Ministry of External Affairs Government of India

BREXIT and its implication for India

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  By: Amb (Retd.) Bhaswati Mukherjee
  Venue: The Jadavpur Association of International Relations, Kolkata
  Date: July 06, 2019
  

The European dream, rising from the ashes of World War II, was intended to develop a liberal welfare state, where citizens would enjoy human rights and fundamental freedoms guaranteed by the all powerful European Court of Justice. This in turn would keep under check those dark forces which had lead to a continent perpetually at war including ‘Hundred Years’ of war in medieval times, the Grand Alliances leading to World War I and the rise of fascism and ultra nationalism preceding World War II. UK was an important and valued partner of that Alliance. As a Permanent Member of the Security Council, UK strengthened the EU with its presence.

It was the Lisbon Treaty in its Article 50 which gave for the first time to Member States of the EU the explicit legal right to leave the EU and the procedure to do so. The treaty is a unique international legal instrument because of the manner in which it has skilfully divided national sovereignty between Member States and the Commission. The different interpretation of these shared competencies by Member States have also led to the forces propelling Brexit and the movement against globalisation within Europe. This has been most recently reflected in the results of the European Parliament elections.

Case study of Brexit

Brexit changed everything including the public mood. Brexit is regarded as the classic case study in the context of contemporary challenges that it poses to liberal democracies. There are many factors leading to Brexit, the prolonged and unhappy divorce of the United Kingdom from Europe. My perception, reflected in my book ‘India and EU: An Insider View’ is that this on-going and complex divorce of Britain from Europe is deeply rooted in conservative, middle class, English euro-scepticism. Brexit ultimately represents the rejection of globalization and migration and the natural opposition of the English to a bigger outside power, in this instance the EU, the Commission and the Brussels ‘bureaucracy’.

Social media also played an important role in ensuring a narrow victory for the ‘Brexiteers’. The ‘Leave campaign’ led by the frontrunner to be May’s successor, Boris Johnson, blatantly used false data to bolster pre-conceived prejudices and biases. One example given was the claim that UK sends the EU £ 350 million a week. This misleading figure disregarded the weekly monetary flows from Brussels to the UK but it had a significant effect in influencing the outcome of the referendum.

In the context of domestic politics, Brexit effectively ended the careers of two Prime Ministers, Cameroon and May. The present extension agreed to by the EU is till 31st October ’19, with the option of Britain leaving earlier if the deal was agreed to in Parliament. The onus was on Britain to find a solution which would not amend the fundamental principles of the original agreement negotiated over months with the EU, including the ‘Backstop’.

Deal or no deal

May’s failure to sell the ‘deal’ to a sceptical House of Commons resulted in her stepping down. The frontrunner to become PM, Boris Johnson, has vowed to take UK out of the EU by 31st October 2019, with or without a deal.

The deal arrived at by May after 524 days of negotiations was required to be put to the UK and European Parliaments for ratification ahead of Britain’s final withdrawal which should have taken place, according to the Lisbon Treaty on 29th April 2019. There was a 585-page withdrawal agreement, which should form the basis of a legally binding treaty as well as a 26-page political declaration on the future relationship. The second document (which is not legally binding) politically binds both sides to some basic parameters in future talks. This has been interpreted by Brexiteers as impacting UK’s sovereignty.

The deal was never approved by the House of Commons. In retrospect, May was out manoeuvred on all major issues including citizen’s rights, the £39bn divorce deal and the issue of a soft border between Northern Ireland and the Republic of Ireland after Brexit, the so called ‘Backstop’. The most contentious issue is the backstop, which is a contingency plan in case future trade talks fail on the Irish border issue. Brexit supporters were furious, noting that it leaves UK within the EU but without a say on policy.

The deal was intended to safeguard the rights for more than 3 million EU citizens in the UK and over 1 million UK nationals in EU countries to stay and continue their current activities in the place in which they have made their home. All those arriving to live in the UK at any point up until the end of the transition period, which could last until the end of 2022 should it be extended, would enjoy the rights that EU nationals have today to make Britain their home, to live, work and study.

The divorce costs are heavy! UK would need to pay about £39bn, to cover its contribution to the EU budget until 2020, and accumulated other outstanding commitments such as pensions for EU officials. Boris Johnson has vowed to keep these costs hostage to the EU relenting on the backstop.

Impact on result of European Parliament elections

The complex and overstretched negotiations over Brexit resulted in UK becoming an unwilling participant in the elections to the European Parliament in May 2019. This was never envisaged by EU leaders who were fully aware that the toxic polarity of a pre-Brexit Britain led by Nigel Farage, would transform and empoison the agenda on which the elections were being contested. Populism and populist parties would now dominate the debate, rather than the centrist alternative symbolised by Merkel and Macron. The Franco-German leadership which had led the EU through the intricacies of the Cold War was under strain as never before.

The results of the European Parliament election has been aptly summarised by visionary educationist Terry E. Givens: "The vote starkly demonstrates… the splintering and polarization of the electoral base across Europe… It also indicates a new, if disruptive, re-engagement by citizens in politics.”

High turnout in any democratic election usually conveys a strong message to the ‘status-quo’ politicians in power that it cannot be ‘business as usual’. This was certainly the case in this election. For the UK, apart from the expected success of the new Brexit party which won the most seats with about 30% of the votes, Liberal Democrats were able to win 20%. Labour at 14% was barely ahead of the Green Party at 12%. Of greater concern for Teresa May and her successor was the drubbing of the Tories who were able to attract only 9% of the vote. This does not bode well for the Conservative party in a UK General Election whenever it takes place.

These results impact the future policies of the EU, given the key role of the European Parliament according to the Lisbon Treaty. The traditional centrist parties which had dominated European politics since the creation of the EU are steadily losing ground. This does not bode well for the liberal democratic values at the centre of the European dream. Fortunately, the liberal-centrist grouping of the Alliance of Liberals and Democrats for Europe (ALDE&R), which includes Macron’s party picked up 32 seats. This alliance will now play an important role in nominating officials for key EU positions and ensuring that these high officials are not populists.

The key figure would be the President of the European Parliament. Another new player expected to be a moderate influence is the Green Party alliance. Its excellent performance in Northern Europe should serve as a counter to populist propaganda by parties in Eastern Europe.

There are many who argue that European Parliament elections are merely a test run for national elections scheduled for later in 2019. There is relief that explicitly anti-EU forces across Europe did not win, as was feared, one-third of the seats which would have enabled them to elect populists as leaders in the new Parliament.

Possible Economic Impact of Brexit on India

There is no doubt that Brexit is a challenge. Whether it is an opportunity remains to be seen but appears unlikely. What are the stakes for India in this background of intense speculation on the impact of Brexit on India EU business relations as well as on the India-UK partnership?

The EU is India’s largest trading partner, accounting for around 13% of India’s total trade in goods in 2017. India contributes around 2.3% of total EU trade and is the EU’s ninth biggest trade partner. With €91 billion worth of India EU trade and €19.4 billion of India UK trade at stake, all partners needed to think through this issue carefully in the business and commercial context.

Services are also an important component of EU-India trade. Eurostat data indicates that Indian services exports to the EU were €16.6 billion in 2018, while imports were €17.1 billion. The sector has also attracted foreign direct investment from the EU, including Germany, the Netherlands, France, Italy and Belgium, as well as the UK.

India enjoys a positive trade surplus of around US$ 3.64 billion in 2015 with the UK. Exports to UK increased by 13.6% in FY 2017-18. Imports from UK have increased by 31.2%. Trade balance is in favour of India in tune of 4.83 billion USD. The depreciation of the British Pound is affecting exporters and importers.

If in terms of the final Brexit no deal scenario, which seems increasingly likely, Indian business in UK, would be denied access to the EU market, the result would be the flight of Indian business from UK to Europe. The UK has been seen by Indian firms as a gateway to the European Union. A common market has so far ensured these companies barrier-free access to the EU countries.

A hard or no deal Brexit would inevitably impact more than 800 Indian companies in UK in crucial sectors of British economy reportedly generating more than 110,000 jobs as well as flows of tourism and business from India to UK. More than half of them work in just five companies from the Tata group, one of the largest foreign investors in Britain. There are high end companies such as Jaguar, under Indian ownership, which risk being adversely affected. A common market has so far ensured these companies barrier-free access to the EU countries.

Some crucial sectors of the Indian economy likely to be affected are automobiles, auto-components, pharmaceuticals, gems and jewellery, education and IT enabled services. FICCI has noted that many of these sectors would be vulnerable to changes in demand and currency values.

In the past few years, many Indian companies have flourished in Britain like Rolta, Bharti Airtel etc. These firms operating in the UK have up to 13 per cent exposure to revenues earned in the British currency, although from EU the number is as high as 30 per cent. The pharma sector is another area where Indian businesses have a lot of exposure to the UK. Brexit is obviously bad news for them. Their revenues will be hit because of the likely weakening of the pound sterling.

Quitting the world’s most economically successful customs union (measured by both GDP and Human Development Index) will cut off 3.9-9.3 percent from Britain’s Gross Domestic Product (GDP) in the first 15 years after Brexit. In 2017, four of the top 10 Indian deals in Europe were acquisitions of UK companies (driven partly by the depreciation of the pound against the rupee after the Brexit vote).

With €19.4 billion of India UK trade at stake, Indian Diaspora and the more than 400 Indian companies in the UK who voted overwhelmingly against Brexit fear for their future in a United Kingdom cast adrift in the world.

Some argue that they would move to the Republic of Ireland or to the Netherlands where conditions are favourable for such companies to operate in an environment similar to the UK. A no deal Brexit would restrict access of Indian companies to the Continent from London. Many of these companies are moving to Amsterdam or Dublin with the risk of increased costs in infrastructure and manpower.

Others note that UK’s exit from the EU represents a win-win situation for India. They remain of the view that India could fill the trade gap with regard to manufactured goods. In the present context this does not seem to be likely. The current anti-foreign sentiment in the UK complicates the negotiations.

Future trade arrangements post Brexit

The Indian Ministry of Commerce confirmed in mid-2017 that India and the UK could work on a FTA only after the latter is officially out of the EU. The Commerce Ministry then commenced an internal ‘audit’ and analysis of the trade issues with UK in anticipation of the negotiations. The content of a future India UK trade agreement would depend on the kind of deal and terms of exit that UK would negotiate to finalize Brexit. UK cannot sign a trade agreement with India as long as it remains part of the EU. The situation is complex since India would insist on inclusion of Mode 4 (Mode 4 covers temporary movement of natural persons) in a post Brexit scenario. According to informed sources, India will also refuse to give a separate dispensation to UK in areas within EU’s competence.

Indian economists are of the view that Brexit is an opportunity for India to reset the legal terms of its trade with the UK and EU at the multilateral level as well as through free trade agreements. The bottom line is how should India respond to Brexit so as to maximize opportunities for its goods and services sectors post Brexit?

These economists are of the view that India should re-negotiate with the UK and with the EU the World Trade Organization (WTO) Schedules of Concessions, for both goods and services, should resume its BTIA discussions with the EU and should prepare to launch FTA talks with the UK post Brexit.

India would need to think critically regarding application of GATT Article XXVIII (concerning Modification of Tariff Schedules) to determine, given the ‘special circumstances’ of Brexit, what new ‘concessions,’ ‘compensatory adjustments,’ and/or ‘adequate compensation’ India needs from the UK to ensure the market access enjoyed by Indian exporters of agricultural and industrial products is not deeply impacted post Brexit.

The same would apply for services. India should renegotiate market access and national treatment terms with the UK and EU for Indian services exports, under GATS Article XXI (Modification of Schedules).

On goods, India needs to draw up a list of ‘substantially equivalent concessions’ it ‘initially negotiated’ with the UK and/or EU that it will ‘modify or withdraw’. On services, it needs to evaluate the prospect of WTO arbitration over ‘compensatory adjustments’ the UK and/or EU offers that India finds unacceptable, and thereafter modify or withdraw ‘substantially equivalent benefits’.

If UK is interested in concluding a trade deal with India, it would need to demonstrate flexibility on Mode 4 and open up to immigration. Indian trade policy remains anchored in demands for what GATS defines as ‘Mode IV’ delivery of services, or in common parlance, temporary migration of business professionals.

Instead, UK negotiators have offered Modes I, II and III as more acceptable than Mode IV.

Mode I (cross-border supply) relates to outsourcing such as Indian professionals delivering services from their offices in Mumbai to patients and clients in Manchester via the internet. Mode II (consumption abroad) relates to travel to India for top-quality medical treatment and first-class engineering consultancy advice. Mode III (foreign direct investment) is welcome since it involves Indian companies investing in the UK and employing British citizens. India however will continue to insist on Mode IV in any trade agreement with UK or EU.

The UK economy, without the rest of the EU, represents a middle level economy, far smaller than India’s almost 3 trillion dollar economy. For the deal to be attractive to India, with the EU now a much larger trading partner, UK would need to make concessions. This appears to be a difficult deal.

UK is now very keen on finalizing a trade deal with India as the Brexit separation date approaches. Responding to questions on how soon India and the UK could begin negotiations on a free trade agreement (FTA), the UK High Commissioner Sir Dominic Asquith noted in April 2019 that while the two countries could not discuss tariffs as long as the UK remained part of the EU, talks on issues such as market access and regulatory controls were allowed and were already happening. He said: "Of course, we cannot conclude an FTA with India till we have completed the exit process and it is not yet clear what it would look like. But my team and ministers have been engaging in good conversations with their counterparts in the Indian Commerce Ministry”.

In June 2016, a month before the Brexit referendum, the UK Treasury had forecast: "A vote to leave would represent an immediate and profound shock to our economy.” As the Brexit deadline approaches, there are ominous signs that Britain’s decision to quit the world’s largest trading block is beginning to take its toll. Official data published on 11th February 2019 showed that in December ’18 GDP had shrunk by 0.4%. The fourth quarter of 2018 showed GDP growth of only 0.2%. The Bank of England has now revised the probability of the economy shrinking and going into recession from 13% to 22%.

The ‘Brexit effect’ is particularly clear in industries that trade or are dependent on EU workers such as the engineering and vehicles sector as well as the hotel and restaurant industry. This downslide would impact both the UK and the EU adversely at a time when the euro zone is weak and just coming out of recession.

UK should accept that it is overwhelmingly a mature, service based economy. India, with about 60 per cent of its economic activity accounted for by services, is not far behind. Thus, a free trade deal would have to involve a different attitude with regard to allowing Indian workers into the UK. The stark reality that a new UK Prime Minister would have to accept is that like the EU, India is a much larger economy than the UK, which is in a relatively weaker bargaining position for precisely the same reason as it is with the EU. India would have to deliver a difficult message to its former coloniser, that UK needs India more than India needs UK. India needs the EU more.

India, like the EU, would expect flexibility from the UK on the same issue that led to Brexit in the first instance – free movement of people and professionals across borders. Ultimately, what India and EU needs are identical: a negotiated soft Brexit.

The deadlocked negotiation demonstrates a fundamental flaw in the functioning of the EU as an intra-state entity. A Dutch philosopher Luuk van Middelaar recently noted: "Being an institution of laws and regulations, EU paid too little attention to the strategic and geopolitical importance of Britain to Europe, focussing on trade first, where Brussels held the cards and security later”.

In India these developments are being followed with alarm and foreboding. There are reports that Law Ministry has cautioned India’s Commerce Ministry that a no deal Brexit is a matter of serious concern for India’s trade and industry and the Government must take legal recourse to protect India’s interests during the process, including through WTO.

The French and the Germans have started preparing contingency plans for a no deal Brexit while realising, too late, the implications and the geopolitical aspects of one of the EU’s most important Member States, crashing out of the EU in this manner. It is being compared to a ‘strategic amputation.’

Frans Timmermans, one of the most successful Foreign Ministers of the Netherlands and the first Vice President of the European Commission paraphrased the Rolling Stones: "You can’t always get what you want, but if you try sometimes, you might get what you need.”

It does not seem to be clear to Brussels or to India at this stage what UK wants, let alone needs. A deal has never seemed so far away.

Concluding reflections

The continuing impasse over Brexit demonstrates the danger of populism and populist policies impacting international peace and security, be it Northern Ireland or North Korea. Brexit threatens the fragile peace in Northern Ireland. The hard core of Brexiteers are willing to gamble with the unity of Britain and to risk losing Scotland and Northern Ireland in their quest to be rid of Europe once and for all. As described by a prominent EU politician, Theresa May’s efforts to secure a deal is like trying to make an omelette while taking out the egg!

The developments around Brexit also demonstrate the fragility of the established democratic order when faced with challenges resulting from globalisation, new technology and social media. A new world order is emerging. It should remain anchored to the principles of liberalism, democracy, tolerance and multiculturalism.

On the other hand, those who predict that Europe is in decline ignore the checks and balances built into the Lisbon Treaty, which ensures that despite every challenge, including from populists, European values remain intact. There is also an intellectual and political synergy between Europe’s Eastern and Western flanks which manifests itself in political churning.

There exists a fundamental conflict between the EU’s western flank which remains overwhelmingly liberal and progressive versus Eastern Europe which is rejecting modernity, liberal values and challenging the principles enshrined in the Lisbon Treaty. It is a conflict between two versions of European vision for the future. The debate in the Western EU is about the sovereignty of the individual. In Eastern Europe, it is about the sovereignty of the nation. Given the growing gap between Eastern and Western Europe, both ideologically and economically, the debate is becoming increasingly toxic.

From an Indian perspective, Indian Industrialist Shishir Bajoria, Chairman of the Bajoria Group appropriately summarized India’s position on this issue: "We have 800 million young Indians who need jobs. We will trade with the UK, Brexit or no Brexit. And we will trade with the EU, Brexit or no Brexit.” (2016).

Pankaj Mishra in "The malign incompetence of the British ruling class” (NYT 19) forebodingly questions if partition is finally coming home to UK, "threatening bloodshed in Ireland and secession in Scotland” and leaving ordinary British people to suffer from the unimaginable chaos of a looming no deal Brexit. He concludes: "More ugly historical ironies may yet way lay Britain on its treacherous road to Brexit”.

Clearly, this is a narrative still in the making with high stakes for all, India, UK and Europe.