Brexit A Serious Risk to The International Economy

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Brexit is an acronym of “British exit”. It denotes the probable exit of Britain from the European Union (EU). The nation would have a referendum on its EU membership on June 23rd, 2016.

The leaders of G-7 during their summit in Ise-Shima, central Japan on May 26th–27th, 2016 declared that a decision by Britain to exit the EU would seriously threaten the global economy. There would be a significant reduction in investment and a decrease in jobs.

The World Trade Organization (WTO) has indicated that The UK outside the European Union would face uncertain trade relations.

According to Roberto Azevedo, the WTO’s Director General, “Britain would not have the same negotiating leverage as the EU.”

The UK government may have to impose £9bn worth of additional tariffs on imports, increasing the cost of living. Exporters could face a further £5bn of tariffs on their sales overseas.

Those statistics for extra tariffs on goods going into or out of the UK are based on the WTO analysis of preferential trade arrangements.

Under WTO rules, member nations are normally supposed to apply the similar level of tariffs to goods wherever they come from. However, there are exemptions for preferential regional and bilateral trade agreements.

Therefore, goods can be allowed into the UK from the EU and from nations with which the EU has signed any preferential deals without any duty.

On exiting the EU, the UK would no longer be party to those agreements. In the absence of a deal, as per WTO rules, tariffs would have to be imposed on goods being imported to the UK from the EU or those other nations.

It is also possible that WTO members could treat the UK as they would treat any other non-member.  In other words, they would put substantial new barriers to goods and services from the UK.

Investors seek profitability and predictability from any given market and predictability would not be there anymore in this situation.

Some decision makers in the UK campaigning for a “leave vote” argue that since the UK is a developed economy that imports more than it exports, its trade partners would want to negotiate seriously.

There is definitely some truth in that. However, the decision to exit the EU would not be an easy process for the UK.

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