Brexit is the name given to Britain’s exit from the European Union (EU). European Union is an economic and political union formed by 28 European countries that allows free trade of goods, free movement of people to live and work in any of the member countries of the EU. UK joined EU in 1973 at a time when EU was known as European Economic Community (EEC). The 2009 Treaty of Lisbon brought EEC and other entities like the Monetary Union under the umbrella of EU.
In June 2016, a public vote or referendum was conducted across UK for voting for and against Brexit. In the referendum 52% of the voters voted in for of Britain’s exit from EU on the grounds of protecting the identity, culture, independence of Britain and for protecting its position in the world. The 48% of voters who voted against Brexit gave the reason of higher economic gains for Britain if it stayed in EU compared to other factors mentioned by the supporters of Brexit. In 2016, British Prime Minister Theresa May triggered a two-year process for Brexit as per article 50 of the Lisbon Treaty as per which Britain was supposed to leave EU on March 29, 2019. However, opposition from the main opposition party, Labour party and Theresa May’s own Conservative party members along with allied Northern Ireland unionists party led to defeat of Theresa May in 2019 and Brexit got delayed. Theresa May’s successor, Prime Minister Boris Johnson took charge in July 2019 and he negotiated some changes to the Brexit deal.
The major change under Mr Johnson’s deal was to create a customs border between Northern Ireland and Great Britain and as per this certain good entering Northern Ireland from Great Britain will be subject to checks and will need to pay EU tariffs which would be refunded if the good were to remain in Northern Ireland instead of moving to Republic of Ireland. The remaining Brexit deal (rights of EU citizens in UK and British citizens in the EU would remain same during transition, UK to pay around 39 billion pounds to EU) was left as it was negotiated by Theresa May. Brexit had been shifted from March 29, 2019 to October 31, 2019 however, due to lack of consensus in UK parliament for passage of Brexit, it was again postponed to January 31, 2020. As per this agreement UK formally left the EU on January 31, 2020. A transition period till 31 December 2020 has been decided upon and during this period UK will be following all of EU’s rules and its trade relations would remain the same. Within the transition period a new free trade agreement is to be negotiated for UK so as to allow goods to move around EU without extra charges and checks without which UK will have to trade with no deal in place that would require it to pay tariffs and face other trade barriers on its goods travelling to the EU. Besides trade, other aspects like law enforcements, data sharing and security, aviation standards and safety, supplies of electricity and gas, licensing and regulation of medicines etc also have to be finalised between UK and EU within the transition period.
Effect of Brexit on Global Economy
Brexit will have significant impact on UK, EU and the rest of the world. January 31st, 2020 marked the beginning of a volatile chapter in the global economic framework. Due to the high volatility of pound and its key role in global economy, it will affect the global market in totality and more so for the emerging economies like India that are in direct trade deals with EU through UK. With Brexit, Euro is likely to experience a fall and it will have a cascading effect on currencies like the Chinese Renminbi which will further call for intervention from China and would trigger an adjustment in the broader currency markets. Even though Indian Rupee is anchored on Dollar as its primary support but fluctuations in Euro will have some effects in the market and is expected to affect the Rupee. After Brexit the trade agreements between UK and EU are yet to be decided and based on the agreement between the two further agreements of other nations with UK and the EU will be formed. There exists a looming risk of imposition of trade barriers, elimination of preferential rates, and increase in taxes etc between UK and EU which might further pose a hurdle for foreign companies and affect their investment in UK. Brexit will also affect the manufacturing and other companies like service sector companies etc that have set up base in UK and enjoy a substantial exposure to mainland Europe and would demand a rethink on location and other agreements of these companies as access to UK would not entitle these companies to an access into the EU market. Brexit may also pose recession risks that would affect the global economy and mainly the IT sector by reducing demand in the sector.
India has around 800 companies in Britain and sectors that will be majorly affected by Brexit are automobile, auto components, metals, oil, pharmaceuticals, IT, manufacturing, chemicals etc. Indian stock market will also be affected by Brexit due to its dependence on pound. Further, EU and UK account for around 24% of Rupee’s effective exchange rate and Brexit will lead to weakening of Rupee due to foreign portfolio investments. Britain is the largest export market for India and UK is the 3rd largest inward investor into India accounting for about 8% of total FDI flow into India and India is the 3rd largest investor in terms of projects in UK. In such a scenario Brexit will significantly affect India as it will change the existing agreements between EU and India that allow open market access.
Opportunity for India Post Brexit
India has relied upon UK as its port for entry into the EU. Since its independence, India has been involved in trade with UK and has maintained a cordial relationship in different other sectors like education. India’s strong relationship with UK is based on 3 parameters: First, Indian businesses shared a common colonial history with England. Second, India, after independence, adopted laws and framework for contracts and property rights, court systems for settling disputes etc that had much in common with English laws. Third, as per international law, Indian businesses that were established in UK had been given rights to operate within entire EU. And considering these factors it has been seen that India invests more in UK compared to the rest of the EU combined. However, post Brexit, India’s relationship with UK will witness certain changes and trade and other relations will be modified depending upon the agreements between EU and UK.
In post Brexit phase number of opportunities will be available for India to further strengthen its relationship with UK and establish a new framework that would benefit India. First, UK accounts for a significant proportion of India’s merchandise trade but with Brexit issue it has been declining. In this context, Brexit would provide India with numerous new trading opportunities with Britain. Second, Brexit would lead to extension of period of low prices of oil in the international market which combined with further widening of the differential between India’s growth vis-a-vis those of other economies will prove to be beneficial for India. Third, Britain’s education system attracts huge number of Indians. Pre-Brexit, British universities were biased towards citizens of UK and EU in terms of offering them scholarships and citizens as per rules of EU. However, post-Brexit, with removal of these binders, universities will be left with more funds for Indian students and further due to reduction of pound value, travelling cost to UK will reduce thereby making travel to UK an easy affair for students. Fourth, India has a strong economic framework and is a large domestic market in the world and after Brexit, UK would strive to develop trade relations with emerging markets like those of India in order to make up for its loss from losing access to the EU single market. Lastly, as has been mentioned above, India is a significant FDI source for UK and India’s focus on innovation and entrepreneurship makes it an attractive destination for foreign investments. Hence, after Brexit, UK would not prefer to miss this investment opportunity and in order to strengthen this investment, Britain would try to attract Indian firms by offering more relaxed terms of agreements like tax break, opening up markets, relaxed regulations etc.
Drawbacks of Brexit
Britain has been considered as a gateway to EU for many nations including India. With Brexit, the trade and free movement terms and conditions of EU will no longer be applicable for UK and UK will no longer be able to provide free access. Also, tax revenues of UK are expected to drop because banks would opt to move their headquarters back into the EU. Brexit also has the potential to reduce FDI for UK as countries would prefer to invest in EU for more benefits compared to UK. Brexit would harm Britain’s manufacturing industry and sectors like steel industry which is heavily dependent on EU for exports and also Britain depends on coordinated action with EU to deal with anti-dumping tariffs on products from China. The pharmaceutical sector would also be potentially affected due to the uncertainty over location of headquarters of pharmaceutical companies and access to European registration for their drugs. Another sector that will be affected is the IT sector. Due to declining value of pound and uncertainty over free movement of people the sector will be adversely affected as IT sector is largely dependent on ability to move skilled workers across the EU from headquarters located in London. Brexit could adversely affect the free trade zone created between UK and USA, this would make Britain lose USA as a primary trading partner. EU is world’s most economically successful customs union and Britain is expected to suffer a loss of 3.9 to 9.3% from its GDP in the first 15 years after Brexit.
India will also be affected after Brexit due to its close relations with EU. India has more than 800 companies in Britain which involve in free trade with EU via UK but Brexit would end access to EU and new terms of trade will be needed for trade with EU. UK accounts for about 17% of India’s IT exports. In case of Brexit, overhead costs will increase, issue of setting up new headquarters (one in UK and one in EU) would also arise and returns of companies will be hampered. In automobile industry, Brexit may lead to a decrease in sales thereby decreasing revenues of profits from Britain. There would also be currency volatility due to devolution of Euro and Pound after Brexit and its negative effects will be visible on companies having sizable presence in Britain. Brexit will also make imports of food and other commodities more costly thereby affecting Indian firms at the same time exports from India will also be hurt due to Brexit. Indian companies would lose their freedom of goods, services, capital and labour and will also have to incur additional cost of building new ports within EU in order to ship goods and services, supply labour etc around EU-27.
Brexit has a significant role to play in the global scenario due to its effect on many major economies including India. A large number of Indian companies in UK are dependent on free European market and in such a scenario Brexit is likely to bring about major changes in trade. India’s major companies in UK include Bharti Airtel, HCL technologies, Apollo tyres, Wockhardt and Emcure pharma. These companies may have to face cascading effect due to Brexit which will depend on negotiations between UK and EU within the transition period. Post Brexit, there is need for a bilateral agreement between UK and India that will be preceded by agreements between UK and EU. India needs to decide upon new concessions, compensatory adjustments etc after properly applying GATT article XXVIII (related to modification of tariff schedules) and keeping in view that Indian exporters and Indian firms do not suffer in post Brexit phase.
India also needs to renegotiate terms of access to market with UK and EU for export of Indian services based on GATS article XXI (modification of schedules). India must negotiate with EU and UK in commercially broad Free trade agreement talks so that Indian companies working in Britain do not bear the brunt of Brexit and India is not adversely affected due to the turmoil caused by Brexit. Brexit will prove to be a key opportunity for India to strengthen its position in global market with a strong trade relation with UK as well as the EU. India must adopt necessary modifications in its trade terms and must decide on agreements with EU and UK with the aim to achieve a boost in its economy and in order to further develop the Indian market. Brexit is expected to create imbalance in global network however, India needs to adopt a cautionary approach to deal with the issue and strive to gain maximum profit from Brexit.