Brexit: Minefields at home and abroad

The Brexit momentum continues, with the clock ticking away and Theresa May’s government is facing challenges at home and abroad. These challenges include the limited time span for a deal, the government’s wafer thin majority in Parliament, a divided Tory party, rebellious House of Lords and Scottish government and resignations by ministers who had been at the forefront of negotiations, including the UK’s lead Brexit negotiator and Foreign Secretary. On the (European) continent, the UK’s partners had until recently been exasperated with the lack of clarity from the UK government. At the global level we are witnessing turbulence because of the Trump factor even as many Brexiteers look to America as a golden opportunity.

There have been some bright sparks. The UK government has finally published a white paper on a trade deal which the EU lead negotiator initially described as “80% OK.” The paper set out the government’s position, namely: to minimise disruption of trade through a “frictionless trade” mechanism; avoidance of a hard Irish border; convergence on standards through common rule books; an end to free movement of people and; security partnership. To mollify its hard Brexit parliamentarians it accepted non consequential amendments to the bill. There have been friendly tines from some key member states towards the UK. Trump’s hostile position on trade with the EU and comments on security issues are also bound to make European countries more appreciative of Britain as a bulwark against Russian aggression.

Some EU states are wary that Britain’s exit will lead to more dominance by France and Germany, particularly, in the case of the latter. A deal will be made but the timeline is likely to be extended although Brussels has suggested that an extension could only be allowed for a second referendum. It is obvious, as noted in my previous paper that any deal will not be as good as existing arrangements but should be better than those with other non EU European states. The Prime Minister and new Foreign Secretary, Dominic Raab will be traversing the continent to gauge and influence support for the UK among member states all of whom have to vote for the agreement.

Britain faces three scenarios, soft, hard or no deal with all of them having significant challenges and opportunities but even as negotiations are taking place the EU and commercial operators are already taking measures that have significant effects irrespective of the outcomes specified. So how will the country fare under any of the possible deals? A recent report by Darrell M West and Christian Lansing, Global Manufacturing Scorecard, which places Britain at the top of the table in terms of its competitiveness in manufacturing along with Switzerland, could be cited by Brexiteers as a sign that the country is poised for a golden age post Brexit.

On needs to be cautious about that conclusion for a number of reasons. The authors cite “political and economic predictability and open market” as the number one condition. In the globalised integrated manufacturing setting that companies operated under, they require a smooth supply chain and Brexit is likely to disrupt this chain particularly in the case of a hard or no deal situation. Many major brands are also foreign owned, this is notably the case with cars, a major “success” area where all volume car producers are foreign owned.Disruptions in the supply chain, limitations on market access for the finished product and pressure and incentives by home country governments will see production being moved to the EU or other countries which have better arrangements with the EU. The fact is that the market for over four hundred million consumers in post Brexit EU will always be more attractive than the sixty five million British consumers. The British government’s White paper only covers trade in goods, leaving out the much larger service sector which accounts for 80% of GDP and 44% of exports; the paper makes vague statements on the sector.

Even as negotiations are taking place, there are moves by the EU and commercial operators towards the divorce. The EU has started moving regulatory institutions out of the UK and excluding the UK from participation in major projects. The Euro Banking Authority is moving to France and the Euro Medicine Agency is moving to Amsterdam. The EU is limiting UK participation in the Galileo Space project and Airbus has indicated that its operations in the UK are likely to be negatively impacted and most commercial operators are at advanced stages in their contingency plans. These regulatory institutions oversee sectors where Britain is a major global force and has significant comparative advantages which will be negatively impacted in any of the Brexit scenarios. The contingency arrangements by commercial operators are significant investments and chances are they many will follow them through as businesses only invest with the high probability of following them through.

Britain’s exit is likely to introduce major shifts in the EU dynamics, notably, a move away from the troika of leading states, Germany, Britain and France leaving the two leading countries as the dominant players. Germany, the powerhouse and largest net contributor to the EU budget realises that the exit of Britain, the third largest net contributor means that it would have to increase its budgetary outlay.It has to tread carefully because of its history and dominance in trade and investment is resented by some EU states. France which co-founded the union with Germany has the second largest economy, embedded dominance in EU institutions – French and English are the official languages and the country has a strong presence in the EU’s bureaucratic framework, including the lead Brexit negotiator, Michel Bernier – will find it hard to fill the financial void because it has yet to fully recover from the economic recession, with stubbornly high unemployment.

Southern and Eastern European countries have relatively large agricultural sectors and/or are the least developed states, with lower per capita incomes are net beneficiaries of the EU budget. This is because the bulk of the EU budget is spent on agriculture and structural cohesion measures that benefit those states. Britain’s exit could therefore reduce payments to them unless Germany and other net payers increase their budget contributions. Northern European states, net contributors to the budget, are wary of the likely of increases in their contributions to make up for the gap that Britain’s exit will leave. It also means that Britain, a key ally of their reform agenda with regard to the EU bureaucracy, budget and economy will be leaving these northern states exposed to their southern and eastern partners who are more interested in pork and maintaining the status quo.

Britain’s exit will also have an impact on the EU political and security front. Ethno nationalism and anti-liberal developments in Eastern Europe, Italy and Austria means that more liberal northern/western members will be losing a key ally against this trend. Most members also belong to NATO and Britain is a major military force that is crucial to face up to an aggressive Russia whose key aim is fermenting disunity within the EU and NATO. And Putin now has a partner in pursuing this objective, President Trump. Britain is a major force in NATO and also plays a critical role in the security infrastructure relating to terrorism and crime which could be affected by Brexit.

Much has been made of new opportunities for Britain in the global sphere but as Lord Malloch Brown noted in his presentation, Britain at sea, much of this is an illusion with significant challenges post Brexit. The EU, accounting for nearly half (43%) of Britain’s trade and historical, cultural and security ties will continue to interact with the UK in a significant way. The new factor that was nowhere in the scene at the start of Brexit is Mr Trump, who key Brexiteers see as Britain’s saviour but who is actually the bull in the China shop, not only for the process but also through his actions and pronouncement on the global stage.

Trump in his recent trip to Europe reiterated his support for Brexit, undermining of May’s government in an interview with the mass daily Sun newspaper in which he criticised May’s handling of the Brexit negotiation and lauded her arch rival and hard Brexiteers, Boris Johnson, the former Foreign Secretary. He also caused a major upset on a separate but related matter of security, namely, his shenanigans on NATO and embrace of the Russian bear which wants to weaken the EU and NATO. His protectionist policies could have direct and indirect impact on the EU, post Brexit UK and globally. He has slapped higher import taxes on EU products and promised more taxes. Europe will be impacted indirectly as protectionist measures against countries like China force them to seek alternative markets for their displaced U.S. exports. Countries around the world may also adopt protectionist measures. The worst case scenario is the development of beggar they neighbour policies reminiscent of those implemented in the 1920s that caused the great depression as many other countries raised taxes on imports and implemented other protectionist measures. As we go to press, the Trump/ Junker (EU President) meeting appears to have resulted in Trump toning down on threats to hike up tariffs on a range of products although those he has already implemented remain in place.

With regards to Britain’s relationship with America post Brexit, as noted in my previous paper, Trump is only interested in transactions when he gets the better of his adversaries and in Trumpworld allies can also be “foes”. Given this tendency, it is hard to see how Trump would make it easier for Britain, which already has a £50 billion trade surplus with the US, better access. Admittedly, this anti-immigrant (unless you are White from countries like Norway) son of a British immigrant mother may have a soft spot for Britain and so make a special case for the UK, a very wishful thinking. Furthermore, it is hard to see how Trump will balance his embrace of Britain which has been targeted by his close buddy, Putin. Putin interfered in the Brexit referendum, poisoned British residents and frequently makes threatening military moves (Russian military jets in Britain’s airspace) against the UK.

While the negotiations with EU negotiators are not smooth, Britain can take comfort in some positive developments. The business communities on both sides of the channel want a pragmatic outcome to the negotiations because of significant trade, integrated supply chains and benefits to consumers and investors. In Britain, hard Brexiteers have not been able to offer any plausible alternatives to what May has proposed. The Trump factor is also a major incentive for an amicable outcome. His belligerent trade posture means that the world and Europe realise that they do not need any additional disruption to the trading system. Policy makers on both sides of the channel therefore realise that the EU and Britain need to focus on improving their competitive advantages in the face of this environment and there will be pressure to minimise the Trump factor. Trump’s attitude to NATO and Russia suggests that Trump’s America cannot be trusted to defend Europe and indeed Trump appears to be in cahoots with Europe’s nemesis, Russia. The UK which has for centuries and is still a strong military force on the continent, will no doubt use this leverage in ensuring an amicable divorce.

Negotiations are going to become more intense and both parties are, as expected throwing punches, making moves which are ostensibly aimed at the opposing side but largely directed at their domestic audiences to demonstrate to their stakeholders that they are determined to put up a good fight. The EU also has to take a tough stand to deter other members who may harbour leaving. Michel Bernier the EU lead negotiator has for example stated that he seeks “solutions that respect the integrity of the single market” and going back on his initial positive position on the UK’s white paper, recently stated that the UK’s proposal is unacceptable because the EU would not delegate its customs policy and excise duty collection “to a non-member who would not be subject to the EU’s governance structure”.

Britain has posited that its “divorce settlement” is at stake in a no deal scenario, a point Bernier disputes because according to him that is a done and dusted deal. Both sides are making contingency plans, as they should, for a no deal scenario. These statements and position are typical of any such negotiation and Bernier is also miffed that the UK is trying to go over him by directly lobbying his bosses, EU member states. It is not going to be easy, and it will be messy, but with so much at stake and in this turbulent world, Brexit will happen without both parties being totally happy or unhappy.