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Brexit and Its Effects on the European Economy

BrexitJanuary 31, 2020, was a historic day for the European Union, for it marks the day the United Kingdom left the Union based on a public vote (referendum) held in June 2016. Seventeen point four million citizens opted for Brexit in 2016 and, after several negotiations and talks, the U.K. is now the first former member of the European Union. An important and large-scale decision such as this has the ability to distort economic stability greatly.

Trade

The EU is the world’s largest single market that allows free trade among all its members. It is also responsible for negotiating trade policies on behalf of its members, establishing a single, strong voice throughout various negotiations. Since Britain is no longer a member, it must create its own suitable trade policies with the countries it wishes to trade within the Union. Britain also needs to negotiate for its own demands. It was projected that the U.K. stood to lose $32 billion after Brexit, with no trade agreement in place between the U.K. and the EU. Losses incurred are more likely to increase as the EU accounts for nearly 46% of the U.K.’s exports. Researchers project that Ireland’s exports to Britain may drop by at least 10%. This creates a serious trade imbalance and hence contributes to the national deficit of the nation.

Food Poverty

British citizens consume a significant amount of imported food. Brexit could lead to a rise in food poverty, as about 30% of food is imported from the EU and 11% is from countries whose trade policies were negotiated by the EU. Since there is no trade policy in place, food insecurity is bound to rise. Food prices will likely rise 6% by June 2020, according to researchers. Overall, an increase in food poverty may be on the horizon.

Immigration

The U.K. had announced that post-Brexit only highly skilled immigrants will be able to secure jobs and the additional requirements have already created an impact on the economy. Immigrants mostly work low-skilled jobs and the implementation of this policy has already lead to shortages. At least one in 11 posts are vacant. Also, immigrants occupy nearly one-sixth (140,000) of the 840,000 care worker jobs. The new regulations will soon prompt vacancies and greatly affect people with disabilities and the elderly.

The Potential Solutions

Trade talks between the U.K. and the EU are taking place effectively. British Prime Minister Boris Johnson proposed a “Canada-style free trade agreement” which the EU is prepared to accept, given the fact that the agreement would demand no tariffs or quotas from them. This shows that negotiations are productive and that the U.K. is trying to cause very little disturbance to the economy. Aware of its reliance on imports from the EU, the U.K. has opted for a mutually beneficial free trade agreement. As the cost of imports and exports are reduced, the trade imbalances are corrected. This in turn will influence food poverty as the general price levels will decrease and imported food will become affordable.

Additionally, there are multiple organizations and government schemes that help combat food poverty in the U.K. For example, The Trussell Trust and other independent foodbanks have distributed nearly 3 million food packages between 2018 and 2019. The organization Healthy Start allows the purchase of basic food necessities for pregnant women and mothers with infants.

What Are the Benefits of Brexit for the UK?

The U.K. is free to trade with other nations such as Japan, the U.S. and India without EU restrictions. This will stimulate growth in all nations involved in possible free trade and help tackle domestic issues, such as unemployment and hunger. Effective trading can lead to increased employment opportunities and better living standards.

The U.K. has given almost half a trillion pounds to the EU to be a member of the bloc. The amount the U.K. will save is significant enough to be directed at rising food insecurity, short-term deficit and unemployment. The U.K. is also able to craft specific policies to suit its needs instead of being subject to the ones crafted by the EU. The ability to do this helps the U.K. and other nations involved, as all policies will be tailored to be mutually beneficial and appropriate.

Overall, Brexit is a challenge. It is difficult to adjust to and likely poses serious threats to economic stability in the near future. However, this is only a short-term issue. Once the transition period is over, a structured agreement between the E.U. and the U.K. will help their economies regain stability.

– Mridula Divakar
Photo: Flickr

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Japan and Australia Sign Free Trade Agreement

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Negotiations for a trade such as this has been in the works for seven years, though only now are the extensive efforts coming to fruition. Concluding with a deal on April 7, Japan and Australia finally reached an accord on a free trade agreement between the two countries.

Prime Minister Shinzo Abe of Japan and Australian Prime Minister Tony Abbott express mutual respect for one another, citing security and neoliberal economic agendas as important ties that have connected the two men and their respective nations for some time. A Joint Declaration on Security Cooperation, renewed in 2010, was initially signed between Japan and Australia in 2007 as a formal recognition of their devotion to the defense and support of one another. The Declaration came after years of informal cooperation, in such contexts as United Nations peacekeeping operations in the 1990s. More recently, Abbott has praised Japan’s democratic values and presence in international security activity.

Japan’s agriculture lobby, however, expressed concerns of an internationally aggressive competition and was opposed to easing access to food imports. Though Abe clearly favored opening Japan’s economy to increased competition, Australia was understandably concerned that the rigorous final round of negotiations would fall through as a result of the Japanese lobbying group’s hold on the ruling party that it elected. Yet the signed agreement builds on a trade treaty of 1957 that contributed heavily to the positive sentiment between the two nations. The new free trade agreement, then, is expected to build on the great business and cultural relations, and is consequently considered by many trade officials to be the best deal the Japanese economy has ever granted to another country.

The final version of the free trade agreement calls for joint compromise in both economies. While Japan is now required to phase out its current 38.5 percent tariff on Australian beef exports, Japan will end tariffs on Japanese vehicles, electronics and household appliances. Within 15 years, the Japanese beef tariff is expected to reach only 23.5 percent, with a subsequent decrease to 19.5 percent in 18 years. The Australian Trade Ministry also reported that Japan would increase cheese imports and simultaneously phase out tariffs on fruits, honey, vegetables, nuts and wine. Prime Minister Abbot has thus declared that Japan is “Australia’s best friend in Asia.”

Some argue that the free trade agreement between Australia and Japan, in bringing both nations closer to the United States as a result, could risk a free trade agreement with China, Australia’s number one trade partner. However, Japan is Australia’s number two partner, and the political and security ties could make a difference in the long run. After seven years of intense negotiations, one can only hope that Australia and Japan have made the correct decision.

– Jaclyn Stutz

Sources: The Conversation, Sydney Morning Herald
Photo: The Sydney Morning Herald

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Does WTO’s Aid for Trade Reduce Poverty?

Does WTO's Aid for Trade Reduce Poverty?
Aid for Trade is a holistic approach to incorporating developing economies into global trade networks by assisting them in increasing exports and market access. Aid for Trade was initiated at the WTO Ministerial Conference in 2005, and the program has since increased its scope to include building production capacity (financial services, businesses, and industry), trade-related infrastructure (communications, energy, transportation), and trade policy and regulations.

When the Aid for Trade initiative began, it was unclear whether it would receive funding or be successful. Now that it has been implemented for over a decade, it is time to reexamine the links between trade, development, and poverty reduction that Aid for Trade aims to strengthen.

The principle behind Aid for Trade is that increased trade should benefit inhabitants of developing countries, whether or not they are directly involved in the program. One Aid for Trade program teaches Ugandan farmers how to grow and process dried fruit to be sold into the European cereal market. The farmers involved should benefit from increased income, market access, and productivity, and Uganda should benefit from increased exports.

Most evaluations of the effectiveness of Aid for Trade programs take place within 18 months of a given program’s initiation. This is not enough time to measure whether the program has truly been successful at reducing poverty in a sustainable way. Additionally, evaluations often do not take into account a program’s impact on those not involved; how did the fruit-growing education program impact farmers who did not receive additional training and support?

A new study on European trade assistance aid, commissioned by NGOs Traidcraft and the Catholic Agency for Overseas Development, suggests that there may be “hidden losers” to Aid for Trade initiatives. For example, South African fruit growers increased exports to Europe after trade sanctions were lifted. They earned higher wages and improved their standard of living. However, the demand for cheaper fruit also caused some growers to lower wages and to replace full-time employees with temporary, often migrant workers, who did not enjoy the benefits.

The study also found that the majority of trade assistance goes to middle-income countries rather than to the least developed countries (LCDs) that Aid for Trade is directed towards. Little evidence exists to prove Aid for Trade’s effectiveness in reducing extreme poverty; this is likely a result of short-term program evaluations that take place before real impact can be measured, as well as lack of donor interest in, and therefore funding for, impact evaluations.

Overall, there are many obstacles to determining whether or not Aid for Trade has been successful thus far. More thorough, accurate, and long-term evaluations of poverty rates are necessary in order to determine the tangible successes or failures of Aid for Trade.

– Kat Henrichs

Sources: OECD, International Center for Trade and Sustainable Development, The Guardian
Photo: European Commission