What Brexit Means Down Under

Much to the surprise of experts, governments, and businesses around the world, Britain and Northern Ireland voted to leave the EU in June of 2016. The referendum result shocked not only the UK and the EU, but also the global economy as a whole.

Nevertheless, the UK government has been determined to honour the results of the vote, and initiated the Brexit process officially on March 29, 2017, which is set to culminate in the UK’s departure from the EU on March 29, 2019, two years later.

After two years of tense negotiations and internal political wrangling, the UK appears to have made no appreciable progress in establishing the UK’s future economic relationship with the EU, or the rest of the world. As of today, Brexit appears to be progressing toward what was forecast as the worst-case scenario: a no-deal Brexit, in which the UK’s trade relationships would revert to World Trade Organization rules. Such an outcome is predicted to not only devastate the UK’s economy in the short term but may also have significant secondary impacts on its major trading partners around the world.

Why did the UK join the EU at all?

To understand the import of Brexit on a global scale, it’s important to understand the original purpose of the EU. Decades before the EU was formed, the EEC was established by France, West Germany, Italy, and the Benelux countries as a way to economically unite European countries. Close economic and political cooperation was meant to help these countries both to economically recover from World War 2 and to help build long term relationships that would serve to prevent future martial conflicts.

While no clear plans seem to exist for the UK’s economic future, UK politicians appear adamant that a no-deal Brexit will be avoided

It was this economic community that the UK joined in 1973, after the 1969 resignation of France’s Charles de Gaulle, who had vetoed Britain’s prior attempt to join in the 1960s. When the single market, the EU as we know it today, was formed in 1992, Britain became a part of it by default.

Why Brexit?

Over time, the EU’s influence over its constituent countries grew, even as more and more countries joined. Unlike the EEC, the EU functions as far more than just an economic community, but rather as a loose superstate comprised of 28 countries. The UK government, for its part, found itself torn between the economic advantages of membership, and the vocal opposition of its right-wing voters even since before it ever joined the EEC.

Before it ever considered joining, the UK had planned to reestablish its status as an economic superpower by developing its own Commonwealth trading bloc. For many British voters, joining the EEC, and later being part of the EU was perceived as a humiliation for a country that had, at one point, governed nearly one-fourth of the world’s landmass. Capitalising on this, British politicians have, whenever possible, laid blame for the country’s economic failures on the EU as a whole, while doing their best to claim credit for British successes nationally. As a result, a large portion of UK voters had little or no concept of how the EU-UK relationship actually works, or how it helped the UK. Instead, it has been primarily viewed as a drain on the country’s resources, and an impediment to its success.

The Global Financial Crisis and the Refugee Crisis

Following the financial crisis in 2008, many of Britain’sfears about the bloc seemed to become reality. Theeconomies of Greece, Spain, Italy, and Ireland werein shambles, apparently validating UK prejudicesabout propping up weaker countries throughits contributions to the bloc. At the same time,immigration to the UK increased as other EU citizens,as well as immigrants from outside the EU, flocked tothe country in search of work. Under pressure by hisown conservative party, which routinely capitalisedon vague anti-EU sentiments, Prime Minister DavidCameron was forced to agree to hold a referendumon whether the UK should seek to leave the EU or toremain in it, before December of 2017.

Expecting it to offer him a strong pro-European mandate, the Prime Minister went ahead with the referendum in 2016. However, Brexit campaigners, riding a wave of anti-immigrant sentiment following the 2015 refugee crisis, and capitalising on the public’s weak grasp of the EU’s relationship with the UK, won the simple in-out vote 52% to 48%.

The UK’s negotiation nightmare

The UK economy is the second largest in the EU, and its departure represents a serious loss for the bloc. While this does give it some leverage in negotiating post-Brexit trade deals with the EU, the UK has made practically no progress in securing a deal. The reason for this is that Brexit supporters are determined to secure trade terms that are more advantageous for the UK than EU membership was. Effectively, they want to retain all of the benefits of membership, while simply doing away with the associated costs. After all, this was what they had promised their voters.

EU member states, for their part, see little benefit to agreeing to any such relationship. The UK relies on the EU for over half its import goods, and 44 per cent of its export market. This means that future trade complications with the EU could severely damage the UK’s capacity to trade internationally while being merely painful for the EU. Furthermore, the UK is not able to negotiate new trade deals with non-EU countries until after Brexit takes effect, which would force other trading partners to also begin trading with the UK under WTO rules. This could severely impact the UK’s ability to trade competitively until such a time as new trade deals can be made.

This puts Prime Minister Theresa May, and British negotiators in a position where any deal the country can feasibly negotiate will fall far short of what politicians need to satisfy their pro-Brexit constituents. As a result, the country has gone through two years of negotiations with the EU to produce nothing but a single lacklustre draft deal that the British parliament has vociferously rejected.

Most UK businesses have made no preparations

While no clear plans seem to exist for the UK’seconomic future, UK politicians appear adamant thata no-deal Brexit will be avoided. As a result, 5 weeksbefore the final Brexit date, UK businesses are entirelyin the dark with regard to how they will be able tocontinue to operate internationally after March 29. Notknowing what to do, more than half of the country’sbusinesses have taken no steps of any kind to prepare.

What a no-deal Brexit means in the southern hemisphere

In the southern hemisphere, Brexit manifests primarilyas a bureaucratic headache for exporters, as businessestry to work out what existing EU import quotas meanfor trade with the UK and the EU after Brexit. Despitethis, total trade with the UK is valued respectively at 1and 2 per cent of GDP for New Zealand and Australia.While slowed growth in the UK might adversely affectsome businesses who trade with it, it’s simply notenough to cause larger economic problems.

This doesn’t mean, however, that there is nothing tobe wary of going forward. After all, Brexit is just one ofa whole list of events that are rattling global financialmarkets and raising trade barriers around the world.

Global financial markets are vulnerable

The US’ escalating trade war with China has already slowed trade between the two countries noticeably and is making investors increasingly nervous with talks of a recession in the world’s two largest economies. China’s exports in December of 2018 dropped by 4.4 per cent, while imports fell by 7.6 per cent. This, as well as the US’ internal political difficulties, are putting pressure on 5 of the world’s 10 most important financial centres: New York City, London, Hong Kong, Shanghai, and Beijing. These are ranked as the first, second, third, fifth, and eighth largest financial centres in the world respectively.

The growing threat of trade barriers

If the UK fails to secure a deal that would preserve its international trade deals by 29 March 2019, it will automatically revert to trading under WTO rules. With the US and China already imposing major tariffs, this would make the UK the third of the world’s top 5 largest economies to erect significant trade barriers. This will strongly encourage other countries to follow suit, hoping to protect businesses in their own economies. Ultimately, this would make international trade more expensive for all countries, slowing growth and effectively stalling globalisation.

While it will likely have a secondary chilling effect on the world economy, including the economies of Australia and New Zealand, even a no-deal Brexit would be unlikely to cause real damage. In an analysis of Australia’s position in the global economy, the International Monetary Fund (IMF) determined that global conditions might have some negative impact on the country, but would fail to halt its strong growth. While businesses should certainly pay attention to the larger global developments in the coming months, most will remain well protected from any direct Brexit impacts.

Nigel Smith www.covisory.com nigel@covisory.com