Brexit Explained: Reasons, Pros, Cons, Impacts on India

The UK left the European Union on New Year’s eve, after the end of the transition period that maintained the status quo for 11 months after Britain formally left the EU on January 31, 2020. While it would mean that the UK’s reclaiming of national independence from the EU and its rules, several challenges remain for the future to be addressed. The post-Brexit trade deal has brought in new restrictions and left several key issues unresolved, leaving the possibility of tense ties between the UK and the EU.

What is the EU?

• European Union is an economic and political partnership comprising of 28 member nations.
• Politically, a law passed in the European Parliament is applicable and binding on all Member nations directly.
• Economically, the EU is the single market allowing the free movement of goods and people. EU has its own currency, the Euro, which is being used by 28 member countries.
• The capital of the EU is located in Brussels, Belgium.

What is Brexit?

• Brexit is the short form of Britain Exiting the European Union (EU).
• In 2016, Brexit was announced in Britain after the referendum for leaving the European Union. (Referendum – A popular vote by the electorate on a political question).
• After the referendum, the UK and EU provisionally agreed to settle financial, strategic and political issues over a transition period of 21 months.

Why Britain has not been exited till now?

• The UK has to invoke an agreement named Article 50 of the Lisbon Treaty.
• The treaty provides 2 years time for the EU and UK to agree to the terms of the split.
• The UK invoked the article in March 2017 and hence it is expected to leave EU in the mid of 2019.

What are the arguments in favour of Britain leaving the EU?

Migration

• Migration of people from both within and outside EU, especially from the West Asia (Syria and ISIS Issue) and East European nations = Fear of losing jobs, social welfare benefits among the Britons.
• Repeated requests of Germany to share the migrants across Europe and asking the UK to accept a number of them have been disliked by the Britons.

Contributions to EU Budget

• UK is one of the ten countries which contribute more to the EU Budget.
• According to some studies, the UK’s contribution is not proportionate to the benefits it gets back.

Failure of EU

• The European Economic Community (EEC) had 6 members, 4 languages and 177 million population when it was founded. But now the EU has 28 members, 24 languages and 505 million population.
• Thus the EU failed on several fronts in creating one community and one identity while solving the differences among its members, including Britain.
• People feel that jobs, living standards were better offered during the early days of nation-states than now. (Click here to learn about the European states system through mind map).

Sovereignty issue

• Some of the Britons feel that they are being controlled by the diktats of Brussels bureaucracy rather than making their own decisions.
• They view the institutions of EU as undemocratic and do not want bureaucrats in Brussels to decide what laws the UK should follow.

Germany’s domination

• With the coming of Angela Merkel, Germany has started playing an influential and leading role in both global and regional affairs.
• It has indirectly made Britain feel marginalized both within the EU and the region.
• Considering their imperial past, Britons are in no way ready to tolerate an EU dominated by a German leadership.

Economic model

• Some Britons are not happy with the way EU central bank responded to the 2008 financial crisis which resulted in an economic recession. (Note: Recession means a widespread decline in the GDP, employment and trade lasting from six months to a year).
• They were not satisfied with the economic model that is in place for three decades and its failure to serve the interests of various sections of the Britons.
• Particularly, the youth are concerned about career opportunities and the affordable homes that were never built by the State.
• It is estimated that unemployment across Eurozone is more than 10 percent.
• According to some studies, the UK’s economy is losing 600 million euros every week because of the burdensome regulations of the EU.

What are the arguments against Britain leaving the EU?

Image of UK

• For the critics of Brexit including former PM David Cameron, the referendum was an utter insult to the entire country as it has reflected the great divide between Britain and EU.
• They also claim that the UK’s image would get damaged by leaving the EU.

Immigrants

Majority of the immigrants are young and hence would boost economic growth and will help pay for the public services.

Trade

• Trade gets a major boost for Britain if it stays with the EU. It is because selling products to other EU nations becomes easier with EU membership.
• Foreign companies may not be willing to invest in the UK if it is not part of the EU. Moreover, they may also move their bases out of the UK as it will not be a part of the single market since it would face problems with different EU regulations.

Security

According to Brexit critics, leaving the EU may affect the ability to fight cross-border crime and terrorism. They believe that Britain would be more secure as part of the EU.

What are the implications of Brexit?

For the UK

• The weakening of pound: The value of pound weakened to a 30 year low after the Brexit referendum. It will negatively impact the country’s imports and exports.
• Trade agreements: the UK has to separately enter into trade agreements with the rest of the world.
• The breakup of the United Kingdom: Scotland (part of UK) had voted in favour of EU during the referendum campaign. Thus Brexit would boost the demand for independence of Scotland from the United Kingdom.
• The Irish question:
  • Ireland is an island to the west of Britain and has 2 major regions – North and South, with different demographic features.
  • “Protestant majority Northern Ireland” (a UK territory) and “Catholic majority Irish Republic” (an independent country in the south), have had serious ethnic tensions within and between them.
  • Numerous agreements and EU’s integrated markets system have thus far been a considerable influence in resolving these tense and violent trends.
  • Since UK plans to leave EU, the Irish question has come to haunt all concerned governments since there is a fear that a new era of violence might start.

For EU

• Britain is an important country in the EU. Without Britain, the EU may lose much of its influence as a global power bloc.
• It may result in a resurgence of the nation-states that once ruled Europe. Because, with Brexit, right-wing political groups in Italy, France, Sweden, Belgium, Poland, Germany, Spain, and Hungary have started demanding the exit of their own nations from the EU. (click here to learn about the European states system through mind map)

For India

• Trade: India-UK trade will get a boost. The stringent regulations of the EU which were the biggest obstacle can be done away with. For example, the EU had banned Alphonso mangoes from India after it reportedly found fruit flies in the consignments. The weakening of pounds will also be advantageous for Indian imports. It will also benefit tourists and Indian students studying in the UK.
• Indian Businesses in the UK: may find it hard to access the single market of EU since their products may become uncompetitive if they are asked to pay import duties upon entering the EU. Thus Indian businesses will not be able to utilize the UK as the gateway to the European Union. Indian IT firms which have considerable exposure to the European markets, particularly the UK, will be affected since there is a risk of a decrease in growth levels in the EU and UK.
• Tourism: Due to the weakening of pound, there will be a decrease in tourists flow into India from Britain.
• Immigration: After Brexit, it is expected that there will be more restrictions on immigration in the United Kingdom thus affecting Indian immigrants.
• FDI: Brexit will affect the flow of Foreign Direct Investment (FDI) in India. It will result in financial instability and a legal regime overhaul in the long-term.
• Indian students in the UK: will get benefitted since the number of applicants from EU nations to the universities in the UK is likely to decrease after Brexit. Also, the weakening of pound may lower down the total cost of education for Indian students. Furthermore, there may be a decrease in international student fee since the low fee structure for EU students may be withdrawn. It has to be noted that, the EU students were availing fee concessions which are being cross-subsidized by a higher international student fee.

For world

• Brexit will create Macroeconomic and financial market impacts in the UK and EU and may spread across the globe.
• The impacts of Brexit will result in financial and political uncertainty = Decline in business and consumer confidence = Lower growth scenario across the world.

What does the draft deal (November 2018) propose?

Transition Period

• Britain will formally exit the EU on March 29, 2019, = UK will cease to be involved at any level in EU decision-making.
• However, the UK will remain inside the EU’s single market and subject to EU laws and regulations until the end of December 2020. Meanwhile, the two sides may attempt to sort out a new trade relationship between them.

Irish border

• Since the Irish Republic (separate country) is an EU member, a porous border with it by the UK would mean a porous border with EU, which is not a desirable outcome for the pro-exit group in the UK.
• Thus it is agreed that there will be no hard border between Northern Ireland and the Irish Republic, at least in the short term.

Customs Union

• If the transition period extends beyond 2020, the draft deal commits both parties to a single customs territory between the EU and the United Kingdom.
• The customs union would eliminate all tariffs, checks on roles of origin and quotas and would cover all goods except fishery products.
• While part of the customs union, the UK will be bound by all international trade agreements = countries outside the EU like the US and China would have access to the UK market under terms provided under the EU’s trade agreements.
• This provision can be removed only via the agreement of both parties = preventing the UK from effectively leaving the customs union without the approval of the EU.

Financial markets

• Under the draft deal, entities created in the UK shall be treated as entities located outside the Union by the EU after the deal = London’s vast financial centre can only have a basic level of access to the bloc’s markets after Brexit.

Freedom of Movement

• The draft agreement gives protections to EU citizens in the UK and similarly UK nationals in EU countries to continue to live, work or study as they currently do.
• Exit visa, entry visa or equivalent formality shall not be required for holders of a valid document issued for EU and UK nationals when crossing national borders within the bloc.

Commitments to EU programs

• The UK will honor all current joint commitments to EU programs as outlined in the EU budget until 2020.
• Under this, Britain agrees to cover contributions to staff pensions and commitments to EU programs the UK made while being a member for the funding period until 2020.

Updates:

The genesis of UK-EU trade deal:

• Brexit was meant to happen on March 29, 2019, two years after Article 50 of the Lisbon treaty, to officially signify the UK’s exit from the EU.
• The two year-period was given to the UK government to come up with a deal to leave the EU.
• The March 29 deadline was delayed twice after the UK-EU deal by the Theresa May government was rejected by the UK Parliament.
• After the MPs rejected the deal for the third time, May resigned and was succeeded by Boris Johnson.
• The Johnson government, after months of negotiations, had successfully negotiated a trade deal to define the future relationships between the UK and the EU.

What are the key highlights of UK-EU trade agreement?

Trade:

• As per the free trade deal, there will be no tariffs on goods or limits on the amount that can be traded between the UK and EU from January 1, 2021.
• This is the first time that the EU has agreed to zero quotas and zero tariffs with a trading partner.
• Implications of these are:

1. Elimination of the fear of increased expenses of goods
2. Businesses need to prepare for new procedures, failing which could lead to trade disruption.

Services and qualifications:

• The UK’s services like banking, architecture and accounting lost their automatic right to access EU markets and will face some restrictions.
• UK professionals will not be automatically recognised within the EU through their qualifications.
• This means that:

1. Instead of following uniform rules for the whole of the EU, the UK businesses will need to comply with regulations in each individual country.
2. Service providers, who gained qualifications in the UK, will need to check each country’s rules to make sure their qualifications are still recognised.

Travel:

• Visa is required for the UK nationals staying more than 90 days in the EU.
• European Health Insurance Cards (EHIC) will be replaced with the new UK Global Health Insurance Card. However, EHIC will remain valid until they expire.
• The UK is no longer subject to the ban on additional roaming charges, though both sides will encourage operators to have “transparent and reasonable rates” for roaming.
• Tax-free airport sales of electronics and clothing will stop and pet passports issued by the UK will be invalid in the EU.
• Travellers from the UK will be subject to travel restrictions imposed on passengers coming from non-EU countries.

Fishing:

• Fishing was the most contentious issue during the negotiations.
• While fishing contributes to only a small portion of economic growth for both the UK and the EU, the issue is extremely emotive and the political consequences outweigh the economic impact for both sides.
• The deal allows the UK to have sovereignty over its fishing waters after it left the EU’s Common Fisheries Policy on December 31.
• According to this deal, the UK will be allowed to ban the EU fishing boats from 2026.
• In response, the EU would be allowed to introduce taxes on British fish.

Dispute redressal:

• As per the deal, the UK will no longer play a role in the European Court of Justice (ECJ), the highest court in the EU.
• Disputes that cannot be resolved between the EU and the UK will be referred to an independent tribunal.
• This means that the UK will be able to “take back control” of its laws.
• The ECJ will have a role in Northern Ireland because it continues to follow some EU trade rules.

Security and data:

• The UK will no longer have automatic access to key security databases.
• It will access them only after requests.
• The UK will not be a member of Europol, the law enforcement agency of the EU.
• The UK need to comply with the EU standards of data protection.
• However, the data exchange will remain unchanged for at least four months as long as the UK does not change its data protection rules.

Education:

• The UK will no longer participate in the Erasmus Exchange Programme, an EU scheme that helps students to study in other countries.
• Rather, it will launch a similar scheme that will apply to countries across the world.
• However, students at the universities in Northern Ireland will continue to participate in Erasmus, as part of the Northern Ireland Protocol.

What happens to Northern Ireland?

• Brexit would involve North Ireland’s departure from the EU as it is part of the UK.
• In the absence of another arrangement, checks would be required along the 499-km Irish Border as different trade rules would apply to north and south of Ireland after Brexit.
• This creates a security risk because a physical border infrastructure would be considered as a potential target for militants.
• To avoid this, an effective insurance policy called the Backstop was originally agreed by the UK and the EU in the withdrawal agreement.
• However, this was opposed by Northern Ireland’s lawmakers as it risked breaking up of the UK.
• Ultimately, the Backstop was replaced by Northern Ireland Protocol in order to avoid trade border emerging on the island of Ireland.
• The protocol was formed as part of last year’s withdrawal agreement.
• It prevents hardening of borders between Northern Ireland and the Republic of Ireland.
• According to this protocol, Northern Ireland (NI) will remain in the EU single market for goods.
• Northern Ireland will also apply EU customs rules at its ports, even though the region is still part of the UK customs territory.
• The protocol will also see Northern Ireland follow certain EU rules on state aid and VAT on goods.
• It also mandates checking and controlling of goods arriving from Great Britain from January 1.
• However, goods going into the Republic of Ireland and the wider EU will face no new checks or controls.
• This arrangement would still have applied even if the wider trade deal failed to be implemented.
• There were concerns regarding Northern Ireland becoming a tariff-dodgers’ backdoor into the EU’s customs union.
• It was addressed by allowing deeming of several goods as “at risk” and hitting them with EU tariffs as they entered from Great Britain to Northern Ireland.
• The tariff could be rebated if these goods were shown to be consumed in Northern Ireland.
• The overall UK-EU trade deal eliminates tariffs on all goods traded, minimising the number of transactions being deemed as at risk.

What are the concerns of this deal?

Security:

• The UK-EU trade deal leaves Britain less secure.
• The UK police had forfeited several key security tools like the Schengen Information System (SIS) – a vast database providing real-time alerts on locations of terrorists and serious criminals.
• On average, British police access the SIS more than 1.65 million times.
• The country currently lacks a substitute system, leading to an intelligence void especially times when Europe is becoming a victim to frequent extremist attacks.
• Similarly, the UK losing the seat in the Europol creates difficulties in cross-border criminal and terrorism investigations.
• New agreements are required with each EU member states to restore the previous relationships in this regard.

Data sharing:

• Restrictions on data flow may create a barrier on trade, putting the UK businesses at a competitive disadvantage.
• While the agreement ensures commitments from both sides on data protection, it fails to provide data adequacy status to the UK.
• The data adequacy is a status granted by the European Commission to countries outside the European Economic Area to enable seamless passage of data without the need for safeguards.

Service sector:

• The service sector accounts for 80% of the UK economy and is largely left out of the Brexit deal, which focuses on removing tariffs and quotas on goods trade.
• While the UK had an overall trade deficit of 79 billion euros with the EU in 2019, it had a surplus of 18 billion euros from trading services.
• The EU is waiting to see if the UK complies with existing EU regulations before striking further deals.

Conclusion:

While the UK has successfully exited from the EU, negotiators failed in addressing several key concerns like immigration, the status of the service sector, fishing, data accessibility, defence cooperation etc. This could pave way for more negotiations and disputes, which could ultimately lead to tariff impositions and diplomatic tensions between the UK and the EU.

Practice question for mains:

The UK-EU free trade deal does not address the long-term concerns of future bilateral ties. Elucidate. (250 words)