Post-Brexit tremors, cracks and opportunities
View(s):
I thought of digging into the emerging economic affairs of Brexit as well as its implications for Sri Lanka. Economic implications of Brexit in both the UK and the rest of the world are essentially linked to its political dimensions, compelling us to look at them too.
Neither Britain nor the UK
It was, colloquially Britain’s exit, but theoretically the term Brexit refers to the exit of the United Kingdom (UK). Officially, as the UK refers to the “United Kingdom of Great Britain and Northern Ireland”, it was the UK which left the EU. But even this answer is inconclusive.
Actually, was it the UK or Britain which left the EU? Probably, it may not be either of them!
Northern Ireland is due to move further away from Britain creating a new “soft border” between the two countries. While Britain consists of England, Wales, and Scotland, there are already indications that Scotland would seek returning back to EU membership independently. This would create another split between Scotland and rest of Britain.
After all, there is 11-month period of time until December 31, in order to make the UK a non-EU member country. This is not the end, however. There is time until 2024 for the UK to carry out post-Brexit adjustments.
The UK has stayed 43 years in the EU by the time that it decided to leave the EU in June 2016. As a result, the EU has formed part of the UK’s legal and regulatory machinery, which now requires time for re-adjustment.
Choices for the UK
Since the UK is no longer an EU-member, it lost the free trade opportunities with EU member countries and the other countries which have free trade deals with the EU. The first category includes the remaining 27 EU-member countries with about 445 million population. The second category includes the countries with which the EU has more than 20 trade agreements.
About 50 per cent of the UK trade is with the EU-member countries, and another 10 per cent with the countries having trade agreements with the EU. This leaves only about 40 per cent of the UK trade, coming under the WTO rules governing tariffs. Brexit means that the UK is going to lose all its “free trade” privileges and benefits affecting 60 per cent of trade, which is a significant blow to the UK economy.
With the application of tariffs after Brexit, the UK exports will be expensive in the EU as well as in other countries which are having trade deals with the EU. And the UK will also choose to apply or, rather force to apply, its own tariffs on imports from these countries which arrived earlier under free trade conditions.
Leaving free trade and adopting WTO rules means the application of border controls and customs procedures, which would also raise trade costs. The UK is primarily a service-oriented economy now so that services exports such as banking and finance will also lose its guaranteed EU market access.
The main problem is that the departure from “free trade” in goods and services affects businesses in the UK. The resulting business contraction would affect economic growth and employment as well.
The UK, however, gained the advantage of deciding on its tariffs with the EU as well as with countries outside the EU. This means that, now the UK has the ability to decide “free trade” with all the countries in the world, if it wants to do so in order to minimise the economic losses of Brexit.
Britain's Prime Minister Boris Johnson reacts as he delivers a speech at the Old Royal Naval College in Greenwich, south east London on February 3, 2020
The UK has decided to go for a series of free trade agreements (FTAs), as it seems to be now, as many as possible. In the run-up to Brexit, the UK has already prepared to enter into over 20 trade agreements as well as about another 20 new agreements. The UK can sign all these FTAs after the completion of Brexit at the end of this year.
Except a few rich countries – particularly the US, Japan, South Korea, Singapore and some Scandinavian countries, most of these trade agreements are with “developing” countries. In order to retain the benefits of trade with the EU countries, the UK wants to have a new FTA with the EU as well, which is yet subject to negotiations.
Trade in the split UK
The biggest headache of the Brexit is the territorial border between Northern Ireland and the Republic of Ireland. Should it be closed down or be kept open? Technically, neither of them are possible after Brexit; why?
Northern Ireland (part of the UK) and the Republic of Ireland (part of the EU) are geographically within one island, which is divided by a land border. To put it differently, it was also the only land border between the UK and the EU.
As long as the UK was an EU-member, this land border didn’t matter. But after the UK broke away from the EU, now it matters, causing the biggest headache of the Brexit deal.
Technically, the Ireland border should be closed in order to make Brexit a sensible move. But it cannot be “closed”, because there is “free trade” between Northern Ireland (part of UK) and the Republic of Ireland (part of EU). The biggest trading partner of the Northern Ireland is the Republic of Ireland. Even for that matter, the border cannot be kept “open”, because then there is no “Brexit” when the UK border with the EU is open.
As part of the approved Brexit deal, Northern Ireland is prepared to stay little away from the UK and little closer to the EU. Thus, there will be a “half-opened border” to the Republic of Ireland and a “half-closed border” to the rest of the UK, which is Britain. If Scotland decides to return to the EU membership independently, these territorial border matters get even more complicated.
Under this new border arrangements, however, goods transported from Britain to Northern Ireland will be subject to tariffs, – then, it looks like “exporting” to another country. However, tariff paid will be refunded only if such goods remain within Northern Ireland. If they cross the border to the Republic of Ireland (that is EU), there will be no refund. Furthermore, Northern Ireland will have to maintain consistency in its trade with the Republic of Ireland, by adopting EU rules rather than UK rules.
Sri Lanka – UK FTA?
Significant economic implications of Brexit for Sri Lanka is primarily through trade. The UK has departed from the EU and, not from free trade. In fact, the UK is likely to promote free trade even more so that developing countries such as Sri Lanka can even improve the benefit of trade with the UK.
Any EU trade concessions that Sri Lanka enjoyed so far, such as the GSP +, will have to be re-negotiated with the UK as well. Other than such arrangements, for a country like Sri Lanka, exporting to the EU and to the UK makes no difference.
While Sri Lanka’s exports to the EU market account for about 30 per cent of total, almost one-third of this goes to the UK. Sri Lanka’s trade value with the UK exceeds GBP 1 billion, while the country has enjoyed a constant bilateral trade surplus. The worrying aspect of this bilateral trade is its dismal performance over the years.
More importantly, there are new opportunities too: It is important for Sri Lanka to negotiate even for a FTA with the UK not only for trade in goods, but also for trade in services. One of the important service areas could be the education sector in which Sri Lanka could reap much benefits in many different ways.
So far Sri Lanka has been negotiating FTAs only with countries with which it has bilateral trade deficits. However, again the worrying factor is that FTAs alone are unlikely to bring about significant trade benefits, when they are implemented in isolation without addressing the sluggish export growth issue at home.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk).