Does Brexit Pose Danger Both For European Union And China?

The geopolitical impact seems to be a “forgotten dimension” of Brexit. The EU will become far less important and its influence on foreign policy within the UN and in a wider global context diminished. The EU’s own internal power dynamics will also become fundamentally imbalanced: the political and institutional reverberations for the Union itself would be far greater than any economic fallout. Britain’s exit would embolden other member states to consider their position within the EU. For China, which has invested time and resources into forging relations with the UK and EU, the prospect of Brexit also presents many challenges.

UK-EU Relations

Although it often has frictions with the EU, the UK, as the second-largest economic entity, a nuclear power, and permanent member of the United Nations Security Council, has been known as part of the EU troika along with France and Germany. Its role is irreplaceable, particularly in EU diplomacy and defence policies. With Brexit, the EU, as an important international actor, will inevitably see its role and influences decline.

Due to the European debt crisis, the increasing threat of terrorism, and the refugee crisis, conflicts and divergences have been on the rise among EU members. The resurgence of extremism and populism has undermined the EU’s internal cohesion, creating new troubles for European integration. The results of the German election will mean that there will be coalition talks between the chancellor Merkel Christian Democrats CDU/CSU and the Free Democratic (FDP) and the Green party which will probably last until December 2017. This means that Germany may not have a government until January 2018. This makes the political climate in which any Brexit negotiations are taking place more uncertain.

Potential consequences of Brexit such as the breakup of the UK are becoming clearer with the Scottish Government pushing to remain inside the EU Single Market and the possibility of having to erect hard borders between Northern Ireland and the Irish Republic.

The financial concessions made to the DUP by Prime Minister Theresa May’s conservatives have produced a reaction in Scotland and Wales. In Northern Ireland, Sinn Fein was strengthened both in the regional elections in May 2017 and in the 2017 general election.

May continues to repeat her Brexit mantras. She tries to project the image of getting on with the job, working to get a good deal, always talking as if the outcome is certain. But it’s not certain at all. May’s speech in Florence on 22 September has been welcomed as a step in the right direction. The lack of detail is persistent in areas such as citizens’ rights and especially Northern Ireland. May remains an optimist on Brexit, but close observers think even she makes the fatal mistake that sank David Cameron – of thinking all this can ultimately be sorted between politicians.

May is trapped by the toxic politics that put her into office a year ago and the growing realisation that Brexit is heading to be an economic and diplomatic disaster for Britain. Her essential stance in the election was that the country should rally behind her Brexit strategy. The UK electorate clearly opposed that proposition.

UK-China Relations

What are the implications for China’s relations with the UK and the EU after the UK’s Brexit vote? The UK’s decision to leave the EU has created uncertainty not only in the UK and the EU, but throughout the world. China is no exception. Brexit is likely to isolate the UK’s economy from the EU and cause short- to medium-term difficulties for the attractiveness of the UK as a foreign direct investment location. In the financial markets, London will still be attractive for China as an offshore renminbi (RMB) centre in Europe for the time being. China’s economic and financial strategy would have to be revised especially in relation to the EU which will benefit from opportunities that the UK would have secured in the past. Brexit will certainly slow down China’s free trade agreement negotiation process with the EU.  But with Brexit on the horizon, China may understandably have to adjust its global RMB strategy and may explore relocating a part of its offshore market to other cities such as Frankfurt.

The Brexit process will negatively impact the EU-China Bilateral Comprehensive Agreement on Investment (CAI) and, added to that, the Dutch, French and German elections in 2017 have further slowed down the process under way since 2013. On the other hand, the uncertainty in relations with the new US President Donald Trump may encourage the EU and China to complete the CAI process sooner rather than later.

With London as a major financial hub, and English offering easy access into Europe as the region’s lingua franca for business, the UK styled itself as China’s gateway to the EU. This strategy paid off; since 2000, the UK has garnered tens of billions of Beijing’s business, making Britain China’s largest European investment destination. The UK also acted as an advocate for Chinese interests in Europe, pushing for greater trade ties and leading the way in bilateral cooperation efforts with Beijing.

The fact that a lot of Chinese investment in the UK is in the housing market could lead to several outcomes. Firstly, the weak pound has reduced the value of these investments. Furthermore, the weak pound will likely lure more Chinese tourists, for whom the allure of the UK’s history and culture remains intact. Despite Brexit, the UK remains a major international travel hub, with aviation infrastructure in Heathrow and beyond ensuring that tourism and travel firms will continue to benefit, although questions concerning travel documentation when entering Europe post-Brexit will cause confusion and logistical problems.

Conclusion

The EU needs to focus on the struggle to keep the European integration process moving forward, especially in terms of Eurozone reform in which Germany and France have to enhance their partnership by positive action. The Brexit process will negatively impact the CAI negotiations. Brexit will challenge the UK’s relations with the EU and with China. The extent of the impact will only become clear when more detail of a deal or greater clarity about any transition period emerge.

Prof. John RyanComment