Brexit has happened. But the UK still faces two major choices over the coming year. How will it align its domestic economy with Europe? And how will it continue its global role? The new UK government is still deeply conflicted on these choices. Only when they are made will it know how to conduct its future relations with Asia-Pacific.
A little history helps. By the end of World War II, the British Empire was still intact. But the US demanded that the British Empire be dismembered. This happened over the next 30 years. The General Agreement on Tariffs on Trade, which became the World Trade Organization, gradually removed barriers to international trade until the Uruguay Round concluded in 1993. It wound back the preferential trade which had occurred within the British Empire. Commonwealth countries such as Australia and Canada increasingly traded with their near neighbours. The Unite withdrew from Malaysia and Singapore. UK rule in India came to an end. The UK saw its way forward in Europe. It joined the European Economic Community in 1973 and led the establishment of the European Single Market in the 1980s. Many foreign firms located themselves in the UK in order to serve the European market. The Japanese car industry established its base there for European expansion. UK firms too seized the opportunity provided by a market of 450 million people. BAE Systems and Rolls Royce, for example, have been at the centre of the aerospace industry in Europe. UK universities lead those in Europe. But the single market is not just a free trade area or a customs union. It is built on four freedoms: the freedom of movement of goods, capital, services and labour. Like all freedoms, these need to be administered and protected within a governmental regulatory framework.
Product, labour and environmental standards – and the freedoms on which they build – are all enforced by the EU. The enforcement of these requirements is carried out by the European Court of Justice. Those engaged in the financial services industry, regarded the free movement of capital and labour within Europe as desirable. But unskilled workers – damaged by the deindustrialisation that occurred under former prime minister Margaret Thatcher in the 1980s – did not. Controlling migration was a central Brexit issue. Many in the UK object to the sovereignty of the European Court of Justice, given their memories of the British Empire. But these compromises were held together by the UK’s prosperity brought by membership of the EU. They have been shattered by Brexit. EU–UK negotiations about future trade are now beginning. The UK wants to continue the unimpeded access to European markets which it possessed in the single market. But the EU asserts that it will grant this only if the UK continues to subscribe to the single market’s freedoms and standards.
Prime Minister Boris Johnson’s new government regards these conditions as unacceptable. Access to the UK market is a smaller prize than access to the EU market, which it used to offer.
Moreover, the UK will find it difficult to grant what foreign countries want. India will seek access for its labour to work in the UK as a price for allowing the UK to sell goods and services into India. Asian countries will seek better employment opportunities for their students studying in UK universities.
China may seek product standards for what it sells to the UK that conflict with those in the EU. Australian farmers will seek access to UK beef, lamb and sugar markets. But UK farmers, which have been protected by the EU’s Common Agricultural Policy, will resist this. And, of course, the US will seek access for its agricultural goods, produced under different standards from those that rule in the EU.
Previously, the UK had been important in determining the EU’s response to China’s Belt and Road Initiative. But it will be harder for the UK to exert this influence now that it is engaged in difficult trade negotiations with the EU. Similarly, while the UK was an EU member, it acted as a bridge between Europe and the US. But the decision to allow Huawei into the UK’s 5G network shows how difficult this will now be. Countries in Asia-Pacific will not be able to make trade agreements with the UK until its relations with the EU are clarified.
Asia-Pacific countries and the UK will need to work together towards greater global coherence in the face of global competition between the United States and China, rather than allowing further global disintegration to continue. That will also require cooperation with the EU.
David Vines is emeritus professor of economics and emeritus fellow of Balliol College at Oxford University. This first appeared in East Asia Forum.