That night will never be forgotten. On the evening of June 23rd last year, the United Kingdom won by majority vote to begin negotiating their “exit plan” and departure from the EU. The sudden awakening of Article 50 was a monumental moment in British history, but it came crashing down upon the hearts of many across the world who favour an unbroken Europe. So here we are today, almost one year on from the vote and in a handsome position to assess the start of the post-Brexit era.
The island nation
By looking at the historic relationship between the UK and the EU over the past 40 years, the physical separation from the European mainland has always served to reinforce at least a cultural distance between the two economic powers, with the UK priding itself on its innate independence and wealthy heritage. This includes anything from the use of its own language, the monarchy and legal systems to the Commonwealth and global influence through an active commitment to the UN security Council and membership of the G7/ G20 bodies.
Janice Morphet, in her recently published book, “Beyond Brexit?: How to Assess the UK’s Future”, draws attention to some important differences. Number 1: The UK doesn’t see the EU as a main source of political influence in global affairs. The historic relationship with member states across two world-wars has brought a different “sensibility to the culture and politics” of much of the EU. Number 2: Europe is historically more “welfarist” in its culture when compared with the UK. It’s supportive of its citizens, against the liberalisation of labour markets and in favour of working people through trade unions. Number 3: Westminster has kept the EU at an arm’s length from the outset, with EU agreements seen “as less binding than their legal status requires”.
In short – the UK has always been encouraged to view the EU through a British lens, where policy “is made in five-year electoral cycles, in an episodic way”, according to Morphet. This is something the UK has never culturally adjusted to, helping blossom it’s difficult relationship with the EU in comparison to other mainland states. And above all, there has always been limited knowledge and familiarity of how the EU worked, with no common-language policy enforced or understanding of the direction in which the EU was heading. Many Britons, including myself, feel no cultural connection or similarities to the EU and the unelected directors in Brussels (we will visit this point later) whatsoever.
“The UK has always been encouraged to view the EU through a British lens” …
The Importance of a united Europe, without Britain
But despite the differences, (of which there are many) the EU is the UK’s largest trading partner with roughly 50% of UK GDP derived from the EU’s 27 other states. The membership provides a discounted trade cost, making goods and services cheaper for UK consumers and the world’s largest trading area for UK business’ exports.
Looking towards LSE’s recent paper on Brexit, titled “The Consequences of Brexit for UK trade and living standards”, it’s clear that higher tariff and non-tariff barriers to trade will be imposed on the UK as a sanction to them leaving and to maintain its own longevity. The paper argues that with the UK representing just 18% of the EU’s single-market GDP (Dhingra, et al. LSE), many claim the UK are in a difficult position to try and negotiate some kind of non-membership deal composed of delicately attached tariffs.
Figures such as the above have led professors, economists, scholars and academics world-wide to massively criticise the decision to leave. Diane Coyle, professor of economics at Manchester University goes as far as arguing that the “Brexit vote will tear a hole in the fabric of the economy”. Since the vote, several banks have claimed that Brexit is forcing them to rethink their attachment to the UK and review investment decisions. HSBC said in February that it would need to move 1,000 jobs to Paris, where it already has large operations progressing. Jamie Dimon (JP Morgan CEO), when quoted by the Guardian, argues that Brexit could mean the UK operation losing a quarter of its 16,000 strong workforce. Some firms are looking towards Hong Kong or Singapore which would be a cheaper alternative if forced to operate outside of the EU.
“Brexit vote will tear a hole in the fabric of the economy”
The renaissance of the City
Despite the expected short-term downturn, there’s still cause to be assured of a functioning post-Brexit world, where the UK could share a relationship with the EU similar to that of Norway, or a member of the EEA (European Economic Area). There are three main alternatives for the UK following Brexit: remain part of the single market like Norway, who have no tariffs on trade but make significant contributions to the EU (83% of the UK’s payment [House of Commons, 2013]); negotiate bilateral trade deals with the EU as Switzerland and Canada have; or trade with the EU under the WTO rules as the US and many non-EU countries do. According to LSE’s paper mentioned earlier, it’s likely that the UK will have to implement rules concerning the single market, including legislation in relation to: employment, consumer protection, environmental and competition policy. The severity of the rules imposed on the UK, however, is the real question we won’t know until we begin to edge closer to 2019. These sanctions have the capabilities to make or break the UK’s economy following on from Brexit.
“There are three main alternatives for the UK following Brexit”…
Nonetheless, the UK will effectively be an independent player for the first time in over 40 years and free to seek its own trade deals with the rest of the world. A lot will depend on Britain’s ability to negotiate FTAs (foreign trade agreements) with the rest of the world, giving many pro-Brexiters the cause to believe in the promotion of trade with China, India and the US among many others. Iain Mansfield, the winner of last year’s IEA Brexit prize, made an interesting point in a blueprint for Britain’s future which won him €100,000. He successfully outlined the potential for the UK to focus on building FTAs with major trading nations, deepen its engagement with organisations such as the G8, G20, OECD and in Europe, while securing open-trade relations.
Whether you believe the UK will be granted the opportunity to continue trading within Europe while progressing new agreements elsewhere or not, it’s too early to say for definite that this route would not be a success. By drawing attention to this “optimistic” outcome so often cited by academics worldwide, we can find quotes in recent articles by Bloomberg and the Guardian who state that “96% of business leaders were confident their company can adapt to life outside the EU” (Bloomberg), showing the kind of confidence and resilience many have in the wake of the decision. In fact, wage growth currently remains solid, unemployment continues to stay low, business activity continues to expand and house prices are still rising (The Guardian). The FTSE 100 share index was even close to an all-time high in October, a long-way off the predictions many threw forward in the early days of the referendum.
“96% of business leaders were confident their company can adapt to life outside the EU”
Politicians including Johnson and Gove have argued that it’s likely the tariffs imposed on the UK will be lower than expected, purely because of the UK’s lust for importation and as its status as the fifth largest economy worldwide. Morgan Stanley went as far as backing the leave camp in “winning an arm-wrestle” with Brussels over trade, especially in relation to automobiles. In a report they produced this year, it’s argued that “Europe has as much to lose, if not more, to lose than to gain from its access to the rich and large UK market, with over €30bn in annual export sales, and potentially €3-4bn in UK earnings”. Again, when we observe the financial services industry, split between the banks and insurers around “the City” of London, Canary Wharf and the hedge fund and private equity businesses that populate Mayfair, it’s clear the UK has a sovereign wealth worth investing in. Perhaps the UK really are in a position to negotiate their terms that best fit all nations on an economic perspective?
“Europe has as much to lose, if not more, to lose than to gain from its access to the rich and large UK market”
Pierre Henri Flamand, senior portfolio manager at GLG partners, looks at Brexit as potentially producing a “Big Bang” or an excuse to improve London’s prospects of doing business elsewhere like Asia and Africa where the ability to strike trade agreements may have been hampered by the UK’s membership of the EU”. Others, including Harriet Agnew of the Financial Times, state that “the UK now has the ability to reinvent itself with a new mission. It’s an exciting opportunity to deregulate and stimulate growth”. Outside of the Article 50 process, UK universities and research funders are already exploring opportunities to scale up international collaboration. This could include bilateral agreements with the US, and Commonwealth countries like Australia, Canada, India, Singapore and New Zealand, according to ScienceMag’s James Wilsdon.
Many in the City resented being ruled by “an unelected bureaucracy in Brussels” (Financial Times, 2017). London now has the chance to become the Singapore of Europe, a less regulated offshore centre which should be competing with cities outside of Europe, like New York, Hong Kong and Shanghai, according to Howard Shore, executive chairman of Shore Capital Group.
The exit from the EU may require the UK to quickly renegotiate existing FTAs and will most certainly require them to request deals with new partners, particularly those in the Asia-Pacific where economies “have a heavy reliance on trade”. These agreements have the potential to be more favourable and deeper than existing EU agreements and can include emerging issues such as non-tariff measures and e-commerce. But at this point in time, a lot depends on the decisions made by Brussels and the influence of Merkel who naturally wishes to keep the EU thriving, with or without the UK. If Britain successfully negotiates their way out of Europe and maintains profitable FTAs elsewhere, the aforementioned data suggests that there’s hope for a world in which Britain can thrive outside the realm of the European Union.
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Please find the link below to Janice’s fantastic book on Brexit, as quoted in the article.