The future of the EU-UK relations

23rd of June 2020 marks 4 years since UK voted to leave the EU.

Following the EU-UK high level meeting of June 15, 2020, the parties noted the UK’s decision not to request any extension to the transition period. The transition period will therefore end on 31 December 2020, in line with the provisions of the withdrawal agreement. The Chief Negotiators agreed to intensify the talks in July with a view to concluding and ratifying a deal before the end of 2020. 

Dr. Pompeo Della Posta, PhD, MA, Associate Professor with the Department of Economics and Management, University of Pisa, and future Full Professor at the Belt and Road School – Beijing Normal University at Zhuhai, shares with us his insights on the future of the EU-UK relations

1.  What do you think about BREXIT opening a new global trade era after 1 January 2021?

A new era of global trade is quite likely; indeed I would say that it has already begun. But I would not say “after 1 January 2021″. To say that Brexit will mark the beginning of a new era of global trade would mean giving too big a role to the UK and its economic policy decisions, while I fear that global trade follows dynamics that are only marginally influenced by the UK. In other words, I doubt that the impact of the UK’s decision to leave the EU would have global repercussions. Of course, it will have an impact largely on economic relations between the UK and the EU and certainly on the UK’s bilateral economic relations with some specific countries that have had a lot to do with it in the past. The weight of the UK on the international trade of each individual EU country, however, only exceeds 10% in the case of Germany, while the weight of the EU on the UK has so far been around 50%. The greatest effect will be felt by the UK itself, therefore, and I fear that it will not be for the better.

Think about the fact that from now on EU students attending university in the UK will have to pay the same tuition fees as students from China or India. What about the elasticity of demand? Will Italian, French, Spanish or German students continue to enrol as before? Very doubtful. There are many alternatives, Ireland, for example, or the Netherlands, Denmark, Sweden, France. But the UK may think it has the world as its horizon, rather than the EU, to replace Europeans with those of the countries of their formal colonial empire, or the rest of the world. Let’s see if that’s the case…

2.  Germany is the UK’s second largest export market for goods and services and second largest trading partner, accounting for more than 10.2 % of all UK trade in 2019. During that period, total trade between the UK and Germany was worth £136 billion. Germany is taking over the six-month rotating presidency of the Council of the EU on July 1, 2020. How do you see Germany wanted to avoid a no-deal scenario that would hit its export-oriented industry?

Yes, as I mentioned in the answer to your previous question, Germany has a large market for its technologically advanced products in the UK, not to mention the fact that Germany owns most of the British automotive industry. Historic British brands are in the hands of German companies such as Mercedes, Audi, BMW. This means that, in terms of industrial organisation, for example, the German car industry has the potential to produce at least part of its car exports within the UK, thereby mitigating the impact of the UK’s abandonment of the single market. When the United States imposed restrictions on imports of Japanese cars in the 1980s, Japanese companies set up some of their plants within the US borders. Furthermore, it should not be forgotten that Germany cannot favour any interest in reaching an agreement with the United Kingdom at the expense of its economic interests within the EU.

As far as the United Kingdom is concerned, it is known, however, that the British manufacturing industry is rather small (the economies of all advanced countries are based on services, but this is particularly true for the United Kingdom) and that many products are imported from abroad. The restoration of tariff and non-tariff barriers against products imported from the EU could provide a shield for domestic producers so that they now find it advantageous to produce and start producing new goods. But today’s production process is quite complex, requires large initial capital investment and even when this is available, as could be the case in the UK, economies of scale play an important role, so that their production only becomes competitive with that of the incumbent producers once they have reached a fairly high level of sales. I therefore doubt whether such an effect can play an important role. I think that British consumers, who are accustomed to enjoying the variety of products of the many high-quality goods from the rest of the EU, will very soon feel the cost of the additional barriers that will be imposed on those products. The significance of Brexit will become clearer for them, so along with the real cost of ‘regaining control’ of their country.

3. What are the biggest challenges for both sides, starting with 1 January 2021?

Once again, I see the UK facing many more challenges than the EU, for the reasons already mentioned. I see a rather significant contradiction in Brexit. When they decide to leave the EU, they certainly cannot expect to be isolated from the rest of the world. They must therefore aim to increase the weight of the rest of the world at the expense of an overly suffocating, limiting and demanding relationship with the EU. Are they really sure that this will be the right way to ‘regain control’ of their country? Will they replace European immigrants with those from the rest of the world? Will it be less critical for them? Will “disconnected” voters, those who are relatively old, low educated and living in rural areas, who have given their preference to Brexit (much more than the more educated voters, who live in urban areas and who are relatively younger), be reassured by this prospect? And, in more general terms, would replacing European economic integration with worldwide globalisation really allow British citizens to ‘regain control’ of their country? Regional integration involves the establishment of economic relations with countries which, because of their geographical proximity and historical links, are usually much less critical than those that emerge when global integration is undertaken, in which case, given the large differences, comparative advantages can play a much more significant role.

For Germany and the other countries of the European Union there will certainly be a cost to enter a market that will be protected by tariff and non-tariff barriers, but in the end their possibility of diversification will be much wider. So, in terms of challenges, again, it is quite easy to predict that those faced by the UK are much more difficult than those faced by EU countries.

4. Due to the COVID-19 pandemics the global economy is in recession, and global trade and investment flows are significantly declining. How do you see the effects of the pandemic on the BREXIT talks? 

I think that pandemics will have a major effect on global trade, and not just as long as it lasts. In fact, it could completely change the outlook for Brexit. A trend towards global regionalisation, i.e. limiting trade and economic relations in general in countries not too far away, has already begun several decades ago. With regionalization, competition is not usually perceived as “unfair”, but rather advantageous, because it would promote efficiency. Since the countries are similar, there are not many structural differences between them, so that a national enterprise can prevail over foreign ones only thanks to the greater degree of efficiency it will be able to achieve (these are the well-known positive effects of intra-industrial trade, which is favoured by regional integration, compared to the negative ones – in social terms – caused by inter-industry trade which takes place with globalization at world level). From this point of view, therefore, Brexit already appears to be a difficult choice to rationalise: all over the world, in general, countries are establishing closer ties with their neighbours and reducing economic relations with more distant countries, while the United Kingdom is doing the opposite.

But the effects of COVID-19 might make this contradiction even more apparent: the disruptions of the global value chain that has been characterizing the pandemics in its initial stages (with many Chinese factories not being capable to provide any more the intermediate goods that factories across the world needed to complete the production process) made many countries and companies realize that splitting the production process across the world is not without costs and sooner or later the bill arrives. As a result, the global production process might well change format and structure, further enhancing the tendency towards a phase of de-globalization that was already in place. To realize that this is indeed the case it is sufficient to think of Trump’s trade conflict with China, for example.But the effects of COVID-19 could make this contradiction even more evident: the disruptions in the global value chain that characterized the pandemics in its early stages (with many Chinese factories no longer able to provide the intermediate goods that factories around the world need to complete the production process) have made it clear to many countries and companies that dividing the production process around the world is not without cost and sooner or later the bill comes. As a result, the global production process could change format and structure, further reinforcing the trend towards a de-globalization phase already underway, as Trump’s trade conflict shows clearly, just to provide an example.

5. What would be the main takeaways from BREXIT?

Critiques against globalization had already been raised in the 1980s and 1990s and at the time had been discarded as coming from people who rejected the idea that the world should progress. Moreover, it was claimed, as Margaret Thatcher argued, that “there is no alternative” (the famous TINA acronym) to economic globalization. This meant paying very little attention to the losers of globalization (if not completely ignore them) and neglecting the critical aspects of globalization. There was a fear that recognizing that some of the criticisms raised against it might be well founded would open a “Pandora’s box” from which anything could come out. Much better to keep that box closed, then, and accept some negative aspects (considered minor) in order to enjoy the supposedly great benefits that could be obtained from globalization. It is true that consumers may have underestimated or taken for granted the benefits they could get from buying goods produced at a lower cost in other parts of the world (thanks to technological progress too); it is also possible that a problem of collective action has prevented their voice and interest from being heard. The higher share of the production cake obtained from profits at the expense of labour might also suggest, however, that the lower costs of the production process made possible by the relocation of factories to countries where labour costs were lower were used to increase the share of profits rather than to reduce the price of products purchased by consumers. After all, labour operated in perfectly competitive (and often monopsonistic) markets, while goods were traded in imperfectly competitive markets, where logos and mark-ups continued to play an important role, so that prices could well exceed the cost of production and consumers did not necessarily enjoy lower prices.

In any case, we have now learned that “there is an alternative” to globalization and that Rodrik’s well-known trilemma (one cannot have at the same time the democratic control exercised by citizens, economic integration and a national government that governs a country in full autonomy) is actually compelling. We have learned that losers can react and in a democratic environment can vote in favour of those parties that promise to provide the protection they claim. But this is nothing new: already in the 1920s Keynes observed the end of that wonderful word where you could order goods produced anywhere in the world “sipping tea in bed” and which ended with the outbreak of the First World War. Nothing is to be taken for granted and sooner or later people will change what they perceive as harm to them (the distinction between perceptions and facts is another matter that should be discussed at length).

We have also learned, however, that democracies are fragile and must be defended against the shortcuts of populism and nationalism. The process of globalisation, and also regional integration, since we are talking about Brexit, has certainly had more than one problem and one weakness. But the answer cannot be nationalism or sovereignty. In one case the TINA paradigm is certainly valid and to one thing “there is no alternative”: comparing our opinions and our legitimate interests with those of others, cooperating, discussing, negotiating, looking for the best ways to solve our common problems.

Leave a Reply

Your email address will not be published. Required fields are marked *