The years following the referendum on Britain’s exit from the European Union (Brexit) have revealed that the “European club” is capable, despite the painful Brexit blow, of showing resilience and adeptly facing the British precedent. They have also shed light on imminent questions within the UK regarding the future, unity, stability and nature of the country that the UK aspires to be. The cornonavirus epidemic has raised the challenge to severe levels that have shaken the UK’s reputation in terms of its claim about being capable of resistance alone, without Europe, to fulfil aspirations that its EU membership had prevented.
It is clear that many of the arguments regarding Brexit were based on a misunderstanding, perhaps willful, of globalization itself. Even before becoming Prime Minister, Boris Johnson had led a political trend that advocates that the UK would have a more open future to the world, particularly in view of the tempting position by US President Donald Trump that the US-UK economic relations may contribute to easing the impact of London’s loss of the EU market in case it fails to strike its deal with the EU. Yet over the last few years, the UK has faced a complicated and hard reality that has transformed the Brexit “dream” into a structural dilemma for the UK’s present and future alike.
Opportunism and challenges of the UK approach
The UK approach to the European project has been doubtlessly opportunistic. Compared to its European neighbours, the country had been facing an economic crisis in the 1960s. It saw in joining the young European project a sanctuary that would save it from its distress. At that time, French President Charles de Gaulle opposed the UK membership. He questioned its European character and blamed it for its transatlantic inclination towards the US. Only years after de Gaulle left the presidency and politics in his country could the UK join the European club (1973).
The close relations with Europe served to enhance the British economy and increase its growth rates. In 1992, the UK signed the Maastricht Treaty that accelerated the European economic integration by surrendering more powers to Brussels, including expanded cooperation on criminal justice and foreign policy and laying the groundwork for the creation of the euro. Thus, the UK shifted from the reality of distress to the reality of economic abundance by benefiting from its EU membership. However, a parallel ideological trend had grown in the UK, shifting from populist margins to mainstream politics through the deep-rooted Conservative Party. It appeared that the UK, which became oversaturated by its relationship with Europe, had now the luxury to give up the EU.
However, it was noticeable that the benefits achieved in the UK at the macro level were not evenly reflected all over the country. London prospered, as did other major cities. But this was not reflected in other industrial regions and weary coastal towns. The incomes of British families remained much lower than they were prior to the 2008 financial crisis. Homeowners in favoured areas enjoyed a prolonged boom at the cost of inequality with other regions. For instance, during 2010, house prices in London doubled compared to their levels in the rest of Britain.
Ironically, Brexit advocates enhanced their political standing by benefitting from voters in underdeveloped areas. This led to the voluntary shift of leftist cities to the right. Conservative leader Boris Johnson became the leader of a coalition that brought together older and more affluent residents of traditionally Conservative cities and suburbs with working areas and cities that had traditionally been a part of the Labour Party’s heritage.
Maintaining this improvised mix constitutes one of the hardest political challenges for Johnson. Furthermore, it would be difficult to find answers to the questions raised by Brexit which have quickly revealed the failure of the UK economic model in demonstrating a distinct response to coronavirus epidemic that would be different from the model of the EU that the UK has chosen to exit.
Adoption of the “Canadian option”: UK tendency to continue to benefit from the advantages of Europeanization
It is important to refer to a common mistake that tends to portray globalization as a uniform process whereby all countries are subject to the same rules. In fact, every country globalizes in its own unique way where industries with competitive advantages emerge on the world stage. This process has helped the UK become the second largest exporter of services in the world, after the US. In this context, London’s position has emerged as a European and global financial hub. UK companies have also prospered in the area of commercial services, such as advertising and management consulting, telecommunications, information technology, and business. According to the international consultancy company McKinsey, UK exports of services are now worth double the country’s exports of goods. Globalization has helped some UK manufacturing companies recover from the “traumas of Thatcherism”. While the share of manufacturing in the UK declined from nearly a quarter of GDP to less than a tenth currently, advanced manufacturing recovered during the 1990s and 2000s, notably in areas such as car-making where companies such as Honda and Nissan built huge factories to export cars to Europe. Aircraft spare parts and pharmaceuticals have also performed well as the UK became a base from which international investors could access the EU frictionless single market.
Boris Johnson is aware of the wealth that Europeanization has brought to his country. While he managed to complete its legal exit from the EU, he now seeks a formula whereby the UK would be “liberated” from EU restrictions while continuing to enjoy its advantages. Johnson has promised Britons to maintain the good indicators of their country’s economy through a new deal with the EU that may perhaps be similar to the one signed between the EU and Canada. According to Johnson, such a deal would confirm his country’s divergence from the EU in terms of the UK’s sovereignty over its rules and standards in the areas of labour and the environment.
While a debate has sparked in the UK over choice between “soft” and “hard” trade relations with the EU, adoption of the “Canadian option” in regulating the UK-EU relationship is a hard choice. While reaching an agreement with Canada took seven years, Johnson and his team continue to promise its possibility before the end of the year. A Canada-style deal would not be promising for the UK. According to the London-based National Institute of Economic and Social Research, under the “Canadian option”, the UK economy would diminish by 3.5 percent within a decade, i.e. a decline of 90 billion dollars or nearly 1,100 dollars per capita per year forever.
According to economic researcher Martin Sandbu, “a hard Brexit … stands to exacerbate the polarising characteristics of the UK’s existing economic model and harshen the social tensions to which it has given rise”. For instance, it will severely hurt manufacturing companies that rely on European supply chains, such as Nissan or Jaguar Land Rover, which rely on sending parts and widgets back and forth across Europe’s borders. According to McKinsey, intermediate goods traded with Europe alone now make up roughly a quarter of Britain’s imports and exports.
The matter will constitute a particular catastrophe for heavy industries. Apple can ship lightweight electronics from factories in China, but in heavier industries such as auto and aviation, production tends to be regional, for instance in North America or East Asia, rather than global. Therefore, it will be difficult for British industrial manufacturing firms to replace contracts lost in France or Germany with others in South Korea and Thailand, for instance.
Brexit will also hit trade in services, or at least those benefiting from the existence of relations with Europe. Thus, the City of London will lose the so-called “passporting” rights that allow banks to sell services into the single market without the need for extra licenses. Global financial centers grow essentially by servicing regional markets, as New York does for the United States or Hong Kong for China. Therefore, London will suffer as it distances itself from its European base as banks and brokerages shift divisions to Frankfurt or Dublin.
However, services are likely to be more resilient than manufacturing. Trade in services continues to grow strongly around the world, in contrast to the exchange of goods. If Britain manages to sign post-Brexit trade deals with countries such as the US and Japan, it is likely to seek favorable conditions for its service industries. Besides, trade in services is less vulnerable to problems of distance, which means that British banks or consultants are more likely than manufacturers to be able to replace European contracts with others elsewhere in the world, for instance in Asia.
Searching for a “new deal” despite the pandemic challenge
Britain’s post-Brexit position is not miserable. Predictions that the UK would plunge into recession have not materialized (even if this was caused by the pandemic anyway). It is worth recalling that Britain’s growth rate has been well above those of Germany and France over recent years. Therefore, the UK is likely to remain one of the world’s 10 largest ‒ and most competitive ‒ economies for many decades.
It seems that the UK will benefit from the globalization dilemma itself which manifested itself on the occasion of the coronavirus pandemic. Harvard University economist Dani Rodrik refers to the “political trilemma” of globalization, in which deep global integration is incompatible with both national sovereignty and democratic accountability. Nations, he suggests, must pick two of these three things. Britain has decided to set its own rules and run its own institutions but at the cost of giving up the economic benefits that hyperglobalization often brings.
Accordingly, an ideological debate has been going on, as yet timidly, in the UK that explores the features of the country’s post-Brexit future, while the world seeks to find its way and explore the outcomes of its position at the post-coronavirus pandemic stage. Johnson continues to believe that Britain can become more economically open and more in control of its own destiny. More cautious Brexit advocates think that leaving the EU might create a new Britain that grows more slowly but is more democratic and equitable.
The experience of dealing with the coronavirus challenge has doubtlessly embarrassed the agenda of UK-EU negotiations. It may escalate levels of tension in the relations between both sides amidst tendency by London and the Europeans to stick to fundamentals in the principles of the main topics of this relationship.
In the long run, there are many ways in which Brexit could turn out to be a good deal. As an institution, the EU may prosper over the coming decade. But if it does not, Britain’s decision to leave may become fortuitously useful and a reasonable option. Britain boasts an economic and political space that would enable it to figure out new routes to prosperity, as was done by South Korea and Singapore. Britain boasts the essentials of leadership in the kinds of industries that will support future global growth, from renewable energy and artificial intelligence to online education.
The risks of claiming the possession of an antidote to globalization according to London’s aspirations should not be underestimated. Despite its embarrassing contexts, the world’s experience with the coronavirus epidemic has revealed, unlike what is heralded by harbingers of the doom of globalization, the world’s need of multilateralism and more openness and cooperation. For example, it has become certain that scientific globalization is the only way to combat a threat that endangers the entire mankind.
EPC | 19 May 2020
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