FOREIGN POLICY IMPLICATION OF THE BRITISH LEAVING THE EUROPEAN UNION
Cost and Benefit analysis of British leaving the European Union
Background
On June 23, 2016, a referendum was organised to decide whether the UK should be included or leave the European Union. By 51.9 percent against 48.1 percent, the UK chose to leave a Union that it has been a member since 1973. This was in a referendum that saw 78.8 percent, or more than 30 million of the eligible voters turning out to vote. Following this referendum, the UK invoked Article 50 of the Treaty on European Union on 29 March 2017. The invocation of this article triggered the two-year period that the UK has to negotiate the terms of its withdrawal. In this 2 year period, the UK and the EU will have to negotiate a deal that will finally see the former leaving the EU by 2019. There is no doubt that the withdrawal will have far-reaching effects on the UK foreign policy.
Costs and Benefits of Leaving
In the run-up to the EU referendum, there were two opposing views as to what Brexit meant for the UK. On one hand, there are those who feel that leaving the EU would leave the UK with the freedom to determine its policy in line with its national interest. On the other hand, there are those who feel that the UK membership in the EU has contributed to peace and stability in the EU as well as economic growth. All these issues and all other weighty issues touching on the economic and political union that is the EU will have recognisable impact on British foreign policy. However, since it is not known which direction the Brexit will take the cost and benefit analysis of leaving can only be made from a point of the different scenarios.
Brexit may happen on the basis of two scenarios: a soft exit or a hard exit. Each scenario has a different implication. In a soft exit, the UK could still maintain some trade, immigration, and close cultural ties with continental Europe. In this scenario, “the UK could withdraw from the EU but join Norway, Iceland, and Liechtenstein in the EEA” (Wells and Martins, 2015, p.39). In the second option of a hard exit, the UK could go for a complete separation. This could mean that Britain could withdraw from the EU single market and its legal rules. In such a great separation, the UK could regain its full control of immigration policy and in general, its sovereignty. Hard exit not only poses a huge risk for Britain but it is also operationally complicated. Soft exit is less risky but maintains much of the status quo (Sunak, 2016)). Either way, the UK will choose between a soft exit or a hard exit, or arrangements with sub-elements thereof. As the UK enters into the negotiation table, it is important to understand what each of these scenarios holds as far as the foreign policy is concerned.
Soft Brexit
A soft exit would not occasion a greater shift in foreign policy. In this arrangement, the UK would negotiate a new form of agreement that retains access to a single market but one that allows it to restrict freedom of movement. A cost-benefit analysis under this scenario still remains uncertain, but much of the effect that could be felt in a soft exit has already been felt. In the aftermath of the Brexit vote, the GDP fell to a 31-year low against the dollar and to a six-year low against the Euro (Bird, 2016). In addition, the UK has continued to receive low credit ratings from different rating agencies.
Though this scenario presents less risk for the UK, the chances of achieving concession for this scenario are minimal. First, freedom of movement is an important element in the access of a single market; it is one of the four principles of the European Union. It therefore follows that a derogation of this principle cannot be easily accepted by the other members of the EU. More importantly, the EU would not want to set a precedent where members can opt out of some principles and still enjoy the benefits of a single market. In order to access the single market therefore, the UK could be forced to accept most of the EU regulations without having a chance to set them. It would also be forced to pay for access to that market, just like the way Norway currently does.
Hard Brexit
A hard exit could change the foreign policy of the UK in a drastic way. This scenario would mean that the UK does not have access to the single market and therefore would be forced to trade with the EU under WTO terms. Such a change of rules would have an impact on UK trade and consequently on the UK GDP. According to some studies, under WTO terms, UK trade with the EU would decrease. This is because more than 50% of the UK trade “go to the EU and more than 50% of imports come from the other EU nations” (Dhingra et al, 2017:8). In such a situation, it is estimated that tariffs under the WTO rules would cause a drop of GDP growth by about 1.5% (Whelan, 2016). In addition to lost trade, the UK could also lose its attraction as a centre of direct foreign investment. It is important to note here that more than half of the UK’s foreign direct investment comes from other EU members. Corporations that fear the harsh trade terms between the UK and the EU could choose to set a base in a country that has access to the EU single market.
However, proponents of Brexit argue that the fear of lost trade is unfounded (Halligan and Lyons, 2017). According to them, the benefits of the EU’s single market are exaggerated. These proponents have dismissed the common view that WTO rules are deeply damaging. According to Halligan and Lyons (2017:5), “tariffs under WTO rules are relatively low and falling. According to the proponents, leaving the EU would present the UK with the opportunity to trade with the EU under WTO rules, operating under the “Most Favoured Nations” (MFN) status. Further argument put to support this is that “once the UK leaves, around 85 percent of the world economy will be outside the EU”. This means that by negotiating favourable WTO terms with other nations, the UK will have access to 85 percent of the world economy. Currently, the UK has no trade deal with the US and China, which are the biggest and the third biggest trading partners respectively. In sum, more than 50% of the UK’s exports are outside the EU market, where the majority of the exports go to countries where the EU has no Free Trading Agreement (FTA). This is an affirmation that the UK can exit the EU market and still manage to strike deals with other nations to compensate for any lost trade.
A hard Brexit is also faced with fear that it could complicate the relationship that the UK has had with Scotland and Northern Ireland. The aftermath of Brexit might see the re-emergence of the Irish and the Scottish questions; it could further strain the fragile unity. The economy of Northern Ireland has thrived under the EU export. As such, a hard Brexit is expected to have a disproportionate impact on Northern Ireland’s economy. This explains why Northern Ireland voted by 56% percent to remain. As such, any post-Brexit UK-EU relations will have to cater for such economic loss. In addition to the strained trade prospects, a hard exit could end up weakening Britain’s financial power.
A strained relationship might come from the Scottish side. Scotland voted overwhelmingly, 62 percent, to remain. Such a high vote was expected. Scotland enjoys close economic and financial ties with the EU. A hard exit could disproportionately affect this interest. In the aftermath of Brexit, Scotland has not hidden its intention to call for another independence referendum. In case Scotland chose independence in such a referendum, the UK constitutional settlement could be destabilised, affecting the stability of the whole union. The UK foreign policy, therefore, will have to cater to such possible outcomes.
Despite such challenges, there are also considerable benefits that the UK is likely to gain from a hard exit. In a hard exit, the UK will no longer be liable for the multi-billion pound annual payment. Every year, the UK’s full membership fee is around £ 10 billion. It is the view of the proponents that such amounts could be used to cater for any loss in trade. In addition, under a hard Brexit, the UK could regain its sovereignty, both for its courts and on immigration policy. Currently, the ruling of the European Court of Justice enjoys precedence in a wide range of issues. Freedom of movement was a central issue in the Brexit campaign. Under a hard exit, the UK would regain its full control of its borders and thus regulate the number of people who come to live or work.
Conclusion
The foreign implication of the British leaving the EU will depend on the kind of relationship that the UK is going to negotiate with the EU. If the UK manages to negotiate a soft exit, the implication of Brexit will be minimal. A hard exit, however, will have a disproportionate impact on foreign policy.
List of References
Bird, M (2016) Pound Drops to Three-Decade Low against Dollar on Brexit Concerns [Online]
Dhingra, S et al (2017) The Costs and Benefits of leaving the EU: Trade Effects. CEP Discussion Paper No 1478
Halligan, L & Lyons, G (2017) Clean Brexit. London: Centre for Policy Studies
Sunak, R (2016) The Free Ports Opportunity: How Brexit could boost trade, manufacturing and the North. London: Centre for Policy Studies
Wells, S & Martins, L (2015) A very British dilemma: Reviewing the case for EU membership. London: HSBC Global Research
Whelan, K (2016) Brexit and the future of the Euro: In-depth analysis. Brussels: European Parliament
