Implications of BREXIT and the prospects of an India-UK FTA
By: Amb (Retd) Yashvardhan Kumar Sinha
National Law University, Jodhpur
Date: September 20, 2019
IMPLICATIONS OF BREXIT AND THE PROSPECTS OF AN INDIA-UK FTA INTRODUCTION
The impending divorce between the UK and the European Union has snow-balled into a Hollywood potboiler, with the essential elements of drama, suspense, bluster and a deep sense of foreboding, adding to the already volatile and incendiary mix that is BREXIT. The countdown has begun with 41 days to go before the UK exits the EU, unless of course a further extension is sought by the UK and granted by the EU, a prospect that Prime Minister Boris Johnson colorfully dismissed recently by saying that he would "rather be dead in a ditch” than ask the EU for a delay. Subsequent developments in Parliament may not give him much room for manouvre in this regard, unless a divorce deal is miraculously achieved before the end of next month.
The fall out of the referendum in the UK, held on June 23, 2016 (51.9% voted to leave, while 48.1% voted to remain), continues to haunt the island nation and recent events have only served to compound the crisis that Great Britain faces. To make some sense of BREXIT and the complexities surrounding the negotiations between the UK and the EU so far is a daunting task. Not only is the whole process imbued with uncertainty but is infused with emotion, often at the expense of realism and ground realities. One needs to understand the politics as much as the history of UK’s momentous decision to walk out of the EU.
While there has been a surfeit of reporting and analyses, on the reasons behind BREXIT, it may be useful to briefly touch upon the European project itself and the traditional British ambivalence towards it. With its genesis in the aftermath of the Second World War, the European project was born out of a widely held belief that a more united Europe would not again fall prey to the large scale destruction and devastation that visited the continent in the wake of the two calamitous world wars of the 20th Century. However, the UK has always portrayed itself, at least domestically, as a reluctant member of the EU. You may recall that it declined to accept an invitation to join the European Coal and Steel Community, founded in 1951 by the Treaty of Paris. Subsequently with the formation in 1957 of the European Atomic Energy Community (Euratom) and European Economic Community (EEC) set up under the Treaty of Rome the potential benefits of cooperation became apparent. This coupled with the post-war recovery in Germany and France led to a rethink across the channel.
Notwithstanding two failed attempts in 1963 and 1967, UK did succeed in its third attempt in 1973 to join the EEC. By that time European cooperation had progressed to a customs union, eliminating all custom duties amongst member states. Within a year of EEC membership, UK started asking for major changes to agricultural and farm policies of the EEC that were more beneficial for countries like France. At this point it may be useful to recall that the Norwegians had through a referendum in September 1972 scuttled Norway’s application for membership of the EEC. Hence the precedent of a referendum already existed. This influenced Prime Minister Harold Wilson to hold UK’s first referendum on EU membership on June 5, 1975 and even though the British public supported continued membership of the EU with 67% voting to stay and 33% voting for exiting the EU, within two years of entering the EEC, Britain was already exploring exit options. During the course of its membership of the EU, it often sought opt outs over issues like single currency, charter of human rights, justice and home affairs legislation etc.
We now fast forward to the present decade. The idea of an EU Referendum was devised by Prime Minister David Cameron in a ‘big EU speech’ (known as the Bloomberg speech) on 23 January 2013 to ward off the growing popularity of UK Independence Party (UKIP) under Nigel Farage and unify the Eurosceptic Tory backbenchers ahead of the 2015 General Elections. David Cameron promised a referendum on UK’s membership of the EU in the Conservative party manifesto for the 2015 General Elections. Cameron’s attempts to address issues relating to unfettered migration from the continent fell foul of EU regulations, notwithstanding the popular sentiment in the UK against perceived abuse of free movement by EU nationals.
It is also important to note the growth of right wing and anti-immigration sentiments (both from EU and non-EU) as seen in the outcome of general elections held in UK in 2010 and 2015.
It was the 2015 elections that brought forward issues with the potential of changing the regional and domestic political landscape of the UK. The good performance of the SNP meant the question of Scottish independence would continue to lurk despite the Scots having decided to stay within the UK through the 2014 Scottish referendum. It may be recalled that the results of the Scottish Referendum reflected a clear win for the Remain in UK (55%) against the Independence vote (45%). The turnout for the vote was high at 83%.
Rising euro-sceptic and anti-immigration sentiments and the fear of losing out votes to UKIP is believed to be the main reason for David Cameron promising to fulfill his assurance of a referendum on UK’s membership of the EU.
I have referred to the outcome of the historic June 23, 2016 referendum earlier. It is pertinent to note that England (53%) and Wales (53%) voted to leave the EU while Scotland (62%) and Northern Ireland (56%) voted to remain in the EU. Citizens were also divided with the young voting remain and the elderly voting leave with the turnout being high at 71.2%. The Leave side’s arguments of take back control” and fear of more immigration clearly won over Remain side’s arguments of ‘economic catastrophe’ in the event of BREXIT.
POST REFERENDUM NEGOTIATIONS
The results of the referendum took most by surprise and claimed an immediate casualty in Prime Minister David Cameron. The new Prime Minister Theresa May, reportedly a reluctant Remainer, struggled to come to grips with the momentous decision to upend links with the EU. It was only after almost six months that the first thoughts of UK Government policy on BREXIT implementation were revealed when Prime Minister Theresa May outlined her Government’s vision of a post-BREXIT ‘Globalised Great Britain’ and priorities for negotiations with the EU in a speech at Lancaster House on January 17, 2017. Her objective included finalization of a comprehensive free trade agreement with the EU, control of migration from the EU and maintaining the common travel area between UK and Ireland. She confirmed that UK would leave the single market as well as the customs union. She also insisted on parallel negotiations on the withdrawal agreement and a new free trade agreement.
Britain formally triggered Article 50 on March 29, 2017 when a letter signed by PM May was received by European Council President Donald Tusk. This was preceded by the approval of the Article 50 Bill by both Houses of Parliament.
EU’s response to the BREXIT trigger was the issuance of draft guidelines for BREXIT negotiations on 31 March, 2017 by the European Council. These guidelines or negotiating directives lay down the core principles of maintaining a balance of rights and obligations, ensure a level-playing field (to thwart UK becoming a quasi-tax haven), final financial settlement of UK’s dues to the EU, preserving the integrity of the single market, the indivisibility of the ‘four freedoms’ and that there could be ‘no cherry-picking’. It was also underscored that negotiations under Article 50 would be carried out as a single package and adoption of a phase-wise approach to agree on a withdrawal agreement first and then conclusion of transitional arrangements leading to an agreement on the future relationship between the EU and UK (as a third country).
Priorities for the EU reflected in the guidelines included conclusion of reciprocal guarantees for the rights and status of EU citizens in UK and British citizens in the EU, need for the avoiding a hard border in Ireland, settlement of British financial commitment due to the EU, preventing a legal vacuum and uncertainties for EU businesses and organizations trading with and operating in the UK and also the desire for EU to maintain a close partnership with the UK after its formal departure on March 29, 2019.
I do not intend to dwell on the tortuous negotiations that ensued between the UK and the EU, post the triggering of Article 50. However, it may be pertinent to briefly touch upon some of the important developments in order to understand the present impasse in negotiations.
The decision to go in for mid-term General Elections in June 2017 proved disastrous for Prime Minister May, as she lost the majority that she had inherited from her predecessor. This in turn adversely impacted on the state of play in negotiations with the EU and ultimately left her struggling for support in Parliament to push through a deal.
The subsequent dilution of UK’s position in negotiations with EU, came to the fore with the Chequers Plan in the summer of 2018, that laid out the type of future relationship between UK and the EU that the UK sought to achieve in the BREXIT negotiations. The main proposals included a free trade area for goods to maintain frictionless trade, supported by a common rulebook and a new facilitated custom arrangement, but only for the rules that are necessary to provide frictionless trade at the border. Apart from the resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson, May was confronted with a rejection by the EU of her plan. The EU maintained that the integrity of the European Single Market is not negotiable and there can be no cherry-picking of the market’s four freedoms – free movement of people, goods, services and capital.
A critical issue in the negotiations between both sides was the post-Brexit treatment of the Irish border. EU’s position is that the so-called "backstop option” for Northern Ireland was a key part of December 2017 phase one agreement with UK and must continue to apply "unless and until another solution is found”. May dismissed the EU backstop stating that this would be unacceptable as it would effectively shift the existing land border to the Irish Sea and compromise UK sovereignty. However, despite considerable divergence between UK and EU positions in the areas of geographical indicators, personal data, governance, implementation of a withdrawal agreement and post-Brexit treatment of the Irish border, miraculously both sides reached common ground and the Withdrawal Agreement, governing Britain’s departure from the EU was published in November 2018 and subsequently endorsed by the European Council.
The passage of the Withdrawal Agreement in the British Parliament was a totally different story altogether. An aborted vote in December 2018 materialised in January 2019 which the Government lost by a colossal 230 votes. The next vote due in February 2019 was also postponed to March and that resulted in a loss by 149 votes against the Government’s motion. Meanwhile the House of Commons voted against a no-deal Brexit under any circumstances but also against a second referendum. A series of votes in Parliament left the Government floundering though eventually a vote on extension on Article 50 was passed.
It was apparent that Prime Minister May had inherited more than just a crown of thorns. A divided Parliament and internecine strife within the Conservatives and Labour were a mere reflection of an increasingly polarised nation. The Irish backstop proved to be one of the insurmountable hurdles. May found herself in a precarious situation, between a rock and a hard place. Her inability to convince her party and Parliament eventually led to her stepping down as Tory Leader in June and resigning as Prime Minister in July 2019. A leadership contest within the Conservative party led to the election of Boris Johnson as Prime Minister. Brexit had already cost two Prime Ministers their jobs and a third is now attempting the Herculean task of managing UK’s impending divorce from the EU with all its attendant consequences. Mr. Johnson finds himself boxed into a corner after losing critical votes in Parliament this month on a no-deal Brexit and his plans of announcing snap elections in October, after controversially suspending the Parliament, a move that is being challenged in the UK Supreme Court.
Notwithstanding his statements that he would find a way out of the impasse, it is clear that his meeting with Jean-Claude Junker, President of the European Commission in Luxembourg on September 16 did not result in a meeting of minds. The next 41 days as Brexit approaches are going to be critical in the annals of British and European history.
IMPACT OF BREXIT
The extent of impact of Brexit on the UK and indeed the EU will depend on whether UK exits with or without a deal. A no deal Brexit would mean that there would be no transition period after the UK leaves, and EU laws would stop applying to the UK immediately. Unless countervailing measures are taken, this could have disastrous consequences for the UK, while EU would not remain entirely unscathed.
There have been various doomsday scenarios envisaged, including in official documents in the UK, about such an eventuality. I recall a report last year, while I was in London, about official estimates of the dire situation that could confront the British people in the event UK crashes out of EU without a deal. It was predicted that Dover port would close down in a few days and there would be disruption in freight traffic links; pharmacies in Scotland would run out of essential life-saving drugs in three days; food prices, especially of fresh vegetables and fruits would increase and there could be empty shelves and higher prices in supermarkets; air travel between the island nation and the continent would be disrupted in the absence of an enabling agreement; UK students studying in the EU and EU students studying in the UK would face a period of uncertainty; immigration controls at entry points into the UK would need to be strengthened immediately, with the current long queues at immigration counters in airports like Heathrow increasing manifold and so on. This is not an exhaustive listing of the severe impact that a no deal Brexit would entail but, just an indication of the disruption and chaos that could ensue.
No business can plan ahead when there is so much uncertainty surrounding a nation. BREXIT without a deal could plunge the UK into chaos and even a recession. The voices of concern of the CBI, Bank of England and others cannot be ignored. World leaders also have been cautioning against a hard BREXIT.
Hundreds of multi-national companies, especially from India, Korea, Japan and China have invested in UK because of free access to Europe. They are looking at relocating in order to secure their future business and growth in Europe. Some already have. According to a Bloomberg report earlier this year, 350 British companies were in advanced talks with the Dutch Government to move their businesses to Holland in the event of a no-deal BREXIT. Some Japanese, German, French and even British Banks were planning to move to Frankfurt. Sony and Panasonic have moved their headquarters to Netherlands. All the rhetoric of business with Europe under WTO rules does not take into account the additional duties that would accrue on British exports.
IMPACT ON INDIA AND PROSPECTS FOR AN INDIA-UK FTA
BREXIT provides opportunities and also poses challenges to India. India-UK relations are both wide ranging and robust, encompassing a broad vision for the future supported by a concrete and comprehensive road map for bilateral and global engagement. High level visits on both sides in recent times have provided an opportunity to further cement our partnership.
While the EU is among India’s largest trading partners, accounting for around 13% of India’s global trade in goods, the UK is ranked 17th in the list of India’s top 25 trading partners with India’s merchandise trade with the UK in 2017-18 estimated at US$14.5 billion with an additional US$ 7 billion trade in services. India enjoys a favourable balance of trade with UK. When it comes to investments, UK is ranked as the fourth largest inward investor in India, after Mauritius, Singapore and Japan, with a cumulative equity investment of US$26 billion since April 2000, accounting for around 6% of all foreign direct investment into India. India also is a major investor in the UK (4th largest). Around 800 Indian companies, with a total consolidated revenue of GBP 47.5 billion, have created over 105,000 jobs in the UK. The technology and telecom sector account for 31% of these revenues, with the pharmaceuticals and chemical sector accounting for 24%.
Brexit will not only impact UK’s trade and investments with the EU but also its other trading and investment partners. Indian companies, many of which have invested heavily in the UK are likely to be quite severely impacted by a no-deal Brexit, particularly those companies that use the UK as a gateway to the European Union and Europe. Even companies that do not have a significant exposure to the EU will feel the impact as a no-deal Brexit will lead to a perceptible economic downturn in the UK. Major investors like the TATA group are already hedging their bets and exploring alternatives.
Irrespective of a hard or a soft Brexit, UK has clearly identified India as a major partner, particularly in the post-Brexit era. The focus on India by successive British Prime Ministers and other key ministers is a testimony to the value attached to India as a major trading and investment partner. With the expiry of the Bilateral Investment Treaty in March 2017 and the absence of a Free Trade Treaty, the imperative to conclude an India-UK FTA is apparent particularly after Brexit. Both sides at the highest political level have committed themselves to conclude an FTA as soon as possible. However, such an FTA can only be signed after the UK leaves the EU and while both countries have their own wish lists, the parameters of a bilateral FTA will be predicated on the terms and conditions of the UK’s exit from the EU.
A Joint Working Group is already in place to explore the contours of a possible bilateral FTA. The 13th meeting of the India-UK Joint Economic and Trade Committee (JETCO) was held in London in July this year. While both sides noted the expansion of bilateral trade by 27% over the last three years, they looked forward to "exploring the building blocks that would allow for more ambitious trade arrangements in the future”. A sector-driven approach that identified key areas like advanced manufacturing, renewable energy, ICT, life sciences, healthcare, food and drink, animal husbandry, dairy, fisheries and so on imparts a more focused approach to the bilateral economic engagement. The progress made on implementation of the recommendations of the India-UK Joint Trade Review agreed at the 12th JETCO in London in January 2018 would help in identifying key areas and product lines on both sides that would need to be pushed. The Review would also help in eliminating any policy or procedural roadblocks that are identified. This would constitute an essential building block towards an FTA.
Both economies rely substantially on their service sectors and while both countries will focus on enhanced market access for their products and services, for India the importance of greater and easier access for skilled professionals, as well as students, would be important. The recent decision by the UK to revert to a two-year post study work visa for international students is a welcome development. However, much more needs to be done particularly with respect to easier access for Indian professionals such as doctors, engineers, those in the ICT sector etc. India will continue to insist on Mode IV access in negotiating an FTA with the UK. This would not be easy given UK’s priorities.
Key opportunities for Indian companies post-Brexit could arise in the food and agro products sector, since the UK is a net importer of food and food products from the EU. It produces about 25% of fruits and vegetables for domestic consumption. While 30% of its fruit consumption comes from Europe, around 80% of vegetables consumed in the UK is imported from Europe. Indian exporters would need to comply with the regulatory framework and accompanying phytosanitary requirements, depending naturally on what framework the UK adopts. I have already touched on the services sector, where Indian firms could help in filling the vacuum that could arise after Brexit, particularly with the receding European footprint.
While London is undoubtedly one of the leading global financial centres and Brexit is unlikely to change that, it will face a huge challenge in case there is a flight of capital after Brexit. A number of Indian companies, particularly PSUs, have raised rupee-denominated bonds, popularly called masala bonds, in the London Stock Exchange. UK’s credit rating has been cut, and given that most buyers of the bonds are from the EU, there is nervousness around these bond issuances.
India businesses have presence in a wide array of sectors in the UK which include automobiles, auto components, pharmaceuticals, gems and jewellery, education and IT enabled services. Most of these sectors will be vulnerable to changes in demand and currency values.
India is a major supplier of auto components to the EU region. The region accounts for about 36% of India’s total auto component exports, while the share of UK is about 5%. The UK passenger vehicle market is highly export oriented and the segment has close linkages with the EU automotive market. The anticipated slowdown in the UK and the EU region and disruption in the supply chain will have a dampening effect on the sector. Also, the depreciating Pound will impact the revenue stream of companies over the near term.
India is one of the largest exporters of IT-enabled services and the sector has significant exposure to the European market especially the UK. UK accounts for about 17% of India’s total IT exports. IT companies thus are expected to face the heat in light of Brexit. Given the risk of further moderation in growth in the UK and EU, there is an increased probability that the companies lower their IT budgets (a discretionary spend). This would have an impact on the domestic software companies. Many of the largest Indian employers operate in the services sector, which will be seriously impacted. UK businesses would be treated as third country service providers by the EU, with potential loss of market access and increase in non-tariff barriers.
Britain’s exit from EU in 2019 could destabilize the steel industry which has enjoyed the protection of EU labour law and safety standards, as well as barriers to unfair completion from other countries. If a hard Brexit comes to fruition, those protections will no longer apply.
Readymade garments are one of the key export items to the UK from India. It accounts for about 20% of India’s total exports to the UK. The sector is expected to feel the pinch on account of moderation in demand. Nonetheless, some of the garment exporters feel that they might be insulated if a Free Trade Agreement is negotiated with the UK post Brexit.
While there are numerous challenges there are also huge opportunities for Indian companies. A study carried out by the Commonwealth Secretariat after the Brexit vote has identified 13 new products which India can export to the UK. It has estimated market access of around $2 billion for these products. A well negotiated bilateral trade arrangement between the UK and India has the potential to increase bilateral trade by 26%. In fact, the report says that the UK and India can secure a far-reaching deal which will see the value of British exports to India rise from GBP 4.2 billion to GBP 6.3 billion, an increase of GBP 2.1 billion, or 33%. Imports from India by the UK will rise by around GBP 1 billion. UK’s balance of trade could improve even though it may still be in favour of India.
In conclusion, I would like to emphasize that Brexit does provide an opportunity to expand India’s trade and economic relations with the UK. Much will depend on the fine print of Brexit and the ensuing negotiations. The challenges that Brexit throws up have to be squarely addressed before an India-UK FTA becomes a reality. Even though the Indian economy may be in better shape than a post-Brexit UK, we will need to leverage our strengths so that the complementarities in our economies are harnessed. We need to work towards a win-win situation for both countries so that we are able to translate adversity into an opportunity for mutual prosperity.
The unfolding saga of Brexit will determine not only the contours of our future economic engagement but also its pace and content. The resilience and resourcefulness of the British people are well known and should never be underestimated. The next few weeks will be crucial for the UK and also for all its partners.
September 20, 2019
Disclaimer :-The opinions/views expressed in the Lectures are author's own and do not represent the views of the Ministy of External Affairs.