Implications Of Brexit On The Pound In The Global Marketplace (Essay Sample)

Brexit - International Finance
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Brexit - International Finance
UK’s intention to leave the European Union (EU) has a rather long history dating back to as early as the late 1970s. Since then, different governments have had conflicting positions on the country’s membership in the EU. The height of the controversy was on June 23, 2016, when British citizens voted to divorce from the union citing diminishing benefits of membership in the union. The withdrawal has raised overly significant concerns among investors, policymakers, other EU countries, and the larger international community. For the international community, Brexit may have negative impacts on trade given UK’s vital position in the EU and the global economy. Focusing on the exchange rate perspective, this essay discusses the impact of Brexit on international trade. The essay also considers the implications of the exit on the pound in the global marketplace.
The EU is UK’s largest trading partner and source of foreign direct investment (FDI). More specifically, nearly half (48%) of the total FDI in the UK comes from the EU (Wright, 2016). Furthermore, majority of all capital market activities in the EU are conducted from the UK. More importantly, approximately 50% of the total British exports are destined to the EU (Woodford Investment Management, 2016). The value of trade links is even larger if countries that trade with the UK freely thanks to their free trade agreements with the EU are included. If these countries are included, then more than 60% of UK’s exports are attributable to EU membership. Additionally, more than 50% of the total imports to the UK come from the EU (PricewaterhouseCoopers [PWC], 2016).
Leaving the EU means that the UK may no longer benefit from the advantages that come with being in the union such as free market access, free movement of labour, as well as the absence of duties and quotas. In other words, exporters and importers in the UK trading with the EU would be subject to extra costs (more tariff burdens, more administrative costs, and so forth), with sectors such as automotive, processed foods, electronic equipment, and services being the most affected. Trade costs would increase in the event the UK does not negotiate a favourable free trade agreement with the EU. Besides EU countries, there are many other countries across the globe with close trade links with the UK in large part due to its membership in the union. Trade costs between the UK and these countries may also increase as new trade agreements are likely to be created, consequently hampering trade flows between the UK and the rest of the international community.
New trade relationships between the UK and the EU and the rest of the world may negatively affect the pound. Due to constrained trade activities between the UK, the EU and other major trading partners, the pound is likely to be weaker compared to the US dollar, the euro, the Australian dollar, and other major currencies. In other words, Brexit may reduce the demand for the pound. This has already been witnessed since the referendum. In the last 12 months, the pound has exhibited disturbing volatility, with investors worried about the outcome of the Breixt negotiations. If the outcomes of the negotiations are unfavourable to the UK, the pound...