The UK risks losing its global influence as it moves on Brexit
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On March 29, the United Kingdom’s government handed a letter to the European Union Council president notifying it of its intention to leave the EU. In triggering Article 50, the UK started a two-year course of negotiations where it must agree a separation deal with the EU, including a controversial assessment of a $56 billion separation bill.

The UK and EU will also begin to determine the terms of their future relationship, something that it is likely to take longer than the two years allowed under the terms of Article 50 (without unanimous EU agreement). Although these two years will be predominantly focused on the future UK-EU relationship, it is not just that relationship that will change as the UK achieves Brexit in 2019. The UK’s standing with many other countries around the world will also change.

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In the first instance, this change will reflect a change in economic relationships. The UK currently enjoys free trade agreements with 53 other countries, comprising 13 percent of its export market, via its EU membership. These too will end in 2019. However, from then on the UK will start a process of negotiating fresh trade deals.

 

Although these will take time to replace the arrangements that cover some 60 percent of the UK’s current export markets, they hold the promise of extending relationships beyond Europe. Moreover, these fresh trade deals will hope to extend trade access for financial services and capitalize on London’s role as a global financial center.

This will include with the United States. The US and UK have previously traded under multilateral trade (GATT/WTO) arrangements since 1945 (having experienced a relatively short bilateral arrangement from the late 1930s). However, the US accounted for 19 percent of UK exports in 2015. Financial links between the two countries have been strong. The UK will seek to deepen these relationships and while President Obama warned that the UK would be “at the back of the queue,” President Trump has been more accommodating.

Yet if the UK hopes to increase its global interactions on a trade basis, its influence in international affairs, with the US and the rest of the world, is likely to wane. An important part of the UK’s “special relationship” with the US has been as an interlocutor with the UK’s EU partners. The UK will still remain involved in the European arena.

The UK is one of the biggest economies in the region. It is one of the largest military powers in Europe. It is also likely to remain heavily integrated in the broader European security network as these nations address the common threat of terrorism. However, the UK’s involvement with the EU will diminish as a consequence of Brexit. As such, the US is likely to see decreasing benefit in negotiating with Europe through the UK and will continue to develop and extend other direct channels of communication.

If this is true for the US, we think it is also true for the rest of the world. On the Brexit campaign trail, many sought to characterize what country a UK outside the EU would most closely resemble. Some argued Switzerland, others saw ambition towards Singapore. The UK economy is nearly six times bigger than both of these, but in terms of assessing its future international influence, these may prove good bellwethers.

One area where Brexit may still have an outsized impact is in financial markets. There is a significant possibility that EU and UK negotiators fail to reach some sort of deal over the next two years. Amongst a host of serious problems this would create for the UK economy, one would be legal uncertainty, particularly around contracts.

Given the vast numbers of contracts traded on London financial markets, this uncertainty creates significant operational risk. Global and domestic companies will spend much of the next two years addressing these operational risks and drawing up contingency plans. But an adverse reaction in financial markets to a chaotic Brexit, or the implications of a hard Brexit cannot be ruled out.

Yet beyond financial risks, the worst case forecasts of what a vote for Brexit would do to financial markets did not come to pass: a material depreciation in sterling since the vote (12 percent lower in trade-weighted terms) and an associated boost in UK stocks, but broader financial markets have not suffered a rise in volatility following the Brexit vote.

Markets face a number of risks over the coming years: European political elections, policy uncertainty from President Trump’s administration, the effects of central banks reversing stimulative policy and China’s continued transition. Brexit should be included in this list. But as time passes, Brexit risk looks likely to slip further down the list of global interest. This echoes the likely path of the UK’s international influence as it pursues its chosen path of increasing economic isolation from its own continent.

David Page is senior economist at global financial firm AXA Investment Managers.


The views expressed by contributors are their own and are not the views of The Hill.