POST-BREXIT FREEDOM

One for all, and all for one! UK now turns to Five Eyes, an alliance comprising Australia, Canada, New Zealand, the United Kingdom, and the United States. These countries are bound by English language, common culture, freedom, and the best standards of living on Earth.

The United Kingdom is home to nearly 3 million people who were born elsewhere in the European Union and migrated to the UK to work and live. Among EU member states, the UK is second only to Germany in the number of EU-born immigrants residing within its borders. One of the looming questions as Brexit talks get underway is the status of these internal EU migrants.

But the UK is only part of a larger migration landscape. All told, roughly 20 million people who were born in a current European Union country have moved from their birth country and now live in another EU nation. Collectively, these migrants make up 4% of the EU’s total population and outnumber the population of all but six EU nations, according to a Pew Research Center analysis of UN migration data. 

Citizens of EU countries have the right to move between EU nations without showing documentation at borders and to reside and work in any other EU country. (Border agents in the UK and Ireland, however, inspect all incoming travelers because the nations are not among the 26 European countries that make up the Schengen Area, which allows for relaxed border patrols. Freedom of movement for new member nations has sometimes been phased in over several years.)

In the UK and elsewhere, EU migration has become a subject of debate. Despite losing their Parliamentary majority in this month’s election, Theresa May’s Conservative Party, which has promised to reduce immigration, is still the largest party in the UK government. Last year, the UK voted to leave the EU, with some supporters of the Brexit referendum saying they wanted to close the UK’s borders to other EU nations as a way to reduce migration. And in a new Pew Research Center survey, majorities in nine European countries surveyed said they want national governments, not the EU, to make migration decisions of EU and non-EU citizens into their nations.

Besides Germany and the UK, other nations with large EU-born immigrant populations in 2015 include France (2.3 million), Spain (2 million) and Italy (1.9 million).

In Luxembourg, EU immigrants made up 39% of the population in 2015, the highest share of any EU country, followed by Ireland (12%). Nations with large immigrant populations had lower shares, including Germany (7%), France (4%) and the UK (4%).

Though it is hard to predict how a bargaining game involving strong emotions as well as economics will play out, we can offer some conjectures about what will happen. These conjectures are mostly based on what we have called the law of distance — the observation that the interactions between two countries are proportional to their sizes (GDPs) and inversely proportional to the distance between them.

Distance, in this sense, is not just physical distance but also cultural distance (e.g., whether two countries have different/similar official languages) and administrative distance (e.g., the absence or presence of a historical colony-colonizer link between the two). The law of distance has been associated with some of the most robust results in international economics, which is why it underpinned the UK Treasury’s generally well-regarded analysis, a year ago, of the long-term consequences of Brexit.

Meanwhile, the EU countries with the highest number of emigrants (people who move from their birth country) living in other EU countries as of 2015 include Poland (3.5 million) and Romania (3 million). Migrants leaving Poland have largely settled in Germany and to a lesser extent the UK, while Romanian migrants have largely settled in Italy, Spain and Germany. Other top origin countries of EU emigrants include Germany (1.8 million), Italy (1.4 million) and the UK (1.2 million).

In percentage terms, however, Luxembourg had the highest share (14%) of its birth population living in other EU countries in 2015, followed by Romania (13%) and Ireland (12%). Notably, in the UK, France, Germany and Spain – countries that receive many EU migrants – only 2% of each of these countries’ birth populations have moved to other EU countries.

Of course, migrants from outside the EU also live in EU countries. As of 2015, in fact, non-EU migrants made up nearly two-thirds (63%) of all migrants living in EU countries. The largest numbers come from Turkey (2.6 million), Morocco (2.5 million) and Russia (2 million). More than a million were born in Algeria (1.6 million), India (1.2 million), Ukraine (1.1 million) and Kazakhstan (1.1 million).

Outside EU, the world is UK’s oyster, and the Commonwealth remains that precious pearl within. UK might be able to gain more from a free hand in negotiating with the Commonwealth — former British Empire states such as Canada, Australia, India, and South Africa — than it might lose in terms of limited access to EU. The GDP of the rest of the Commonwealth is only 55% as large as that of the rest of EU.

UK has a common official language (English) with 91% of the rest of the Commonwealth (on a GDP-weighted basis) and a colony-colonizer link with 99%, versus only 2% on both factors with the rest of EU. Based on estimates that a common language normally boosts trade by 2.2x and that a colony-colonizer link has a multiplier effect of 2.5x, the joint effect of the two (5.5x) in boosting market potential in the Commonwealth is substantial.  UK on its own has the leverage to achieve better terms with the Commonwealth countries than it currently enjoys with the EU. Consider that Britain accounts for only 16% of EU GDP.

Moreover, the tenor of the relationship between the UK and the EU is not good: Compare Britons insisting that the UK could exit without paying a brass farthing versus the EU’s claims for £50 billion or more. Consider the combative personalities of some of the key negotiators. Add in the consideration that Brexit, even if accomplished with a maximum rather than minimum of goodwill, will hurt Britain’s trade with EU for purely technical reasons, and it seems safe to predict that there will be a deterioration of trading relationships with Britain’s largest natural market; the only question is to what extent.

Given that relatively safe prediction, the natural next question is which industries and companies are likely to be hurt the most and therefore face the greatest need to reconsider their current operating models. Brexit is likely to change the most is the administrative distance between the UK and its former partners in EU. This suggests that industries with a high degree of sensitivity to administrative distance are likely to be affected the most — unless, of course, the provisions under which UK-based operations can access EU markets happen to be eased the most for them.

Correlated indicators of administrative sensitivity include industries that are subject to high levels of regulation, produce staples or entitlement goods or services, are large employers or suppliers to the government, include national champions, are construed as vital to national security, control natural resources, or require large, irreversible, geographically specific investments. Other markers of industry sensitivity to Brexit include high levels of scale economies that need to be amortized over international regional markets, rather than just by national markets; high levels of trade-dependence on either the export or the import side; and belonging to the service sector.

At the company level, there are some additional attributes that seem likely to be associated with high degrees of exposure to Brexit. Companies with particularly high levels of export or import-dependency in relation to their competitors are likely to be hardest hit. Small firms that aren’t yet exporters or importers are also likely to be hurt more, at least in terms of a narrowing of their opportunity sets: Such firms typically look nearby for their first international transactions. And even where products or services aren’t flowing across borders, companies that use Britain, particularly London, as their regional headquarters for serving all of Europe (e.g., many U.S. multinationals) are likely to need to reconsider basing that role there — as may, for that matter, companies that use London as their global headquarters, especially if most of their business is outside UK.

The British companies that may have private reasons to cheer are those focused on UK that are trying to hold off regional or even global competitors at home. Which is a reminder of the importance of granularity in forming such assessments — not all companies within the same industry, let alone all industries, will be affected in the same way. Similarly, in terms of what is to be done, once again, the appropriate response will be predicated on the specifics of a company’s situation.

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