[Analytics] The UK’s uncertain post-Brexit economic relations with Asia

Boris Johnson shakes hands with a humanoid robot Wabian2 at Research Institute for Science and Engineering at Waseda University's Kikuicho Campus in Tokyo, Japan (Photo: Reuters/Eugene Hoshiko/Pool). Sketched by the Pan Pacific Agency.

Brexit has happened. But the United Kingdom still faces two major choices over the coming year. How will it align its domestic economy with Europe? And how will it continue its global role? The new UK government is still deeply conflicted on these choices. Only when they are made will it know how to conduct its future relations with the Asia Pacific. David Vines specially for the East Asia Forum.

A little history helps. By the end of World War II, the British Empire was still intact. But the United States demanded that the British Empire be dismembered. This happened over the next 30 years. The General Agreement on Tariffs on Trade, which became the World Trade Organization, gradually removed barriers to international trade until the Uruguay Round concluded in 1993. It wound back the preferential trade which had occurred within the British Empire. Commonwealth countries such as Australia and Canada increasingly traded with their near neighbours. The United Kingdom withdrew from Malaysia and Singapore. UK rule in India came to an end.

The United Kingdom saw its way forward in Europe. It joined the European Economic Community in 1973 and led the establishment of the European Single Market in the 1980s. Many foreign firms located themselves in the United Kingdom in order to serve the European market. The Japanese car industry established its base there for European expansion. UK firms too seized the opportunity provided by a market of 450 million people. BAE Systems and Rolls Royce, for example, have been at the centre of the aerospace industry in Europe. UK universities lead those in Europe.

But the Single Market is not just a free trade area or a customs union. It is built on four freedoms: the freedom of movement of goods, capital, services and labour. Like all freedoms, these need to be administered and protected within a governmental regulatory framework. Product, labour and environmental standards — and the freedoms on which they build — are all enforced by the European Union. The enforcement of these requirements is carried out by the European Court of Justice.

As a result, membership in the European Union required deep political compromises in the United Kingdom. Those engaged in the financial services industry, of course, regarded the free movement of capital and labour within Europe as desirable. But unskilled workers — damaged by the deindustrialisation which occurred under former prime minister Margaret Thatcher in the 1980s — did not.

Controlling migration was a central Brexit issue. Many in the United Kingdom object to the sovereignty of the European Court of Justice, given their memories of the British Empire. But these compromises were held together by the United Kingdom’s prosperity brought by membership in the European Union. They have been shattered by Brexit.

EU–UK negotiations about future trade are now beginning. The United Kingdom wants to continue the unimpeded access to European markets which it possessed in the Single Market. But the European Union asserts that it will grant this only if the United Kingdom continues to subscribe to the Single Market’s freedoms and standards.

Prime Minister Boris Johnson’s new government regards these conditions as unacceptable. His government wants to diverge from Europe in order to negotiate new openings for trade with other countries. But what will the United Kingdom actually offer other countries in future negotiations? Access to the UK market is a smaller prize than access to the EU market, which it used to offer.

Moreover, the United Kingdom will find it difficult to grant what foreign countries want. India will seek access for its labour to work in the United Kingdom as a price for allowing the United Kingdom to sell goods and services into India. Asian countries will seek better employment opportunities for their students studying in UK universities.

China may seek product standards for what it sells to the United Kingdom that conflict with those in the European Union. Australian farmers will seek access to UK beef, lamb and sugar markets. But UK farmers, which have been protected by the EU’s Common Agricultural Policy, will resist this. And, of course, the United States will seek access for its agricultural goods, produced under different standards from those which rule in the European Union.

The United Kingdom will need to resolve these issues in principle by December 2020 when the Brexit transition period is meant to end. Only then will openings emerge for negotiations about the United Kingdom’s future relations with countries in the Asia Pacific.

And only then will its global position become clear.

Previously, the United Kingdom had been important in determining the EU’s response to China’s Belt and Road Initiative. But it will be harder for the United Kingdom to exert this influence now that it is engaged in difficult trade negotiations with the European Union. Similarly, while the United Kingdom was an EU member, it acted as a bridge between Europe and the United States. But the decision to allow Huawei into the United Kingdom’s 5G network shows how difficult this will now be. Responses coordinated with France and Germany seem essential on both of these issues.

Progress will be slow. Countries in the Asia Pacific will not be able to make trade agreements with the United Kingdom until its relations with the European Union are clarified. Asia Pacific countries and the United Kingdom will need to work together towards greater global coherence in the face of global competition between the United States and China, rather than allowing further global disintegration to continue. That will also require cooperation with the European Union.

David Vines is Emeritus Professor of Economics and Emeritus Fellow of Balliol College at Oxford University. He is also a regular Visiting Fellow at the Crawford School of Public Policy, The Australian National University, and a Research Fellow of the Centre for Economic Policy Research, London.

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