The United Kingdom (UK) and the European Union (EU) have had a love-hate relationship. Till the end of the Second World War, the UK had an enormous empire, with territories around the globe. It was also on the forefront of the industrial revolution and was the leading industrial nation till the 1920s. Well before the Second World War, its dominant position was being eroded; it was losing its colonies while other countries were industrialising very rapidly. By the end of the Second World War, its days of glory were over. It joined the European Economic Community (which was later to become the EU) only in 1973, long after its formation in 1957. During the four decades since, British politicians have always skirted the issue: should Britain remain a member of the EU or go it alone.
When, in 2010, David Cameron became Prime Minister as the leader of the Conservative Party, his party had made an electoral pledge to hold a referendum on UK's membership of the EU. In 2015, the referendum was held: 51.9 per cent of the voters chose to leave while 48.1 per cent voted against leaving - a gap of only 1.3 million votes. Cameron, who had canvassed to remain in the EU, resigned. It would be useful to examine some of the key arguments on both sides of the debate.
SOVEREIGNTY: There is no doubt that some sovereignty is given up by remaining in the EU. For instance, in matters of trade, agricultural policy, human rights, foreign policy, counter-terrorism, etc. it is the common policy of the EU that supersedes domestic interests; of course, the UK contributes to developing such policy in Brussels. The UK has been quite successful in retaining some flexibility even within the EU. For instance, it has not joined the Euro (common currency), the Schengen agreement (common visa), and enforced migrant quotas. Membership of North Atlantic Treaty Organisation (NATO), the United Nations (UN), and the World Trade Organisation (WTO) implies surrendering some sovereignty, but the EU requirements are much more intrusive.
IMMIGRATION & JOBS: EU laws oblige the UK to allow EU citizens to travel to and work in Britain, while the British have equivalent rights in the EU. 2017 statistics reveal that about 3.7 million (of whom about 2.2 million are working) EU nationals, and about 2.6 million non-EU nationals, live in the UK. Statistics of British citizens living in the rest of the EU may be almost a million.
Most of the EU nationals working in Britain are in the service industry, and the net effect on the economy has been overwhelmingly positive. It is estimated that about a million Polish are in Britain, mostly in the construction industry. Following Brexit, should there be a sudden departure of EU workers from Britain, the immediate results would be devastating for Britain. Yet, "immigration" has been one of the most important considerations for many voters who opted for termination of ties with the EU. The statements of the political leaders demonstrate that they are fully aware of the contribution of EU workers in Britain, and are unlikely to take a harsh decision that may force their departure.
It is difficult to estimate how many jobs in the UK would be lost upon leaving the EU, if at all. If trade and investment were to fall, after Brexit, many jobs in these sectors would be lost. Should trade and investment rise, more jobs would be created. However, a drop in immigration would imply more jobs for those who remained, but specific skill shortages would hold back the economy in the short run, in selected sectors.
TRADE: This is an area that holds the most challenges. The EU is the UK's largest trading partner, and any disruption in that arrangement would have a major impact on the economy. In 2017, the UK exports to the EU were GBP 274 billion (about 44 per cent of total UK exports) and imports from the EU were GBP 341 billion (or, 53 per cent of all imports). Clearly, the interest in maintaining the existing trading arrangement would be from both sides, probably more so from the EU that had a surplus of GBP 67 billion.
Negotiating trade deals is another area of extreme uncertainty. The GDP (gross domestic product) of the EU is currently estimated to be about $ 18 trillion; compare this with that of the US at roughly $ 19.4 trillion, and of China at about $ 12.2 trillion (2017 data). Within the EU, the UK has the second-largest economy amounting to $ 2.8 trillion. This gives the UK considerable economic power within the EU, and in EU trade negotiations with non-EU countries/regions. However, once the UK leaves the EU, it becomes a much smaller entity when it comes to trade negotiations with non-EU members. Analysts question whether, once outside the EU, the UK will be able to negotiate deals comparable to those that the EU can get. On the other hand, the UK will be free to follow its own specific interests in the negotiations. A drawback will be lack of trade negotiations expertise - for decades, trade negotiations have been handled by Brussels, and the UK seems to have a serious lack of skilled trade negotiators.
The infrastructure for trade, should Britain leave the EU common market, will be a nightmare for the UK. Currently, there are no customs border controls between the EU and Britain. Setting up border controls, and manning them with suitable personnel, will not be easy. Current expectations are for long delays at the border, and temporary shortages in the UK retail shops. From late last year, the UK has been making preparations for customs controls in the event it leaves the EU without a deal (no-deal Brexit), but there are no signs of such preparation on the EU side.
A critical issue in the negotiations with the EU relates to Northern Ireland's border with Ireland. Northern Ireland is a part of the UK, and has traditionally had open borders with Ireland. When the UK leaves the EU, Northern Ireland may be required to have a hard border, and border controls, with Ireland - Northern Ireland would never agree to that scenario. No acceptable solution has been found in the current negotiations with the EU; this will remain one of the major sticking points in any Brexit deal.
Nobel laureate Paul Krugman observes that "…Exit from Europe's customs union would substantially raise transaction costs on roughly half of Britain's trade. This would impose a cost on overall British real income that most estimates put at a low single-digit percentage of GDP - say, 2.0 to 4.0 per cent."
INVESTMENT & FINANCE: The London Stock Exchange is the largest in Europe, and is the gateway to Europe for US, Middle-Eastern and other investors. Its market capitalisation exceeds US$ 4.6 trillion (2018); the closest European stock exchange is Frankfurt, with a capitalisation of under two trillion dollars. Should the financial firms in London lose the right to operate freely in the EU, the results could be devastating. In the uncertainty surrounding Brexit, several firms have already, or are considering, shifting headquarters outside the UK - the impact could be lowering of UK tax revenues. In the absence of duty-free access to the EU, investment in the UK would be reduced; a Japanese firm recently decided not to locate a car-making plant in the UK.
Major benefits of Brexit to the UK could be in entrepreneurship and the labour market. EU rules subject Britain to slow and inflexible bureaucracy making it difficult for small businesses and entrepreneurs. Once outside of the EU, the UK could encourage businesses and provide considerable flexibility in the labour market making it investor-friendly. This is potentially one of the most significant benefits that the UK could derive in the medium-to-long term.
Departure from the EU would mean a net savings of the contribution to the EU budget. In 2016, Britain paid GBP 13.1 billion, but also received GBP 4.5 billion, making the net contribution GBP 8.6 billion. There are estimates that even in VAT which the consumer is required to pay, there are savings for the UK post-Brexit. What is not known is the payment that the UK will have to make for leaving the EU - there are unconfirmed reports that this may be between GBP 36-50 billion.
The long run impact are likely to be favourable. Brexit would mean a persistently weaker pound, which would mean a bigger manufacturing sector; but the initial slowdown would impose considerable hardship in the short run.
FOREIGN AFFAIRS & SECURITY: Within the EU, Britain has considerable clout in steering the EU's foreign relations; once outside of the EU, Britain will be alone in dealing with non-EU countries. While domestic border security would be enhanced following Brexit, Britain may not have access to EU's intelligence on counter-terrorism and cross-border crimes. The reliance on the EU for support during threats from outside can no longer be assured, once outside the EU. The recent case of poisoning in the UK of Skripal, a former Russian military officer and double-agent for UK intelligence, and the support the UK received from the EU allies only reinforces the extensive benefits of membership of the EU.
IMPLICATIONS FOR BANGLADESH: Being a member of the Commonwealth, Bangladesh has had a special relationship with the UK. UK leaders have repeatedly assured Bangladesh that there would be no adverse impact on UK-Bangladesh relations following Brexit. This would seem to be the intention, but there are legal and administrative hurdles to be crossed.
Bangladesh derives considerable benefits from EU's offers to the LDCs (least developed countries); whether the UK would continue to extend the same benefits once outside of the EU remains to be seen. For instance, Bangladesh last year (2017-18) exported $ 2.8 billion to the UK, about 93 per cent of which were garments - the UK is currently the third most important destination for Bangladesh ready-made garments. All products entered the UK (as part of the EU) duty-free. Imports were miniscule in comparison: about $ 334 million in 2016-17. Our export prospects in the UK are good for non-traditional products as well, particularly in view of our diaspora there. For the future when Bangladesh will be out of the LDC category, negotiating trade agreements would need to be considered.
UK development assistance to Bangladesh in 2018-19 is budgeted at about GBP 170 million; in 2019-20, it is expected to increase to GBP 192 million. UK development assistance is useful in some areas, particularly in their partnership agreement with BRAC (GBP 40 million) which is included in the allocation for this year. The health sector is another important beneficiary of UK assistance.
Wage earner remittance from the UK to Bangladesh in 2016-17 was $ 808 million. This is important to the economy of Bangladesh. In the event of a weaker pound, and rising cost of living in the UK, it would appear that our diaspora would remit less. Weakening of the pound and inflation may have other consequences for Bangladesh - such as, reduced demand for Bangladeshi products.
The impact on immigration from Bangladesh may be positive. According to the Bangladesh Caterers Association in the UK, "..EU's freedom of movement rules had led to the UK Government introducing crippling limits on non-EU workers, which had made it much harder for curry businesses to recruit skilled chefs (from their home countries)". It is reported that as many as five restaurants may be closing every week due to shortage of Indian chefs, which is blamed on the EU immigration policy. Since Britain last year had 333 thousand net influx of immigrants, it had decided to curtail immigration from non-EU countries, including Bangladesh, India, and Pakistan, to comply with "free access for EU citizens" rule. In the post-Brexit era, the prospects of immigration from the non-EU countries may be better.
CONCLUDING COMMENTS: The current negotiations with the EU have become complex, particularly on the Irish border and trade issues. Perhaps the drawbacks in the trade and finance sectors have prompted the Labour Party in the UK to propose that the trade relationship be maintained in any Brexit deal with the EU. However, this seems to have been rejected by the UK Prime Minister who does not, as yet, have any proposal that will be acceptable to the UK Parliament. The EU has just (on March 21) agreed to extend the deadline for a deal until May 22, if UK MPs approve the withdrawal deal negotiated with the EU this week. If they do not, the EU will back a shorter delay until April 12, allowing the UK time to get the deal through or to "indicate a way forward". The EU clearly wants to make life hard for Britain, to discourage further breakaways and to reduce the adverse impact that a Brexit will have on the EU.
Dr. Toufiq Ali is a trade economist.
