Till Brexit Do Them Part

Like most countries around the world, Britain too has been caught in the grip of the coronavirus pandemic for the past many months. However, now that the country has reopened on the 4^th of July, it will have to finally tackle the other challenge facing it: Brexit. And while nobody knows how long Covid-19 will linger or whether there will be another wave, Brexit has a fixed deadline, thanks to Boris Johnson’s refusal to request an extension to the transition period from the EU.

As I write this piece from Goa, there is news that a fresh round of negotiations has already begun in Brussels on the main sticking points that still remain. Not least, the border between Northern Ireland and the Republic of Ireland. Fishing rights is yet another issue being discussed, along with other trade related subjects. Having spent years wrangling over the same issues over and over again, here is Britain still having to “get the deal done” as Boris Johnson would like to say, before time runs out. In all, there are reported to be five more rounds of talks between UK and the EU, all of which are being targeted to conclude by August 17, 2020. The last bit of news from Brussels seems to be that both sides have not made much headway in the talks.

Meanwhile, there is still the issue of getting all EU countries to ratify the agreement and for all countries to start preparing in earnestness for the big divorce. I had written long ago in a blog post about how businesses in the UK are preparing for Brexit, but it looks like they are no closer to any clarity on what will unfold once Brexit is done. If getting Brexit done has taken four nerve-wracking years, entering the WTO system of trade regulations will take several more.

Meanwhile, the UK economy is on a downward plunge, as are many others, thanks to the pandemic. Covid couldn’t have come at a worse time for Britain, with Brexit already looming ahead. As it is the UK economy is forecast to shrink by 11.4% in 2020 according to the OECD, and with a second wave of Covid-19, it could be much worse at a contraction of 14% for the year. As The Guardian says in this article, UK will be the worst affected amongst European countries in comparison with France, Germany, Italy and Spain. And god forbid, if it’s a No-Deal Brexit, the UK economy will be impacted so hard, it will take years for the country to ever recover.

Since services industries have been the hardest hit during the pandemic, Britain faces the worst of the economic shock. While most of retail (which is big business in the UK) has moved online, due to the lockdown, retail sales would have been muted and limited to certain types of essentials anyway. Financial services is the other big sector, as are real estate and energy. All these have been severely affected during Covid, and while many jobs have been protected through the furlough system which the UK has just extended till the end of October 2020, the employment and overall business scenario look dismal.

In fact, there are news reports that thanks to the uncertainty over Brexit, British nationals working elsewhere in the EU are already facing the brunt of it: they are being overlooked for job openings and interviews. I suppose the same might hold for EU citizens working in the UK.

Next, if we look at most of what Britain exports, 43% of it used to go to the EU. Now, even with low levels of trade and external demand, Britain will not have the same ease of access to so many EU countries and their markets. While many such as Jacob Rees Mogg saw a great future in doing business with China, it is not going to be easy to pivot to China that soon either. Besides, China would import different kinds of merchandise and services from the UK than the EU does. What’s more, UK’s current offer of citizenship to Hong Kong residents, if they wished to emigrate would not have gone down well in Beijing, casting a shadow on any diplomatic or trade and business talks between the two countries.

I had anticipated long ago that Brexit would mean that the UK gravitates towards America, not least because both countries are currently led by politicians of a similar populist mindset and America has openly supported Brexit, dangling the juicy carrot of a free trade deal as well. The two countries have had what is termed “a special relationship” in the past, but in the current circumstances it would be merely a marriage of convenience. And with the US eyeing Britain’s NHS for its big pharma companies, Trump has a lot to trade for. Britain, not so much. So much for taking back control then. Brussels will be replaced by Washington DC.

So much for visions of Global Britain too. Together with EU countries such as France and Germany, Britain was a voice for a rules-based world order at multilateral forums and institutions, whether it is the UN Security Council, or NATO, or any other organization. Now it will either be on its own, or tethered to its Big Brother America’s apron strings, which is not the same America that helped build many of these multilateral institutions in the first place.

If the UK is envisioning a bond with the US similar to the one that brought about sweeping changes in the Western capitalist system in the ‘80s with the Reagan-Thatcher combine, it is sadly mistaken. Both countries live in a very different world now. One reason is, of course, the rise of China. And the other is the rise of technology, which also has to do with China. That is why we see the US locked in a vicious eco-tech war with the Middle Kingdom. Where does the UK fit into this picture, if it does fit at all?

Meanwhile, let us cast a glance at what the EU will look like without Britain. The triumvirate of Britain, France and Germany that led the EU will now be replaced by France and Germany, with Italy or Spain stepping in now and then. The Eurozone area was being led by France and Germany anyway, in the sense that it always required a good Franco-German alliance to lead the region. Now the onus of leadership will fall just a tad more heavily on these two countries.

It must be said, though, that the EU is economically very vulnerable and weak and it still hadn’t recovered from the Euro crisis, when the Covid pandemic struck. Greece had begun to grow, but unemployment levels in all the southern PIGS economies continue to be alarmingly high. France too is experiencing very high levels of unemployment. As a result, consumption demand is weak, and so is investment. The EU has recently seen a lot of investment from China which is pulling back from investing as heavily in the US, but this has unfortunately alarmed people in many quarters.

I think excessive fear and suspicion of China and its investments is misplaced. Of course, EU countries must safeguard their own interests when negotiating and allowing Chinese investors in, but it makes more sense to keep an open mind and explore new avenues for European investment in China as well. EU countries trade a lot with each other, but external demand is critical for the region’s output, and EU has been China’s largest trading partner for the past decade and more. China also is the EU’s second largest trading partner, after the United States.

Global trade is already down significantly, in part due to the US-China trade war and now due to Covid. In fact, it so happens that thanks to the US-China trade war and now due to Covid, the ASEAN region has pipped the EU to become China’s biggest trading partner in Q1 2020, in no small part due to trade in electronics. At a time like this, it would help to boost trade ties and increase investment in China. China’s economic recovery is critical for global economic recovery, as I have written so often, not just because it is a critical player in global supply chains but because it is also the world’s largest market for many products and services and is likely to keep growing at a healthy pace in the coming decades.

India is another country that makes an attractive investment destination, and the only one that rivals China in size, if not in the same kind of purchasing power. Of course, India needs to introduce reforms in land and labour laws – though not of the kind rushed through recently by many states – as well as taxation and most of all we need to improve our infrastructure across the board. We need FDI and not just in our capital markets, but in long-term job-creating investments on the ground that help to build capacity, grow the markets for several products and services and the economy over the long-term.

Getting back to the subject of Brexit, consider me a Brexit-sceptic then. As I have said before, I really can’t see much good coming of it for Britain in the short or long term. Europe too will miss an important ally and the voice of reason, especially a multicultural one. But I have to say that on balance, Britain will be the worse off as a result of this long and very expensive divorce. And as I had written in another blog post months ago, the country, especially its youth, will pay heavily for this rash and populist decision. Because Britain has simply signed its future away.

Meanwhile, the task of “getting Brexit done” awaits. 

The featured image at the start of this post is of a protest march in London by Sandro Cenni on Unsplash