Brexit case analysis

INSTRUCTIONS:

1. Read the article “Brexit: Ministers expect no-deal challenge next month” The article is 

available at: https://www.bbc.com/news/uk-politics-49329630

It is recommended that you also watch the video entitled “Confused by Brexit jargon? 

Reality Check unpacks the basics.” that is embedded in the article as it provides some 

additional clarity on Brexit. 

2. After you have read the article, answer the following three questions:

a. Provide a brief summary of main points of the article. (Approximately 150 

words) (30 points)

b. Based on information provided in the article, identify and discuss one advantage

and one disadvantage of the Brexit. How does the advantage and disadvantage 

you have identified relate to what you have learned in “Refresher Notes #3”? Be 

sure to include specific terms and concepts from Refresher Notes #3 in your 

answer. (Approximately 250 words) (40 points)

c. Based on information provided in the article, briefly discuss any implications you 

see for the trade relationship between the U.S. and the U.K. after Brexit. Be sure 

to examine the implications in the event of “No-deal” and also if the U.K. and 

the E.U. were to come to an agreement. (Approximately 100 words) (30 points)

SUBMISSION INSTRUCTIONS:

1. Answer the case in a Word doc. The paper must be turned in as a Word doc file

attachment in the Brexit Case Analysis Dropbox link in Canvas.

2. Answer all questions using complete sentences. NO BULLETS OR NUMBERED 

LISTS!!! Points will be deducted for using a bulleted/numbered list format. 

3. Please number the question you are answering. Include your name, Panther ID, and the 

case title on the title page of your paper.

4. The paper should be single-spaced, approximately 500 words (total) excluding the title 

page and questions.

REFRESHER NOTES #3 – CROSS NATIONAL COOPERATION AND AGREEMENTS

Important:  The primary driving force behind regional economic integration (REI) (a/k/a trading blocs) is geography (e.g., NAFTA/USMCA involves N. American countries, the EU involves European countries, etc.)

A. GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

I. Major Factors

1. Formed in 1947 under the United Nations to abolish quotas and reduce tariffs among member countries

2. Fundamental principle – Each member must open its markets equally to all other members.

3. Most-favored-nation (MFN) Clause – prohibited discrimination through its principle of “trade without discrimination” – reduced tariffs were automatically extended to all member nations. 

4. GATT did not cover trade in services.

B. WORLD TRADE ORGANIZATION (WTO)

I. Major Factors

1. Formed in 1995 to replace GATT 

2. Expanded GATT’s scope to include trade in services, investment, intellectual property rights, among other items. 

3. In the US, the Most Favored Nation clause is known as Normal Trade Relations (NTR)

C. TYPES OF REGIONAL ECONOMIC INTEGRATION (REI)

I. Free Trade Area (may be easily identified because “FTA” usually appears in the name (CAFTA, NAFTA, EFTA)).  Features are:

1. No internal tariffs among member countries. 

2. Each member sets its own tariff with non-members. 

3. Example – see next page

I. Free Trade Area (continued)

3. Example: 

a. Assume FTA members (US, Mexico, Canada), and Germany (non-member). 

b. Trade between US, Mexico and Canada – no tariffs. 

c. Between US and Germany – US sets 15% tariff 

d. Between Mexico and Germany – Mexico sets 10% 

e. Between Canada and Germany – Canada sets 5% 

II. Customs Union 

1. No internal tariffs among members. 

2. Common external tariff: each member must use tariff schedule set by the trading bloc when trading with non-members. 

3. Example 

a. Assume members are US, Mexico, Canada and non-member Germany. 

b. The bloc has set an external tariff of 20% with non-members. 

c. Trade between US, Mexico and Canada – no tariffs. 

d. Between US and Germany – US must use 20% tariff 

e. Between Mexico and Germany – Mexico must use 20% 

f. Trade between Canada and Germany – Canada must use 20%

III. Common Market

1. No internal tariffs among members. 

2. Common external tariff: each member must use tariff schedule set by the trading bloc when trading with non-members. 

3. Free factor mobility – factors of production (labor, capital, etc.) allowed to move across members’ borders without restrictions (no tariffs, no visas required, etc.) 

IV. Complete Economic Integration – see next page

IV. Complete Economic Integration

1. No internal tariffs among members. 

2. Common external tariff 

3. Free factor mobility – factors of production (labor, capital) allowed to move across member borders without restrictions (no tariffs, no visas required, etc.) 

4. Common monetary and fiscal policy (e.g., the euro) 

5. Political integration 

NOTE – European Union is not yet at complete economic integration category mainly due to its lack of political integration.

D. EFFECTS OF INTEGRATION

I. Static Effects

1. Trade barriers fall (e.g. when an FTA is formed). 

2. Inefficient producers are no longer protected by trade barriers.

3. Due to competition, inefficient producers are then replaced by efficient ones. 

4. Because the demand for goods made by inefficient producers is replaced by demand for goods by efficient producers, the overall level of demand stays the same (hence the term “static”).

II. Dynamic Effects

1. Trade barriers fall. 

2. Volume of market potential increases (more countries/consumers now available). 

3. Production increases resulting in greater economies of scale. 

4. There is overall growth in the region.

III. Trade Creation 

1. Trade barriers fall. 

2. Companies now able to export to new markets without additional costs caused by barriers. 

3. New products may now be shipped to these markets. 

4. New industries may develop as a result of these new products entering the market.

5. Example – see next page. 

III. Trade Creation (continued)

5. Example: Assume there are no computers in Country A.  When Country A joins the FTA, computers from Country B are exported to A.  As a result, other industries (computer repair shops, retail outlets, software developers, etc.) are created in Country A. 

IV. Trade Diversion

1. Occurs when companies trade with inefficient member countries instead of efficient non-members when trade barriers fall. 

2. Example:  Assume Mexican producers now trade with efficient producers in Germany.  The Mexicans must pay high tariffs to Germany.  Mexico forms FTA with US but US producers are inefficient.  Mexican trade gets diverted from Germany to US because costs are lower due to the absence of trade barriers. 

E. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

I. Areas Covered by NAFTA 

1. Market access – covers topics such as tariff and non-tariff barriers; rules of origin 

2. Trade rules – covers anti-dumping legislation, health and safety standards, subsidies 

3. Services – provides for the same safeguards for trade in services (consulting, engineering, software development), etc. 

4. Investments – establishes investment rules governing minority interests, portfolio investments.  Protects investments made by any company incorporated in any NAFTA country regardless of the company’s country of origin. 

5. Intellectual property – NAFTA members pledge to protect intellectual property rights while ensuring that the enforcement doesn’t itself become a barrier to trade 

6. Dispute settlement – provides a process for settling disputes in order to discourage member countries from taking unilateral actions against an offending member (i.e. in case of disputes, member countries must follow the established settlement process and not act on their own.)

E. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) (continued)

II. Rules of Origin and Regional Content Rules

1. Rules of Origin require that to be eligible for NAFTA preferential treatment (i.e., reduced or no tariff barriers), goods must “have been the subject of substantial economic activity in the free trade area” (i.e., a significant portion of the cost of production of the item must have been incurred in the region). 

2. Regional Content Rules (a/k/a Local Content Rules) state specific percentages of production costs which must be incurred in the region for the product to be considered North American (e.g., for many products, at least 50% of the cost must be from NAFTA countries).

III. NAFTA Special Provisions 

These were included in NAFTA because of US concerns regarding conditions in Mexico.

1. Working conditions and labor standards in Mexico have to meet standards.

2. Environmental conditions in Mexico must meet standards.

F. UNITED STATES-MEXICO-CANADA AGREEMENT (USMCA) (2017 to Present)

Source of information: US Trade Representative (ustr.gov)

I. New FTA proposed to replace/supersede NAFTA.  Signed by U.S., Mexico, and Canada but not yet ratified.

II. Some Provisions 

1. Gives U.S. greater access to Canadian markets (e.g., dairy products)

2. Increased NAFTA regional content rules on some products (e.g., automobiles from 62.5% to 75%)

3. Requires 30% of work on automobiles manufactured in N. America to be made by factory workers earning US$16 per hour by 2020; increasing to 40% by 2023.

F. UNITED STATES-MEXICO-CANADA AGREEMENT (USMCA) (continued)

II. Some Provisions (continued)

4. Members must review agreement every 6 years.  Agreement expires after 16 years but can be renewed for additional 16-year periods. 

5. Introduces enhanced protection for “digital trade” (e.g., stronger protection for e-books, online consumer protection, etc.).

G. CENTRAL AMERICAN-DOMINICAN REPUBLIC FREE TRADE AGREEMENT CAFTA-DR)

Source of information: U.S. Dept. of Commerce 

I. CAFTA-DR – a free trade area between the US, El Salvador, Guatemala, Honduras, Costa Rica, the Dominican Republic, and Nicaragua. 

II. Approved by the US Congress in July 2005 and signed into law (in the US) August 2005

III. Approved by El Salvador (3/1/06), Honduras and Nicaragua (4/1/06), Guatemala (7/1/06), the Dominican Republic (3/1/07) 

IV. Passed in Costa Rica (January 1, 2009).