The post-Brexit world

More uncertainty is the only certainty

The deadline to extend Brexit negotiations expired in June this year, so it is now certain that the United Kingdom (UK) will leave the European Union on December 31. This is the only certainty that economic actors in this four-year drama can hope for at this time as the region struggles to come to terms with the Covid-19-induced economic slump. Negotiations on a new trade deal appear stalled over such issues as fishing rights, workers’ rights, and checks on cargo. If no deal is reached when the deadline lapses, a basic set of rules under the World Trade Organization will come into operation, involving tariffs, inspections, and checks at European and British ports. Many Brexiteers regard this outcome as a desirable one because it would free the UK from what they consider onerous and costly standards (on safety, environment, and so on) and leave it free to negotiate more advantageous (and theoretically less burdensome) deals with other countries, though little headway seems to have been made in talks with the US or Canada. Although this flexible regulatory future sounds attractive, it masks the practical complexities for manufacturers in terms of following different standards for different markets, requiring tweaks on the assembly line and the need to maintain multiple sets of documents. Indeed, the EU, which, understandably, has no stake in easing the divorce settlement, is demanding “level playing field obligations” in the trade agreement that would tie the UK to EU law and regulations.

The complexity of this position will be most evident in Ireland, the only country with which the UK shares a land border. British Prime Minister Boris Johnson’s post-Brexit arrangements draw a line in the Irish Sea but Northern Ireland will be designated UK customs territory. Goods entering Northern Ireland from the rest of the UK will be treated in two ways. Those deemed “at risk” of being moved to the Republic of Ireland would be subject to EU tariffs. The tariff payment can be claimed back if it can be shown the goods were consumed in Northern Ireland, a structure that condemns businesses trading between these territories to the sort of bureaucratic rigmarole with which all businesses in India are familiar. Equally, EU negotiators have pronounced unacceptable British proposals to give the City of London, one of the world’s largest international financial centres, access to the European financial markets. This apart, arguments over a £39-billion divorce bill are yet to be settled even as the UK refused to contribute to the region’s Covid-19 bailout package.

All of these issues had proven tough to solve four years ago; given the mounting bad will on both sides, it is unlikely that they will be sorted by November, the last possible month for EU leaders to sign off on a final agreement. These are realities that Indian IT, financial services, and manufacturing companies that had set base in the UK to serve the European market must brace for in the coming year. Many multinationals have already set new bases in Europe — Panasonic, Sony, and Tesla are among nearly 170 manufacturing firms relocating to Germany and the Netherlands even as financial services firms are shifting to Frankfurt and Luxembourg. This exodus may offer the most telling indicator of the shape of the post-Brexit world.