Multinationals’ effects: a nearly unexplored aspect of Brexit

• Date: 01 April 2018
• Pages: 2-18
• Published date: 01 April 2018
• DOI: https://doi.org/10.1108/JITLP-12-2017-0053
• Author: Claudia Fernández-Pacheco Theurer,Jose Luis López Ruiz,María C. Latorre
• Subject Matter: Strategy,International business,International business law,Economics,International economics,International trade

Multinationals’ef‌fects: a nearly

unexplored aspect of Brexit

Claudia Fernández-Pacheco Theurer

Universidad Autonoma de Madrid Facultad de Derecho, Madrid, Spain

Jose Luis L

opez Ruiz

Universidad Complutense de Madrid Facultad de Estudios Estadisticos, Madrid,

Comunidad de Madrid, Spain, and

María C. Latorre

Universidad Complutense de Madrid, Madrid, Spain

Abstract

Purpose –The purpose of this paper is to review the economic studies on Brexit, highlighting that

they have focused mainly on its negative impact on trade. The economic intuition behind these

outcomes is provided, explaining why they are asymmetric with the UK being much more harmed than

EU-27.

Design/methodology/approach –The importance of foreign multinationals in the UK and of UK’s

multinationals abroad is shown using a non-standard quantif‌ication, which may be preferable than

conventional methodologies. In addition, EU trade and investment legislative regimes are explained.

Particular attentionis paid to the change after the 2009 Lisbon Treaty which transfers foreign investment to

the exclusivecompetence of the EU as opposed to EU states.

Findings –The data showthat EU-27 is a much less important investmentthan trade partner for UK.

Originality/value –Although modelling the economy-wide impact of multinationals is challenging,

the data and EU legislative framework analyzed suggest it is very much worthwhile. Other

considerations about UK’s diminished leveraging power to negotiate after its EU’s withdrawal are also

considered.

Keywords Foreign direct investment, FDI, Economic impact, EU FDI legislative framework,

EU trade legislative framework, Foreign trade

Paper type General review

1. Introduction

Several unexpected events in the past recent years seem to be challenging the process of

globalization that has dominatedthe world economy for decades (Subramanian and Kessler,

2013). USA withdrawal from the Trans-Pacif‌ic Partnership (Ortiz and Latorre, 2016), the

pause of the Transatlantic Trade and Investment Partnership negotiations (Latorre and

Yonezawa, 2018) and other Trump’s protectionist measures, together with Brexit are

changing the landscape of international relationships. This paper analyzes a nearly

unexplored aspect of the multifacetedprocess of Brexit.

Much has been written about the impact of Brexit on foreign trade. In fact, most of the

papers that analyze that historical decision deal with trade (Busch and Matthes, 2016;

Latorre et al., 2018a; for reviews). The majority of them f‌ind that the reduction in trade

resulting from Brexit will be harmful for UK. They also f‌ind that it will be harmful for the

rest of the European Union (EU-27, henceforth), but UK will be much more negatively

affected than EU-27.

JITLP

17,1/2

2

Received31 December 2017

Revised31 December 2017

Accepted10 January 2018

Journalof International Trade

Lawand Policy

Vol.17 No. 1/2, 2018

pp. 2-18

© Emerald Publishing Limited

1477-0024

DOI 10.1108/JITLP-12-2017-0053

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1477-0024.htm

Properly modelling some aspectsof trade (such as non-tariff barriers) is not exempt from

diff‌iculties; however, investment remains a much more diff‌icult area of modelling.

Investment is volatile, subject to sudden changes in expectations and to a great extent its

performance is more diff‌icult to be grasped than trade. Of course, this applies not only to

domestic investment but also to foreign investment. As a result, less studies estimate the

impact of Brexit on foreign directinvestment (FDI) and on the operations of multinationals.

This paper analyses the role of UK multinationals abroad and of foreign multinationals

within the UK economy. It provides a rather unusual approachto capture their quantitative

importance, discussing why it may be more appropriate than other more standard

measures. The study also covers the current legislative regime for investments of

multinationals in the EU and the consequences Brexit may have for it. The focus is on the

operations of multinationals because they tend to be more directly related to productive

investment, economic growth and the creation or destruction of jobs, than other type of

investments, such as f‌inancialinvestments[1]. The data presented show that the UK is much

less related to the EU in terms of multinationals than in trade. The EU-27 is by far the most

important trading partner for the UK. By contrast,the EU is not the main destination of UK

multinationals. In addition, the importance of EU multinationals’operations in UK is also

smaller than the role of imports coming from EU-27 in total UK imports. Interestingly, the

weight of foreign multinationals in UK is well above the average of the one in EU-27. This

indicates that multinationals are particularly important players in the UK economy. What

does this imply for the studies that obtain bad outcomesfrom Brexit analyzing only trade?

Would Brexit imply that UK would be free to establishnew investment agreements, once it

is outside the EU and heavily benef‌itfrom the activities of its multinationals abroad? Would

reductions in the operationsof foreign multinationals in the UK prevail after Brexit?

To address these questions, the paper f‌irst beginschallenging the conventional wisdom

that there are no Brexit precedents and comments the Brexit pre-agreement reached on

December 8, 2017. Section 3 provides intuitive explanations for the economic impact of

Brexit derived in a group of studies. Section 4 addresses the diff‌iculties in modelling

multinationals’operations, while Section 5 presents data measuring the role of

multinationals in the UK, contrasting them with trade data. Section 6 describes the

legislative framework for multinationals before Brexit and the changeit may imply. A f‌inal

section offers some concludingremarks.

2. Aren’t there any Brexit precedents?

Looking back at European history, it is fascinating to see how many different countries

decided to create a joint project (Baldwin,2016). After World War II, much of the continent

was left devastated and there was a widespread desire for lasting peace. To avoid another

war, six countries (France, Germany, Italy, Belgium, Netherlands and Luxembourg) placed

their coal and steel sectors underthe control of a supranational authority. These two sectors

were crucial for f‌ighting by that time. This led to the creation of the “Economiccommunity

for steel and coal”(ECSC) in 1951, which made thesenations begin to grow strongly. Thus,

the six committed to form a customs union, the so called “European EconomicCommunity”

(EEC), 1957.

Great Britain had led to the creation of a different integration process called the

“European Free Trade Area”(EFTA). But, except for Great Britain, the countries (i.e.

Portugal, Norway, Sweden, Denmark, Switzerland, Austria and Finland) which made up

this second area were small. Whenborder barriers (mostly tariffs by that time) began to fall

within the EEC and within EFTA (but not between the two blocks) discriminationappeared.

The GDP of the EEC was more than twice that of the EFTA. The EEC was far more

Multinationals’

ef‌fects

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