WHITHER CHINA 2019-2020 Brexit Sidebar, China Connection

By on September 17, 2019

By John W. Tulac

I am writing this article while on vacation in London, so I begin with a brief aside to focus on the trade implications of Brexit with or without a deal. At the end of the article I suggest how China may take advantage of Brexit.

Parliament and indeed the whole country is tied up in knots over the impending Brexit deadline. Half the country favors Brexit, many under any and all circumstances, including a No Deal scenario, and half the country is opposed.  Thus, in terms of popular opinion, almost nothing has changed since the Referendum.

Almost all of the Members of Parliament are opposed to a No Deal Brexit.  More than a mere majority are opposed to any exit from the European Union.  This creates a dilemma for the MPs.  The U.K. is a representative democracy.  The elected members are tasked not only in carrying out the wishes of their constituents, but also to deliberate and act collectively in the best interests of the country.  Sound familiar?  They are deadlocked.  Sound familiar?

If the country is evenly divided in popular opinion, one would think that the MPs would feel free to act in the best interests of the country as they are likely to antagonize a good portion of their constituency no matter what they do.  So far Parliament has now managed to muster reasonably strong effort against a No Deal Brexit to which Prime Minster Boris Johnson has agreed to honor. 

It is easy to have sympathy for those who wish to leave the bloated, bureaucratic mess that the E.U. has become.  But then what?  In the absence of a plan, the country risks a much bigger mess that will lead to recession, shortages, and disruptions not experienced since World War II and its aftermath, which lasted into the 1950s.  Brexit voters certainly don’t want that, but entrusting politicians and a divided caretaker government (sorry, Theresa May, but that’s all you were) to develop a realistic plan acceptable to all affected interests was an exercise in wishful thinking.  Expecting a No Deal Brexit to work without first causing absolute chaos in the absence of any plan is simply absurd. 

A more sensible approach would have been a five-year timetable to exit the E.U. with negotiated benchmarks achieved in stages over that time period, instead of one grand “deal” in too short a period of time.  It’s how the original European Common Market was created and the modern European Union was a result of years of phased-in steps.  culminating with “Europe 92,” which really did integrate the E.U.  Of course the U.K. even then went its own way by staying with the British Pound instead of adopting the Euro and adopting the Big Bang reforms which made London the center of finance.

A trade deal between the United States and the United Kingdom would eventually ameliorate the loss of unfettered access to the E.U. countries.  However, short of an immediate opening of trade without restrictions, which neither government would ever agree to do, a U.S.-U.K. trade deal is only a dream and may take a year or two to negotiate. However, a No Deal Brexit might result in swift temporary easing of U.K. barriers to facilitate exports from the United States.  Companies looking for a small, but significant alternative to selling to Chia should be preparing to service the U.K. market.  Similarly U.S. companies may very well find that they have a comparative advantage to U.K. companies in selling to the E.U.

In the short run, China will seek to benefit from the discord between the U.K. and the E.U. and all the disruptions that will flow from Brexit whether with or without a deal.  China has made inroads in the E.U. market in recent years, particularly in Italy and Greece.  Both countries have had major long-running problems in both their gorenments and their economies.  Both countries have struggled to adhere to E.U. requirements. China has made substantial investments in both countries in recent years. 

As the U.K. experiences major problems post-Brexit, China will opportunistically offer to “help” under the Belt & Road Initiative and other means to gain a stronger foothold in the U.K. In a country already divided by the influence of non-U.K. entities and the free flow of E.U. workers into the U.K. the presence of more “foreigners” outside of cosmopolitan London will be deeply resisted and resented.  It has the potential to get very ugly, sorry to say.

On the other hand, U.S. companies would be much more warmly welcomed.  The idea of a “Commonwealth” or “Common Law” trade pact, long imagined, but never seriously undertaken in planning or negotiations, might see the light of day.  A free trade agreement (well, relatively free; we must be realistic) among all the former U.K. colonies and the U.K. would be a potent counterbalance to China.  It would certainly mitigate against the mistake of pulling out  of the Trans-Pacific Trade Partnership.  Although the Trump administration has been hostile to multilateral trade agreements, it might well be receptive to such new grand trade alliance.  

John Tulac

John W. Tulac is an international business attorney practicing in Claremont, adjunct professor of law at University of La Verne College of Law (retired), and Lecturer Emeritus (retired) at Cal Poly Pomona.  He is peer recognized as preeminent in international business law and holds the highest ratings for competence and ethics from the Martindale Hubbell National Law Directory. http://www.johntulac.com