Brexit and Trade

Three years after the people of the United Kingdom voted for Brexit in one of the most controversial and surprising elections in Europe, there has been much debate about the political, social and economic effects that the departure from the European Union would have for the British and for the rest of the continent.

Since then, despite the efforts of former Prime Minister Theresa May (who resigned in 2019), the British parliament has failed to approve an exit agreement settled with the European Union. With the election of Boris Johnson as the new Prime Minister, Brexit is expected to happen by October, the month in which the agreed deadline expires. Otherwise, a hard Brexit would take place, whose consequences are so severe that they threaten the stability of the country.

For this reason, the commercial analysis of the United Kingdom between 2008 and 2015 is an interesting task. The country's trade balance between these years can indicate a great deal about the British economy and its relationship with the European Union. We start from the year 2008, because in that year the global financial crisis began and we complete the analysis one year before the Brexit referendum.

During the period from 2008 to 2015, we can see how the balance of payments of the United Kingdom remains with a persistent deficit in the current account, reaching its highest point in 2013 at -139,686.4 thousand million dollars ($). This is caused by different factors such as: loss of competitiveness, that is, goods and services produced in the United Kingdom have little competitiveness compared to those produced abroad, especially those from other states of the European Union. So, the U.K. is a country that imports more than it exports. 

Pro-EU protest in London

Pro-EU protest in London

Furthermore, since the global financial crisis, the U.K. has suffered considerable inflation that further weakens exports. This is also accompanied by a relatively low savings rate, compared to some of the other competitors countries. A low proportion of savings implies a relatively higher percentage of spending on consumer goods (which tend to be imported). In turn, this negatively affects investment, both public and private (mainly manufacturing, oil, other fuels and food).

Another aspect to highlight is the increase in public spending. The British government saw the need to save several banks and companies during the 2008-2011 period, due to the global economic crisis, which also affected public investment.

In order to level the deficit in the current account, UK has a surplus in the financial account, which means that, despite the global crisis of 2008, it has been able to attract enough foreign capital and incur enough liabilities with other states. It represents a short-term inflow of money, which in turn is a clear increase in the country's foreign debt (this is one of the main concerns of the British government). However, this inflow of money from abroad does not cover the current account deficit alone, so the UK has also had to use reserve operations for this purpose.

This brief look at the trade balance reflects how UK trade works and the interdependence the UK has with the European Union. In the case of a hard Brexit, negotiations of new trade agreements between Britons and Europeans could last for years, greatly affecting both economies. For this reason, the British should reject a Brexit without agreement. It is yet to be known if the British government will do this, or instead crash out of the EU.

Jorge HernándezComment