Looming Brexit and potential fallout
India needs to look beyond the US and EU to widen its trade and investments
Why has the UK, the country of Isaac Newton, James Maxwell, Bertrand Russell and Charles Darwin, taken leave of its senses and decided to exit the European Union (EU) by end December 2020? If this were to finally happen, the UK will scramble for free trade agreements not just with the EU but also with others including India. Currently, the UK’S major partners for goods trade are Germany, US, China, Netherlands and France. The UK imported $92 billion worth of goods from Germany and exported $65 billion to the US in 2019. These two countries were the UK’S top import and export partners.
The Covid-19 pandemic has complicated matters for all countries and the UK’S economy shrank by about 20 per cent in the Apriljune quarter, the most among G7 countries. To remind ourselves, in
June 2016, the UK voted in a national referendum to leave the EU by 52 per cent of the vote in favour and 48 per cent against. In England and Wales, the vote to leave the EU was 53 and 52.5 per cent. By contrast, Scotland and Ireland voted to remain within the EU by 62 and 56 per cent. It is a reprehensible sentiment but some in India may feel a sense of schadenfreude as the UK economy flounders its way to Brexit.
While Scotland receives budgetary assistance from Westminster, there may be a point beyond which the Scots feel that the benefits of remaining in the EU may outweigh the costs of leaving the UK. Since the Good Friday agreement of April 10, 1998, people have moved easily between Ireland and Northern Ireland. Post Brexit would the UK impose controls on the movement of goods and people between Northern Ireland and Ireland? That would not go down well with Northern Ireland, which incidentally in August 2020 has a higher proportion of Catholics than Protestants in its overall population. Some time back, a retired colleague in the Indian government asked a former British High Commissioner over dinner at my residence in Delhi about how the Northern Ireland issue would be resolved if Brexit were to happen. The High Commissioner snapped back, “Please don’t ask about Northern Ireland otherwise I will have to talk about Kashmir”. I was left wondering about the maturity of diplomats that the UK sends to India nowadays.
Four elements which are integral to the EU are the free movement of capital, services, goods and labour within its borders. The UK wishes to cherry pick and carve out a free trade agreement with the EU to allow free exchanges of goods and capital but not all services and definitely not labour. For Germany and France, the EU is as much about political cohesion as about economic integration. Yet for them the UK is a large market nearby. Each side is hoping that the other will blink first in the Brexit negotiations.
As for Brexit’s consequences for trade between India and the UK, this could be adversely/favourably impacted depending on changes in bilateral tariffs. In 2019-20, India’s exports to and imports from the UK amounted to 2.8 and 1.42 per cent of the respective totals of its goods trade. The twoway trade in goods totalled $16.8 billion and $15.4 billion in 2018-19 and 2019-20, respectively, with about $2 billion trade surplus for India. The combined worth of imports and exports of services between India and the UK in 2018-2019 was about $9 billion.
In 2018-19 and 2019-20, India received $9.4 billion and $10 billion respectively from the UK as foreign direct investment (FDI) inflows which accounted for around 6 per cent of India’s total FDI in these two years. India has been a significant FDI investor in the UK and two high value investments were the Tata group’s acquisitions of Corus steel and Jaguar Land Rover (JLR) in 2007 and 2008. The Corus purchase was a disaster from the start given the high labour costs and inflexibility in laying off workers. JLR was initially profitable with robust sales into Chinese and EU markets. Last week it was reported that JLR had lost a billion pounds from January-july 2020 and Corus continues to be comatose.
British colonial era centralisation of power in Delhi, with English as the administrative link language, contributed to India’s emergence as one political entity. Yet, post Indian independence, the UK was consistently unreliable when it came to India’s core strategic interests. For example, the UK prime minister Harold Wilson’s obvious tilt towards Pakistan before and during the Indiapakistan 1965 war and coordination with the US to resolve the Kashmir issue on lines that would favour Pakistan. Things were somewhat different a year back when Prime Minister (PM) Narendra Modi met UK PM Boris Johnson on August 25, 2019, in Biarritz on the side-lines of the G7 Summit. This was 20 days after the abrogation of Articles 370 and 35A and the media reported that the UK PM had commented that Kashmir is a bilateral issue between India and Pakistan.
Given the large sizes and sophistication of the EU and the US economies, India needs to work towards higher volumes of trade and investment linkages with them. However, India is not as important to them and India’s focus right now should be more on widening and deepening trade and investment with Japan, South Korea and Asean nations. These Asian countries have systemic linkages with China as a consumer or supplier of their intermediate or final products. India’s problems with China on the Line of Actual Control are likely to persist. In the coming years, the US/G7 may dilute economic-high technology exchanges with China and India needs to tread carefully to be a part of supply chains that do not include China. To sum up, India’s efforts to promote trade, investment and technology transfer directed at raising manufacturing at home should focus on Japan, South Korea, Germany, US, Holland, France and Asean nations in descending order of importance.