Economic Integration Agreements And Trade Essay

Question:

Discuss about the Economic integration agreements and trade.

Answer:

Introduction

23rd June 2016 is considered as a historic date, due to the landmark referendum of UK (United Kingdom) being passed, where the nation decided to leave the European Union (EU), and this was known as Brexit. As soon as the results of this referendum were declared, the pound fell at its lowest since 1985, and this was the fear of the world showing in face of the uncertainties surrounding Brexit (MacKay, 2017). Till the time Brexit had not taken place, UK had been positioned at the top for starting up any business, but with the uncertainties which continue to be present on the topic of Brexit, the position of UK is in question. The possibility of a hard Brexit has shaken the most well established businesses, so much so as to force them to think of going overseas (Hobolt, 2016). However, there are those who think that Brexit would only result in improved conditions for their businesses, and are therefore optimistic about the whole thing. This is particularly in comparison to the ones who predict that, for UK, Brexit is a big mistake (James, 2017). Where UK is set to bear negative impact of Brexit, EU is set to gain a lot. However, some proponents of Brexit believe that the reverse would happen.

Jaguar Land Rover Automotive PLC (Jaguar Land Rover) is amongst the leading multinational automotives companies, who fear of the impact of hard Brexit (Kumar, 2017). This discussion is focused on highlighting the possible impact of Brexit on Jaguar Land Rover, and the benefits and threats faced by it, in addition to drawing up a strategy for the purpose of exploiting the possible opportunities and averting the threats.

Economic Integration

Economic integration is an agreement which allows the nations, in a particular geographic region, in removing/ reducing their barriers, in order to promote free flow of goods and services, and the other factors having an impact on the business (Baier, Bergstrand & Feng, 2014). This involves any such type of arrangements where the nations agree on coordinating their fiscal, monetary, or/and their trade policies (Liepmann, 2017).

When it comes to the relation between UK and EU, it becomes clear that UK is highly economically integrated with the rest of EU nations. The extent of economic integration between EU and UK can be elucidated by making use of the World Input-Output Database of the University of Groningen. This database provided insights into the exports of Britain to WU, and the supply chains which provide the intermediate services and goods for the exporters. In context of all of such effects, the UK’s share of output sold to the EU covered 9.8% in 2011. To bring these figures into perspective, the share of London in UK output stood at 22% and that of the South East, excluding London, stood at 15%. However, every other region of UK contributed less towards the GDP of the nation in comparison to the share which was sold to EU. Trade with China and US contributed way less to the economy of UK in comparison to EU. The figures for China stood at 1% and for US stood at 3.4% (CER, 2016).

UK gets a comparative advantage when it comes to financial services and production of businesses, in addition to the designing, marketing, engineering and various other services. The service exports of Britain, as per the Groningen database, along with the services which are provided to the exporting companies by the domestic firms, are very heavily skewed towards EU. EU alone accounts for 2/5th of the UK services demand by foreign nations. The share of US in this is just 17%, and the emerging economies under BIRC only contribute to 10% (CER, 2016).

The close proximity of UK with the EU member states is another major reason for the high economic integration between the two. A gravity model was constructed by CER for quantifying how much trade goes down to EU. It demonstrated that the EU membership of UK resulted in boosting of its trade in goods with the other member states by 55%. Back in 2015, the goods trade of UK with the remaining EU member states stood at ?364 billion. The EU effect thus amounted to nearly ?130 billion. Comparing the bilateral trade, which Britain has with China, it was only ?43 billion for that year (CER, 2016).

There are other ways also in which UK is highly integrated with Britain. Back in 1997, the member states of EU contributed to 30& of accumulated stock of FDI in UK, and this figure had rise to 50% by 2014. The value of bank assets of UK in 2015, which was held in euro zone stood at 45% more than US assets, even with the economy of euro zone being only 3/4th of US economy size. London has been the key beneficiary of single market in terms of the financial services. A large market is present in the euro zone for lending which is originated from UK in comparison to the suggestions as per its economic size (CER, 2016). To put these in context:

Future economic integration for UK and 27EU

Free Trade Agreements (FTAs) help in regulating the tariffs, and the other trade restrictions, present between two or more nations, in order to carry out the trade in an easier manner (Findlay, 2015). Singapore was the very first ASEAN nation to initiate bilateral foreign relations negotiations with EU for FTA (Elijah, Kenyon, Hussey & van der Eng, 2017). In order to indulge in trade relations, Singapore and UK make use of these FTAs (Peng, 2016). This has led to Singapore becoming the largest trade partner of UK in Southeast Asia. UK is amongst the largest foreign investors in Singapore, and this contributes a considerable percentage of the total EU investments in Singapore (Ming, 2017). All this has been enabled due to the FTAs signed between the nations.

With the approaching Brexit, UK and the 27 EU would not be able to obtain benefits, which they earlier could, and in order to trade with each other, there is a need for adopting the strategies which were adopted for trading with the other nations, not having the advantages of being a member state of EU. In this regard, a great option is presented in drawing up FTAs (Dhingra Ottaviano, Sampson & Van Reenen, 2016). Taking the example of Singapore, UK and the other EU member states would not have to undertake FTAs for the trade to run smoothly between them. FTAs are not only used with Singapore, but by the 27 EU and UK for their relations with US, Canada, Georgia, Moldova, Germany, Colombia, Peru, South Korea and a number of Central American nations like Panama, Nicarragua, Honduras, Guantemala, El Salvador and Costa Rica (Bertelsmann Stiftung, 2015).

Impact of Brexit on Jaguar Land Rover: Benefits and threats

With Brexit, UK would no longer be a part of EU. This means that all the advantages which the companies could earlier get, by being a part of EU and having their headquarters at London, would no longer be applicable. The benefits which could be earlier attained due to the applicability of economic integration, would no longer apply. The company is amongst the ones who fear that Brexit would negatively impact their business. They have even estimated that by the end of this decade, Brexit would cost the company 1 billion pounds or $1.47 billion in annual profits (Thomson Reuters, 2016). The possible impact, which would happen due to economic integration, being no longer applicable for Jaguar Land Rover, has been summarized below. To compete with the German counterparts, Germany is taken as the selected EU nation.

Free movement

The first one in the list of possible negative impact on businesses is the restriction of free movement. Earlier, the people of UK could move in any nation of the EU, including Germany, to carry on their work, to get jobs, and to live there; and the same was also true vice-versa. With Brexit, this can no longer be done (Rankin, 2017). This is coupled with the same restrictions for the family members of the employees or workers coming from EU nations to UK or vice versa, where they could earlier come and reside in UK with the employee. With Brexit, the employees and their family members would have to apply for visa in the same manner, as is to be done people from non-EU member states, when they want to enter UK or EU member states. There would be separate permits required for working in EU or UK for nationals of UK or EU member states (Mullin, Webb & Harper, 2017).

Volume and margin concerns

In terms of volume, Europe accounts for the fourth ranking volume for Jaguar Land Rover. Europe is also the source of around 35-40% of the components requirements of the company from the region. Earlier there was free movement of goods in EU member states and Jaguar Land Rover was thus not required to pay any tariff, bet it for selling vehicles in the EU nations, or for sourcing the parts from the EU nations. Though, now the situation would change, and the goods sold from and to EU, would certainly attract duties. This would Jaguar Land Rover uncompetitive against its German rivals. As a result of this, the volumes and margins of the company would be adversely impacted. This would in turn prove negative for the company even in short term as this would result in the fiscal deficit being raised, shortfall of adequate manpower, and lower growth in UK (Mohile, 2016).

However, within this is an opportunity or a possible benefit for the company. This is due to the fact that there could be a range of indeterminable variables which would level the impact on the company. Owing to the strong margin performance for 2015-16 at 15%, in addition to the better geographic mix and strengthened new model launches, the company is expected to expand its margin for the next two years. Again, an uncertainty looms due to Brexit. For the year ending on March 2016, the company made sale of 5.21 lakh units in the retail market alone, which was a growth of 13% in comparison to last year. The total sales contribution for company of Europe grew by 24% from 19% in previous year. UK and EU account for 44% of the global volumes for company. This is the reason why companies like Jaguar Land Rover hope that UK would have FTAs with EU or would join single EU markets, fostering the bilateral trade (Mohile, 2016).

Currency Risk

Jaguar Land Rover is also set to face the volatility of currency. As soon as Brexit was announced, the Great British Pound started depreciating and is further expected to depreciate only. The value of GBP has gone down in comparison to the US Dollar (Leissle, 2018). Though, this has the possible benefits for Jaguar Land Rover as 80% of its products; but at the same time, it would inflate the import bill of the company. Where trade tariffs would become applicable, the German luxury calls would also get more expensive and this would allow Jaguar Land Rover with the opportunity of gaining market share in its home market. It is worth noting that the benefits of weak GBP would come before the possible negative effects of the import tariffs (Mohile, 2016).

Manpower issues

The skill base of the company is also likely to take a toll. This is due to the hindrances in the mobility of labour in between 27 EU and UK. For undertaking its operations, Jaguar Land Rover requires skilled manpower, and the majority of it comes from Europe. With restrictions in immigration, it would impact the company (Mohile, 2016). There would be a problem in attaining and retaining talent. CIPD has reported that in view of 72% human resource professionals, getting qualified talent would become a key difficultly and that the competition would toughen up (CIPD, 2017). A survey undertaken of a thousand human resource professionals demonstrated the same fear (Jack, 2017). So, when the staff from German would have to go to UK, or vice versa, it would require additional costs for Jaguar Land Rover.

Strategy for future

On the basis of the threats and benefits which are posed through Brexit, a strategy has been created for Jaguar Land Rover to follow in its future endeavours. This requires Jaguar Land Rover to firstly create a base in German as well. This is particularly important that as this would allow Jaguar Land Rover to attain the benefits of free movement of trade within the 27 EU nations, with UK no longer able to do so. By setting up branch in Germany, the advantages which the company could earlier enjoy by being in Britain could be continued. The next part of this strategy is to make arrangements for their talent coming out from EU nations, to continue their work from Germany. This would allow the costs of visa of employees and their relatives, being brought down for the company.

Alternatively, they can wait out for the possible FTAs to be drawn between UK and other EU nations, and continue their endeavours in UK itself. However, this is not a feasible option, and should be adopted only later on. By doing so, the talent pool of Jaguar Land Rover can be retained, and even new talent pool can be attracted. For the individuals of UK, the company could continue their operations there, as UK does have FTAs with non-EU nations, which are crucial for the company, and which require work to be done. Thus, by adopting this strategy, not only would Jaguar Land Rover be able to establish new base in Germany, but would also be able to secure its talent pool.

Conclusion

Thus, in the previous segments, a thorough discussion was undertaken on the possible impact of Brexit for UK, EU member states and Jaguar Land Rover. In doing so, the concept of economic integration was made use of, and the manner in which the economic integration exists between the EU and UK was highlighted. This helped in gaining an understanding on the manner in which the relations exists between EU and UK. The discussion then highlighted the manner in which the economic relations could continue in future between UK and EU, through the use of FTAs.

This was followed by the discussion on the possible benefits and negatives of Brexit, particularly in context of Jaguar Land Rover, which is fearful of the negative impact which Brexit would have on its business annually. There are possibilities of difficulty in free movement of people, GBP falling, attaining and retaining talent, and volume and margin concerns. Based on this, a strategy was created for Jaguar Land Rover, where it is suggested to create its base in Germany to continue taking advantage of working in EU and in continuing its association, along with continuing its work in UK, to tap in the advantage of FTAs drawn between UK and other non-EU nations. This was done to show the level of impact which Brexit is set to pose on the working of the companies like Jaguar Land Rover.

References

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