ISSN 2330-717X

Brexit Consequences: Complexities And Uncertainties – Analysis

By

By Amita Batra*

Brexit, that is, Britain’s decision to leave the European Union was announced on the 23rd of June. The announcement led to an immediate and sharp decline in the value of the British Pound (GBP). The stock markets in Britain and around the world followed suit with major losses incurred in the initial couple of days after the announcement. While pressure on the GBP continued, the stock markets recovered partially by the end of the working week. The political scenario in the UK is now in the process of getting reconfigured. The timing of the initiation of Brexit from the EU is not yet known even though the EU has shown a firm response and desired that the UK actualise its decision at the earliest. From announcement to initiation to exit, the time it may take to accomplish the task of Britain’s withdrawal from the EU may be long drawn and uncertainty may prevail in the interim. How is the Brexit decision likely to impact the UK economy, its trade and economic cooperation with the EU in future, EU stability and its integration in the global economy, are among the many questions that the world has since been grappling with.

As an immediate consequence of the weakened GBP and associated economic uncertainty, global investors in a risk-off mode are seeking safer currencies like the US Dollar (USD) and Yen. In the process, the USD has strengthened and allowed the Chinese to undertake depreciation of the Renminbi (RMB). The magnitude of RMB depreciation has been small so far. However, if USD continues to gain strength and there is corresponding and large depreciation in the RMB, speculative forces may trigger potentially destabilising capital outflows not unlike those experienced earlier in the year in January-February. The stability of many emerging market economies could be further endangered by appreciation in their large USD denomination debts. As a positive for the Chinese economy, RMB devaluation may help push Chinese exports in the immediate short run but over the longer run may lead to competitive devaluation in the region. Indian exports that have seen a steady decline for over a year now may find it difficult to reverse the trend under these circumstances. Capital outflows may also impact the Indian economy and it could as a consequence see lower portfolio inflows. Uncertainty in general will dampen investor sentiment, postpone large investment decisions such as in infrastructure projects and consequently adversely impact growth prospects in the region.

As the UK pulls out of the EU, losing its advantage of access to the single EU market and large investments are postponed owing to the uncertain economic environment the possibility of a slowdown in the UK economy looms large. In the process, the EU’s growth prospects are also likely to be adversely impacted. The EU is a major trade partner for the UK even though the UK’s trade with non-EU countries has been increasing since 1999. The EU is also a major investor and a major recipient of UK investment. In 2014, the EU accounted for 44.6% and 53.2% of UK exports and imports of goods and services respectively. In 2013, 43.2% of UK overseas assets were held in the EU, whereas 46.4% of assets held in the UK by overseas residents and businesses were attributable to the EU (www.ons.gov.uk). The economic slowdown will exacerbate the existing woes of the EU which is still struggling with the post 2008 financial crisis outcomes, the travails of the periphery economies and the more recent migration crisis as also of the world economy that has yet to register a sustained recovery from the global financial crisis. For Asia, the slowdown will imply further loss of export demand in its traditional EU market. Transaction costs of trade with, and investment in, the UK and EU will now be higher as both will have to be dealt with as independent economic entities. This may not be so easy. In the case of trade and investment, EU laws, standards and rules are likely to remain the same but the UK will have to negotiate afresh with the WTO. The nationalistic sentiments that have defined the exit campaign may now imply the imposition of higher tariff and other trade barriers by the UK. Asian exports may suffer as a consequence. Stricter provisions with regard to movement of people could be another consequence of the Brexit. Asian economies could be particularly adversely affected with a change in these provisions. A majority of the 42 million international migrants born in Asia were living in Europe in 2015 (International Migration Report 2015 Highlights, UN, 2016).

For India, Brexit may not be an immediate concern. The central bank made careful interventions in the currency market allaying fears of volatility induced costs and it is expected that stable macroeconomic fundamentals and its fastest growing economy status will help India sail through the uncertain economic environment post Brexit. While among the top twenty trading partners for India, UK has a small share of about 2 per cent in India’s total trade. This has not changed much in the last half a decade. How tariffs and other trade regulations alter in the wake of Brexit and hence impact on India’s trade with the UK, while not immediately clear, may also not be immediately critical for India’s trade prospects. EU is a more significant trade partner for India, with a 16 per cent share in exports and around 11 per cent in imports in 2015 (dgft.gov.in). Finalising the India-EU FTA, under negotiation now for almost a decade, should be India’s priority. The issues that have been at the heart of prolonged negotiations such as IPR, migration and movement of people may now acquire new dimensions. At the same time, a separate FTA with the UK may not be immediately possible and certainly not till the UK undertakes its negotiations with the WTO on trade treaties and rules.

For all South Asian economies that are beneficiaries of the non-reciprocal preferential trade treatment under the EU General Scheme of Preferences/Everything But Arms/General Scheme of Preferences Plus (GSP/EBA/GSP Plus) scheme/s, benefits will continue. Though, without the friendly supporting voice of the UK, continued GSP plus preferences to South Asian exports by the EU may not be easily ensured in the future. This is significant as the EU is a major export market for South Asian exports in the labour intensive and revenue generating textiles and apparel sector. Also, in the absence of the UK, Sri Lanka which has been keen on getting back the GSP plus status (suspended in 2013) with the EU may now find it more difficult. Additionally, a slowdown in the UK economy may lead to depressed grants and remittances for the Pakistan economy with consequent adverse implications for its external position. As for trade with UK, much would depend on how far the UK will retain its pre-exit trade rules once the exit is formally complete.

Of course, all of the above uncertainties would be compounded and the ramifications far more complex were instability in the EU to become reality and if the Brexit was to trigger other such reactions from significant other members of the EU. It is also possible that Brexit may play out differently; and as many are hoping, the invocation of Article 50 may be indefinitely delayed or the UK may retain access to the EU. What can however be said without doubt is that the Brexit outcomes are complex, not yet fully comprehensible and uncertainty reigns supreme. In these circumstances it would be best for Asia to strengthen its intra-regional growth impulses, supply chain networks and trade agreements to successfully counter global uncertainties.

* Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU, New Delhi


Enjoy the article? Then please consider donating today to ensure that Eurasia Review can continue to be able to provide similar content.


IPCS

IPCS

IPCS (Institute for Peace and Conflict Studies) conducts independent research on conventional and non-conventional security issues in the region and shares its findings with policy makers and the public. It provides a forum for discussion with the strategic community on strategic issues and strives to explore alternatives. Moreover, it works towards building capacity among young scholars for greater refinement of their analyses of South Asian security.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

CLOSE
CLOSE