By Sheahan Nasir Bhuiyan and Kester Clark
Brexit. A bold new step in a new direction, taken without maps, compasses, or any idea of where such steps may lead. A stubborn insistence on independence, standing against the flow of the crowd. It’s now been two months since the vote, after which the Pound dropped to its lowest level since 1988, but so far little else has changed since the striking decision.
Upon this time, business-as-usual has not yet been much affected. In Britain, the economy has shown signs of a slow-down but remains firmly in growth. The financial services sector, arguably the most important sector of the British economy, seems stable. Key banks, including HSBC and Barclays, announced that they have no plans to relocate from London, a city with a highly developed network of support services and access to capabilities which cannot be easily replicated elsewhere. This said, German financial centres, such as Frankfurt, are likely to make some gains, and German lawmaker Michael Fuchs recently declared that EU passporting rules, which allow a bank incorporated in any EU member state to sell its products and services throughout the bloc, are ‘not negotiable’, thus stifling the hopes of the City of London to be able to maintain current levels of access within Europe.
The manufacturing sector, in which Britain remains a world-leader in particular industries such as car manufacturing and aviation, may stand to lose some of its European market share, but this is well offset by the potential gains to be made from a cheap Pound, making British exports aggressively competitive. Indeed, a survey of manufacturers made this month by the business lobby group, the CBI, found that export orders remained ‘comfortably above the long-run average’, hitting a two-year high. This cheap Pound, which has not yet shown any sign of rising back from the depths to which it dropped, may yet turn out to be a powerful engine, driving growth in the secondary economic sector, and cushioning the UK from the worst of the Brexit fallout.
The EU has no such competitive advantage to leverage. Already beset by economic and political woes in the form of the Greek financial crisis, coupled with the ongoing refugee situation, Brexit could hit the EU hard, particularly if it encourages resurgent nationalisms and anti-EU feelings in other member countries. However, strong leadership has emerged within Europe to counter this possibility, with the Italian Prime Minister, Matteo Renzi, the French President, François Hollande, and the German Chancellor, Angela Merkel, joining forces to ‘relaunch the powerful ideals of unity and peace, freedom and dreams.’
And yet, uncertainty lingers. Ultimately it is too early to tell how this will all play out. Third quarter economic reports will be telling, and the view from next year even more so. On the financial sector, Standard and Poor’s said in a note that: ‘The direct and indirect implications of Brexit for UK banks’ credit profiles are therefore likely to evolve slowly and are unlikely to be substantially reflected in their full-year 2016 results.’
Moreover, in a sense, the real event has not yet happened. Article 50 of the Lisbon Treaty (the clause which needs to be invoked for the UK to formally begin leaving the EU) has not yet been set in motion, and currently, the UK is not estimated to leave the EU until at least 2019. Negotiations of the terms of Brexit hardly seem to have got off the ground, and a critical question remains unanswered. Which will Britain prefer: the ability to control its borders or an arrangement of free and open trade with the rest of Europe? As far as the EU is concerned, only one of these options can be selected.
Moreover, though the possibility has been ruled out by the new Prime Minister, Theresa May, who famously said that ‘Brexit means Brexit’, it is still plausible that it may never happen. Opposition parties may yet call for a second referendum or campaign strongly to remain at the next general election. Even now, the prospective new leader of the Labour Party, Owen Smith, is campaigning on a ticket to hold a second referendum, as the Irish did to ratify the Lisbon Treaty in 2002, backed by a petition signed by more than 4 million people.
So what does this mean for the Bangladeshi outlook? The UK is the third single largest trading partner for Bangladesh. In the 2012-13 fiscal year, Bangladesh exported $2.2 billion worth of goods to the UK and imported $2 billion worth goods and services from the UK.
The immediate effects of Brexit will be felt through the devaluation of remittances coming in from the UK. The UK is the second biggest source of remittance after the United States among western nations and contributes $1 billion out of $15 billion overall. The Pound Sterling has shown no signs of climbing up to its pre-Brexit value and this has prevented many migrant Bangladeshi workers from sending back money as they await a revival. Those who are sending it are sending it at a devalued rate.
The devalued Pound will hit Bangladeshi exports to the UK as well, as Bangladeshi products will be more expensive to the UK buyers under the current exchange rate. Bangladesh exported goods worth $3.23 billion to the UK in 2014-15, enacting a 21.28% growth from the previous year, according to the Export Promotion Bureau. Garments make up nearly 90% of the export figure. The drop in Pound has coincided with a rise in costs in the garments industry, putting pressure on British buyers to minimize expenditure. If this trend continues, demand will fall for RMG from the UK and put pressure on the Bangladesh RMG industry to meet its goal of reaching $50 billion exports by 2021.
Continuing with exports, under the current agreement with the EU, Bangladesh enjoys duty-free exports as well as favorable rules of origin as part of the Least Developed Countries (LDC) group. This allows Bangladesh to bring in more imported input for its export items to be eligible for free entry into the EU and part of the EU’s Everything But Arms (EBA) scheme. Once the UK leaves, these favorable terms may change when exporting to the UK. Brexit will mean the absence of the UK from the EU-Bangladesh Joint Commission which is the main legal instrument used to govern issues relating to trade, economic cooperation, development, human rights and good governance. A separate agreement has to be enacted with the UK and Bangladesh will miss the convenience of this one-stop-shop for deals and negotiations with the EU.
Immigration was a key topic in the referendum decision. Brexiters want to bring the annual net immigration number down from 333,000 experienced in 2015. The new Prime Minister, Theresa May has set a target of 100,000, a promise undelivered by her predecessor, David Cameron. Due to the high number of immigrants, the British government has curtailed immigration from non-EU countries such as Bangladesh, India, and Pakistan to comply with the free movement of people from EU countries. Migrant Bangladeshis in the UK believe Brexit will lead to a fairer immigration system where everyone will have an equal opportunity to migrate with no special rules for EU citizens. Bangladeshi students, however, will find it more difficult to study in the UK. Ms. May has already proposed rules governing the number of foreign students that apply for British universities. Some universities have been banned from taking in non-British students.
A significant degree of how Bangladesh will fare depends upon negotiations and agreements which will take place following Britain’s eventual exit from the EU, scheduled to be around 2019. This gives the Bangladeshi government ample time to structure favorable deals for the country. Of prime importance will be the continuation of duty-free exports as well as the EBA agreement, both of which are crucial if Bangladesh is to maintain their competitive edge in the global garments market. Other areas that need to be negotiated are the standards of health and safety for imported goods which were set by the EU. Bangladesh exports a significant amount of food products to a large number of Bangladeshi migrants as well as to the many Bangladeshi restaurants operating in the UK. Following Brexit, the UK will adopt their own standards and Bangladesh has to meet them to continue exporting. Negotiations between the UK and the EU will also affect Bangladeshi exporters. Currently, exporters can ship by bulk to a single importer within the EU who would then ship the goods to the UK without any barriers. Unless the freedom of movement agreement is changed, this system should remain in place.
Brexit was a vote for change in a world. Above everything else, Brexit can be seen as a reaction to the uncertainty and volatile global pressures which spin and buffet today’s international society. The decision was hailed as a victory by right-wing advocates across the world, from Donald Trump in the United States to Marine Le Pen in France, and grieved by many as yet another way to divide us further. Whatever happens in the coming years, one thing is for certain. The world is entering uncharted territories.