Ask a Professor: DePaul Economist Discusses Key Brexit Issues

For more than three decades DePaul University Professor Thomas Mondschean has taught students the fundamentals of economics and how they apply to their lives and careers. This spring he gave students a first-hand look at one of the most tumultuous economic issues of our time – Britain’s plan to exit the European Union, or Brexit – during a business study abroad seminar he led to Dublin and Belfast.

In this Q&A, Mondschean discusses what students gained from the trip and answers key question about Brexit.

What are the main issues of Brexit?

The United Kingdom has been a member of the European Union since 1973. Since that time, its economy and society has become increasingly intertwined with the other members. Brexit means that the UK would no longer be a member of the European Union. This will affect international trade between the UK and the rest of the world. It may also change the mobility of labor between the UK and the rest of the EU, its budgetary contribution and receipt of benefits, and its ability to influence future European policies.

The main issue for the UK is to decide on what an exit from the EU would look like. Indeed, it is the uncertainty about the type of Brexit that ultimately will be agreed to that has already affected investment decisions by businesses both within and outside the UK.

A “hard” Brexit is taken to mean that Britain leaves the EU without a trade agreement. In that case, the UK would revert to the World Trade Organization trading rules, which would significantly raise tariffs and adversely affect UK trade with the EU countries. It would take years for the UK to negotiate trade deals with other countries that might be more favorable than WTO rules. Another possibility is a “customs union” where the UK still maintains free trade with the EU but cannot negotiate better deals with the rest of the world. There is also a possibility of there being no Brexit at all, if the British revoke Article 50. In between a “hard” Brexit and no Brexit at all lie many possibilities.

How does this affect workers and trade?

Whether there is free mobility of labor between the EU and the UK is also an issue. Immigration to the UK, especially from Central and Eastern Europe, was a reason so many British citizens supported leaving the EU. Many professional people from EU countries live and work in the UK, and many British citizens live on the continent. Negotiating their status is another issue that must be addressed.

One of the most difficult issues to resolve has been the nature of the border between Ireland (EU) and Northern Ireland (UK) after Brexit. The border between Ireland and Northern Ireland was opened up after the adoption of the Good Friday Accords in 1998 that ended the civil war in Northern Ireland (aka “the Troubles”). With Brexit, there needs to be a way to control trade between Northern Ireland and the Republic of Ireland; otherwise, it would be easy to circumvent trade restrictions. But both sides fear that the resumption of serious border restrictions would reawaken tension in Northern Ireland that neither side wants.

How did your study abroad trip help students better understand Brexit?

We spent time in Ireland and Northern Ireland. We studied how Brexit would affect one of the UK’s most important trading partners. The supply chains between Irish and British firms are deeply intertwined. Brexit threatens to force costly changes in these relationships. This is especially the case in food and medicines. Ireland exports a lot of food to the UK. It is not clear how Brexit will change things. Part of the issue is the regulatory environment in which trade is conducted. The regulation of food and medicine goes beyond trade to the issue of public health and safety. If the UK does not adopt EU protocols, then it must set up its own regulatory regime and it will become more difficult to export into the UK. This could be very disruptive. Britain is woefully unready for Brexit to occur, which is why it is a great relief that the EU has agreed to extend the deadline to Oct. 31.

Students really could see on the front lines how Ireland was coping with Brexit. In our meetings with the Irish Food Board and the Central Bank, these issues were discussed in detail. At our meeting with the Daughters of Charity, the executive director and her staff emphasized that the economic difficulties Brexit could create for the Irish economy would increase demand for the social services their organization provides.

In Northern Ireland, students could study the British perspective from those who have the most to lose from Brexit. Northern Ireland will suffer more than any other region of the UK because of its close ties to Ireland. We also visited companies (e.g., Caterpillar, CME and Accenture) in which Brexit was one of many issues they were planning for. This helped to put Brexit in perspective.

Depending on the outcome, what are the potential economic impacts of Brexit on Britain and Europe?

It is hard to answer this question without knowing how severe the breakup will be. It will most likely hurt Britain more than the EU as a whole, but Ireland would be hit harder than other EU nations due to its location and longstanding trade relationships with the UK. The Central Bank of Ireland was suggesting about a 1.5 to 2% drop in gross national income if a “customs union” type arrangement is negotiated with a larger decline occurring and if a “hard” Brexit occurs. Similar numbers obtain for the UK as a whole, but Northern Ireland would experience a larger decline relative to other UK regions. Of course, these kinds of forecasts are often not reliable because many factors (including the fiscal policy responses in both countries) can mitigate the effects.

Why should Americans care about this issue?

Americans should care because it will change the relationship between the UK and everyone, including the U.S. The UK is an important ally, and it will likely experience diminished political clout because the UK will no longer be part of the EU. It is possible some industries like agriculture will benefit since EU tariffs may be eliminated on food. But it is too difficult to know at this point. One area where the U.S. may benefit is financial services. London will become less important as a financial center and some of the services it provides may be done through New York City instead.

Exports to the EU may become more difficult until the UK figures out what set of trade regulations it wishes to have. This is especially important for food and medicine.

It will not affect tourism very much. In fact, Brexit has lowered the exchange rate value of the British pound, making travel to Britain more affordable than before. No one is suggesting that Brexit will change the desirability of Britain as a tourist destination.

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