Brexit: an uncertain separation

The date of the UK’s withdrawal from the EU is drawing ever nearer. What this exactly will entail and how it will affect South Africa is yet to be seen, but the UK says that, regardless, it is pushing for closer economic ties with Africa.

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British Prime Minister Theresa May parroted the phrase “Brexit means Brexit” with shrill insistence in the weeks following the UK’s shock decision in 2016 to leave the EU. But with the country’s departure on March 29 looming, what that actually means still remains frighteningly unclear.

Months of painstaking negotiations between the EU and the UK have resulted in a withdrawal agreement that very few people want. In parliament, it was rejected by a record 230 votes, including those of 118 rebel MPs from May’s ruling Conservative Party.

Among supporters of both the Conservative and the opposition Labour party there is a wide spectrum of views about what Brexit should entail.

There are, on the one hand, the “remainers” who, in spite of the June 2016 referendum result, want to stay in the EU.

Among the people who want the UK to leave the bloc, those favouring a “soft Brexit” want to maintain close links — including staying a part of the EU’s customs union and single market, which allows free movement of people, money, services and goods. This arrangement, akin to the one Norway has with the EU, would allow British companies to trade seamlessly without tariffs or checks, and its citizens could continue to live and work freely in the EU’s 27 other countries. However, it would also mean adherence to many EU standards, regulations and laws; and the UK would have to allow migrants from the EU to live and work within its own borders.

This is far beyond the pale for advocates of a “hard Brexit”, whose rationale for leaving the EU is that they want to regain full control of legislation and migration and be able to make trade deals independently. None of this would be possible with a Norway-style arrangement.

May would seem to have kept the UK’s future relationship with the EU fuzzy deliberately. If the withdrawal agreement were to miraculously find the support it needs and come into effect, there would be a transitional period until December 2020, during which future relations would be figured out.

Complicating matters, though, is the issue of the border between Northern Ireland (part of the UK) and independent Ireland, which is part of the EU. After decades of bitter sectarian strife, the 1998 Good Friday Agreement made the Irish border permeable, with no checks or controls, in a bid to defuse tensions and support cross-border ties and trade.

A hard Brexit may imperil this: if the UK leaves the single market and customs union, the Irish would, in theory, be forced to conduct checks on goods and people crossing the border — which would become the border between the EU and the UK — in contravention of the Good Friday Agreement. Both countries want to avoid this at all costs, as they worry that erecting any form of barrier could reignite the violent conflict between Catholic republicans and Northern Ireland’s Protestant majority, which mostly favours union with Great Britain.

May’s attempt to prevent this so far has been the “Irish backstop”. If the transition period ends in 2020 without the UK and EU having finalised a trading agreement, then the UK would automatically remain part of the EU customs union. Checks would be done on certain goods — especially pharmaceuticals, agricultural products and some foods — coming into Northern Ireland to ensure these comply with the single market’s standards and regulations, in the event that they cross the border into Ireland.

Northern Ireland’s Democratic Unionist Party, which props up the Conservative minority government in the House of Commons, is dead set against this. The party believes anything that would result in Northern Ireland being treated differently to mainland UK would be the thin end of the wedge, presaging the gradual erosion of Northern Ireland’s membership of the UK, and putting pressure on it to be reunited with the rest of Ireland — something it vehemently opposes.

The hard Brexiteers also hate the backstop proposal because it risks keeping the UK stuck indefinitely in a customs union with the EU. Far from giving the UK the independence they crave, it would mean remaining compliant with a raft of regulations, with little prospect of disentanglement.

Even though Brexit hasn’t happened yet, its impact has already been widespread and damaging. In a climate beset by uncertainty and plunging confidence, house prices in posh UK suburbs have plunged as much as 25%; the pound has weakened against the dollar (from $1.45/£ to $1.31 at the time of writing). Businesses are moving elsewhere in droves: among them vacuum cleaner company Dyson (once trumpeted as “a great British success story” by former prime minister David Cameron) is moving its headquarters to Singapore; Sony’s Europe headquarters are moving to Amsterdam; and the ships of venerable ferry line P&O will sail under the Cypriot flag.

The Centre for European Reform calculates that by June last year, the UK’s economy was 2.5% smaller than it would have been if the referendum result had gone the other way. Brexit, it estimates, is costing the country £26bn a year — or £500m a week.

Come March 29, if an agreement with the EU hasn’t been reached, the UK’s trade with EU countries (49% of its exports and imports in 2017) would fall under standard World Trade Organisation rules. Financial transactions into the EU would no longer be immediate. Freedom of movement would end, to be replaced by mandatory passport and customs checks, and tariffs would be slapped on goods and services.

Endless queues on both sides of the English Channel are foreseen, leading to delays that would result in shortages of everything from car parts to cat food and medicine. Stockpiling has already begun, though this is only a partial solution given that the UK also imports 40% of its fresh produce from the EU.

Several UK parliamentarians are resolutely determined to prevent a no-deal Brexit. At the time of going to print, the House of Commons was debating possible amendments to the Brexit agreement with the EU — though none seemed to offer much in the way of a sure path forward.

An amendment by Yvette Cooper of Labour — the largest opposition party — would ensure that Brexit is delayed by nine months if a deal hasn’t been reached by March 29.

Conservative MP and former attorney-general Dominic Grieve proposed that MPs conduct a series of votes on the kind of Brexit they deem most palatable. If successful, it could open the door to a second Brexit referendum. However, ardent Brexiteers have howled in protest at what is essentially a bid to wrest control of the process from the government and place it in the hands of parliament.

Then, ahead of the debate, May did an about-turn, supporting Conservative MP Graham Brady’s proposal: renegotiating the withdrawal agreement with the EU to find an alternative to the backstop while avoiding a hard border.

However, both the EU and the Irish have insisted the backstop is not up for renegotiation. If May were to return to the EU to ask for changes to the deal, the UK would be “snatching defeat from the jaws of victory”, EU deputy chief negotiator Sabine Weyand has said.

What does this “mother of all messes”, as The Economist aptly describes it, mean for South Africa?

“Regardless of the outcome, the relationship [between the two countries] will remain very important — as much on the capital side as on the trade side,” says Peter Attard Montalto, head of capital markets research at Intellidex.

According to UK government figures, bilateral trade stood at £8.8bn (R157.9bn) in the year to the end of the second quarter 2018, a 9.3% increase from the preceding period. The UK remains SA’s biggest source of foreign direct investment — £9.6bn (R172.2bn) in 2017.

“Brexit is a tail risk for SA itself, but [for those] … heavily invested offshore and overweight the UK, it is important, certainly,” says Attard Montalto. He predicts “significant volatility” in the rand-sterling exchange rate — especially under a no-deal scenario.

But he offers some reassurance, saying that any outcome is likely to result in the UK keeping its strong standing in the global economy in the long run and remaining an investment destination. “It will, therefore, make little sense to have a dramatic shock withdrawal of capital in general by investors on a ‘no deal’, even if some hedging goes on, especially in the currency, which will be the main shock absorber,” he says.

Attard Montalto believes a hard Brexit might work in SA’s favour, as it would allow the UK to tailor a trade deal with the country that could usher in more frictionless trade and lower tariff barriers than are the case at present.

Meanwhile, the UK high commissioner to SA, Nigel Casey, assures the FM that his country is determined to prevent disruption in trade, regardless of whether a deal is reached by March 29.

“We have been working intensively with the SA department of trade & industry and its counterparts in the SACU [the Southern African Customs Union] and Mozambique,” he says.

The aim is to replicate the existing economic partnership agreement governing goods, trade and maritime services between the EU, the SACU and Mozambique.

“We are nearly there, but time is now short, and we need one final push to complete that process, and then to get it signed and ratified,” says Casey.

Irrespective of Brexit, the UK is pushing for closer economic ties with Africa — especially Nigeria, Kenya and SA, he says. It wants to replace the US as the continent’s largest investor by 2022. This co-operation extends beyond trade to cover collaboration in research and innovation across the board, and “investing in building links between the burgeoning tech sectors in the UK and SA”.

Angel Jones, CEO of Homecoming Revolution, a recruitment agency that helps professionals return to SA and elsewhere in Africa from advanced economies such as the UK, says anecdotal evidence presented to the company so far suggests Brexit is having little effect on South Africans’ decision to return from the UK.

The company “received a flurry of interest and inquiries from South Africans interested in hearing about opportunities back home” in the immediate aftermath of the referendum, Jones says.

“However, that hasn’t necessarily translated into actual returns.”

This article first appeared in the Financial Mail‘s 31 January 2019 edition.

Picture credit: 123RF/Marian Vejcik

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