Brussels, Belgium to London, England, but since those regulations have been in place it’s not likely we’ll see new food safety or plant and animal health laws.

“If Britain decides to have different phytosanitary rules or different export controls, we might fill out another piece of paper if we are going to ship to Britain and Germany,” Amanor-Boadu said. “So, we will have two papers to fill – but I don’t see that being very different than what it is right now because we are not changing the rules of international trade; we are changing how Britain engages with the rest of Europe.”

Since the U.S. and U.K already traded with the same currencies as they will after Britain officially leaves the EU (the pound sterling instead of the euro) no changes will occur there. Amanor-Boadu said more serious problems could arise if other countries also choose to leave the EU, but that it isn’t likely.

“There’s really no interest on the part of any of the remaining members to quit, because the benefit of being part of the union is greater for the Eastern European partners,” Amanor-Boadu said.

As new trade agreements between the U.S. and the EU are negotiated, Britain will become a lower priority in any future partnerships from an economically strategic standpoint, since the market population of Europe is larger than the U.K., he added.

The Brexit vote also made other countries aware of the complexities of leaving international coalitions such as the EU.

“If nothing at all, Britain has become a case study of how not to get out of international unions once you become part of one because you become very entangled in a lot of ways,” Amanor-Boadu said.