Economics and politics of Brexit

Weighing the pros and cons in the final analysis is not easy

It has been difficult to come across a well-considered opinion piece in favour of Brexit abroad or in India. Nevertheless, UK citizens voted for it by however small a margin. Those in favour, let us recall, comprised the ordinary citizenry being of the opinion that they were being eased out by European immigrants, thus losing jobs at acceptable pay and conditions. They were silent yet effective in casting their votes. However, appropriate analysis by Brexiteers has not flooded the media except for a few opinionating politicians. Could this be surmised to be a reflection of their confidence that Brexit is the right path and that it will occur and, perhaps, the outcome would even be their preferred hard Brexit? The answer is probably in the affirmative.

In July, the UK government issued a statement from Chequers, followed by a White Paper. As one examines them, it is hard not to conclude that, ceteris paribus, they have merit. Of course, there are areas of obfuscation or of pushing a selected matter into the future. But, all negotiated deals emerge that way by virtue of the fact that they are, by nature, second-best solutions for both parties. 

Overall, the economic package makes sense. Trade in goods will continue to follow a “common rulebook” allowing trade to occur seamlessly between the UK and the EU after Brexit. Yet no analyst is pointing out that Ireland’s vehement earlier opposition in accepting a trade border with Northern Ireland (part of the UK) gets immediately resolved. And, overall, free trade in goods makes eminent sense as a goal for the UK to pursue in the global context. So trade in goods with the EU is subsumed and consistent with it. For this, the UK has agreed to accept and pursue EU standards in regulation and clearances. Some have called it subservience, ignoring that trade in goods, including agriculture, with any trading partner is invariably subject to multi-institutional regulation.    

Services will be treated differently, to no small extent due to the EU’s perception of an opportunity in charting its own growth in the financial sector. No doubt the UK is likely to face significant realignments in its financial sector. Of course, the UK prefers a continuation of its pre-eminent position as a leading financial hub but the EU is attempting to curb that continuation just for free. Thus, the UK will have to pay a price for it mainly in the form of some uncertainty in the broader ramifications for its economy. 

Nevertheless, it may be worth taking this risk because, first, the UK has established a modern financial centre at Canary Wharf on the shoulder of its colonial experience when it managed international finance and trade much more so than any other colonial power. As of now, therefore, it is not surprising that few financial entities have revealed any rush to move out. Moreover, the continuation of English as lingua franca will certainly continue to buttress the UK for the foreseeable future.  

Illustration: Ajay Mohanty

There are challenges, however, in administration and commensurate implementation, for example, the UK’s proposal to collect customs duty for the EU, though not the EU doing the same for the UK. Why the EU would agree to it is unclear. Similarly, the UK’s assertion that it would abide by meaningful regulation in environment and social sectors, consumer protection, digital economy and others comprises phrases such as “close cooperation… maintaining…(or)… committing to high regulatory standards… exploring options… new relationship.” These appear as work in progress at best or hollow at worst. Most of all, the UK’s determination to emerge from the European Court of Justice and take up all litigation between the EU and the UK through a specially appointed committee cannot be expected to slip through without strong resistance from the EU.   

The aspect I view as the original Brexit trigger, net immigration, should also have been dealt with more clearly, or analytically, in the two official documents. It is understandable that immigration to the UK from the EU that has been three times as large as emigration from the UK to the EU is unsustainable and the outcome of the Brexit Referendum centred primarily on this issue. The Chequers statement, however, just said, “end free movement, giving the UK back control over how many people enter the country”. As in “A Chequered Tale,” a July 17 editorial in Business Standard correctly pointed out, the Chequers statement described the free movement as “non-negotiable”. Subsequently, the White Paper revealed that the immigration Bill would finally reflect a report of the Migration Advisory Committee. Thus, at present, the future movement of labour in construction, farms, hotel services, leave alone professionals, remains uncertain.  

How this would impact India and emerging economies is unclear though apprehension prevails. For it is not unlikely that the excess demand for labour generated post-Brexit would necessitate opening up the supply of labour from non-EU sources. In the medium term, the restrictive policy engendered by the Conservative governments of  David Cameron and Theresa May on post-degree students seeking even short-term employment would become unsustainable. And there has been strong criticism of the government regarding its botched immigration policy retrospectively deporting Caribbean immigrants after entire work lives in the UK. Thus, while the free movement to and from the EU is bound to be contained, immigration from the rest of the world may be expected to counter that to no small extent.    

In sum, there are pros and cons to Brexit and to what may be expected next year regarding arrangements that finally emerge. As I have pointed out in earlier columns, Brexit should not be assessed in a static context. Within the EU, Germany and France take the lead with a coyish attitude towards the UK which has been uncomfortable in its third position or worse. Travelling back, European history reveals that, at least from the reign of Philip II of Spain, Elizabeth I of England was considered a thorn from that ‘island nation’— and, subsequently, she defeated the Spanish Armada. Britain’s exclusive leadership era, brutal as it was, comprised less than three centuries of colonialism, counting in its American colonies. Post Second World War, it lost that position. It did not regain even comparability despite joining the EU. Now it has selected the adventurous path of attempting to regain that lost glory. May it remain exclusively a European matter with only beneficial side effects for the rest of the world.