Brexit’s Global Spillover: Assessing Effects on Trade, Aid, and Migration

Pro-European Union Britons demonstrate against the pending Brexit process. London, United Kingdom, February 20, 2017. (Tim Ireland/Associated Press)

The United Kingdom’s government is preparing to trigger Article 50 of the Treaty of Lisbon and a two-year period of negotiations to leave the European Union. Ambiguity remains around the outcome of this process, with the one certainty being the ushering in of a period of uncertainty for the UK and EU economies, which risks damaging their international profiles for trade and investment. While it will be up to the UK and EU to navigate the turbulent waters, many other regions and countries will be affected by Brexit’s waves. This will likely include not only economic effects but ramifications for international development and perhaps even the movement of refugees and migrants.

The EU collectively represents the world’s second-largest economy, top trading entity, and largest source and recipient of foreign direct investment. It is the first- or second-most valuable trading partner for many states, including the United States and China. The UK, in turn, is the fifth largest economy in the world. It remains impossible to fully ascertain what the precise consequences of invoking Article 50 will be for the two markets and their international partners, though there have been some initial effects. In July 2016, the International Monetary Fund revised its global growth forecast downward by 0.1 percentage points, and by 0.2 percentage points for the EU and UK. Lower growth could lead to diminished demand for exports to the UK and EU in the medium term, although there is yet to be evidence of this.

There has, however, been a noted effect on the British currency in the wake of the Brexit referendum in June 2016. The pound’s value dropped to its lowest point in 31 years in the immediate aftermath and, while its value has since recovered against the euro, exchange rates have experienced more fluctuation than in the preceding two years. The weakened pound has resulted in creeping prices for UK consumers and in the longer-term might lead to lower demand, especially if further weakening occurs. To preempt an economic slowdown, the Bank of England cut interest rates to a historic low of 0.25 percent in August 2016, putting further pressure on bond yields and on pension fund investments.

Trade with the Developing World

A weaker pound may be welcomed by tourists to the UK, and manufacturing exporters, but has repercussions for economic development elsewhere. Overseas destinations for UK travelers may find themselves with fewer bookings, and tourists spending less. For some developing states, the drop has also reduced the value of money sent home by migrants. Although the value of remittances is extremely difficult to track, the World Bank estimates that in 2015, the equivalent of $3.8 billion was sent from the UK to India, accounting for 3.4% of India’s GDP. Remittances from the UK to Bangladesh, Pakistan, and Nepal amounted to 8.5%, 7%, and 29% of national GDP respectively.

Developing states also face insecurity regarding future trade relations with the UK. Currently, these are governed by EU trade regimes. For a number of developing states whose exports to the EU are concentrated in the UK, Brexit presents a dilemma. Estimates from the Overseas Development Institute (ODI) suggest that the least developed countries could lose £323 million annually if preferential access to the UK is discontinued. It remains unclear whether the UK will unilaterally afford them the same level access to its market as they enjoy through EU arrangements. It seems unlikely that the British government would raise tariffs on exports from these countries, and the UK Department for International Development’s strategy highlights trade as a core priority in its commitment to economic development. However, there could be complications if legal and bureaucratic measures, such as rolling over existing preferential access or improvements, are not put in place with sufficient time. At present this does not seem to be a priority.

The UK’s emerging trade policy seems to be based on bilateral market access approach, and a desire to negotiate preferential trade agreements with the country’s most significant UK economic partners such as the EU, US, China, and India. For developing states there is a risk that they may not have the capacity to negotiate reciprocal deals and may suffer from future deals negotiated with their competitors. Pakistan, for example, could lose out if India gains preferential access to the UK in a bilateral deal and its current access through the EU’s Generalised System of Preference is not retained. Even if the current access were retained, the benefit would erode if India’s access to the UK market improves. Developing states’ exporters find it more challenging to comply with divergent sets of standards and could be burdened with high costs if standards and procedures for exporting to UK diverge from those for exporting to the EU, which accounts for ODI’s recommendation that the UK adopt EU standards and promotes mutual recognition of conformity assessment with the EU.

Brexit could also change the dynamics of EU-developing world relationships. The negotiations of economic partnership agreements (EPAs) between the EU and developing states have been rife with controversy. Most EPAs still await final ratification and implementation. EPAs exchange continued and improved access to the EU’s market for governance reforms and market liberalization. The loss of the UK, a key export destination in the EU for a number of developing states, may alter the cost-benefit analyses of certain African states and their willingness to continue the EPA processes.

Trade with the Developed World

Brexit’s effect will not be limited to developing states. EU trade agreement negotiations with developed states will also be impacted. Losing part of its market will reduce its trade appeal and the asymmetric political power derived from this. At the end of 2015, for example, the EU and Australia announced their intention to work toward negotiating a comprehensive free trade agreement. The EU is a critical trade partner for Australia, its top source of foreign direct investor, and its second largest trading partner. However, the UK in particular accounts for about 30% of Australian goods exports to the EU and 46% of services exports. While there are no indications that these negotiations will not proceed, the dynamics of negotiations will change, as the possible gains from the agreement for Australia have been altered. The EU’s imminent concern with negotiating Brexit could, potentially, also introduce delays in new negotiations, purely related to resource constraints at the highest political levels.

The EU’s trade policy’s initial response to Brexit has been to promote completion of ongoing negotiations and ratification processes of free trade agreements (Canada, Vietnam, Japan), and renewed commitment to new ones as a signal of commitment to economic openness and trade at a time of protectionist pressures are on the rise. However, it may find already difficult negotiations further complicated by the uncertain climate generated by Brexit.

On the British side, the government’s proposes making the UK a leader in free trade in its own right. Some Brexit advocates have floated the idea of using the Commonwealth as a vehicle for this. The first formal meeting of Commonwealth trade ministers takes place on March 9-10 this year. Its priorities of implementing the World Trade Organization’s Bali agreement, expanding trade finance for small-to-medium enterprises, improving aid for trade, and skill development through exchanges, show a commitment to facilitating trade and a focus on the trade-development nexus. However, these are far from radical pro-development changes, nor proposals for some sort of Commonwealth replacement for the EU. Moreover, given the wide diversity of states forming the Commonwealth, and their differing levels of development, some form of deep trade regime within would be incredibly challenging to negotiate, as the WTO Doha negotiations have shown, not to mention the potential opposition to a UK-led move with some hints of an imperial past.

Suggestions of a reinvigorated “Anglosphere” after Brexit have likewise been made. While the EU departure need not affect security links and cooperation through institutions such as NATO or the Five Eyes (USA, UK, Canada, Australia, New Zealand) intelligence-sharing arrangement, some form of trade bloc of this nature is highly unlikely, not least given the election of US President Donald Trump, who has a clear preference for bilateral negotiations. Moreover, many of the English-speaking states have diversified trade profiles. For instance, the UK is the seventh largest export market for Australia after China, the US, Singapore, South Korea, Japan, and New Zealand. Canberra will continue to enter into preferential trade agreements that bring it benefits, and is highly unlikely to rally around some concept of Anglosphere solidarity. During the negotiations for the beleaguered Trans-Pacific Partnership, Australian and New Zealand, despite alliances to the US, made it clear this would not be at the expense of their relationships with China, nor participation in the Regional Comprehensive Economic Partnership being pursued with Beijing and Southeast Asian governments.

Aid Commitments

Brexit may also affect future levels of overseas development aid. Collectively, the EU and its member states are the world’s top source, with 0.47% of the bloc’s gross national income (GNI) going to this purpose in 2015, compared to 0.21% of gross national income donated on average by non-EU states in the OECD’s Development Assistance Committee (DAC).  While the UK and EU officially remain committed to international development, Brexit could be costly on both sides of the channel.

The UK is one of the few states, alongside Norway, Sweden, Luxembourg, the Netherlands, and Denmark, that has reached the DAC’s 0.70% of GNI in aid target, in 2015. If the costs of Brexit, be it direct cost of liabilities, or derived costs from a weakening economy, become significant enough, public pressure to reduce development aid may increase. Moreover, the decline in the value of the pound also limits the purchasing power of aid. On the EU side, in the medium-to-longer term, the loss of the UK will reduce the EU general budget, which may affect the size of EU (as opposed to member state) development aid. Moreover, in the last few years a higher percentage of EU member states’ development aid has been spent on in-donor refugee support (the costs of supporting refugees in host countries). It has increased by 5.6% of the collective EU overseas development assistance total in 2014, to 12.5% in 2015, reducing overall aid spent overseas.

Refugees and Migration

The increased refugee and migrant influxes into the EU in recent years featured heavily in the UK referendum campaign, and the tensions generated are unlikely to subside. Although under the EU’s Dublin Convention asylum seekers and refugees are supposed to lodge their claims in the first member state they enter, in practice there is reluctance to do so. Many prefer to make their way to states where they have relatives, friends, and larger communities from their home countries.

Since the 2003 Le Touquet agreement UK border control is exercised at the French port of Calais, preventing undocumented entry into the UK. Many of those refused entry in the past stayed around Calais in various impromptu camps. Even after the French government cleared the latest of these camps in October 2016 and moved residents to other locations in France, their desire to reach the UK is likely to remain unabated, and hundreds have already returned to the port town.

The Brexit vote has raised tensions around the Le Touquet agreement, although for now the French government remains committed to it. It is also not entirely evident that moving the border back to Dover would necessarily reduce the number of people wishing to reach the UK. It could, however, pass the onus of border control to private transport companies as the UK makes the transporter liable for fines if people trying to enter the UK clandestinely are found onboard. Nonetheless, with the complicated elections of 2017 presidential in France it is also a challenge to accurately anticipate developments in this area.

Maria Garcia is a senior lecturer in the Department of Politics, Languages and International Studies at the University of Bath, and currently a visiting fellow at Australian National University’s Centre for European Studies.