Although referendum result is known, there will be prolonged period of uncertainty: are we going to have a ‘soft Brexit’ or a hard one?
It’s been almost three months since the results of the Brexit referendum shocked the world. As of September 2016, neither the timetable nor the terms for withdrawal had been established: in the meantime, the UK remains a full member of the European Union.
Will Britain leave the EU and still remain in the single market? How will UK-China relations evolve in a post-Brexit era? Mark Pinner, Managing Director and Partner at Interel China, who has also worked for the British Conservative Party, sits down with CKGSB to give his thoughts on Brexit.
Q.Although the vote to leave the EU is historic, Brexit has not actually happened yet. It will take years to be fully implemented. In terms of China’s relationship with Britain and EU, what immediate effects did the vote itself have? And were they significant at all?
A. The first reaction was a bit of shock. Most people were not expecting Britain to leave the Europe Union, so it was a bit of scramble. The public and government all wondered what it meant.
The first great impact was in the morning after vote, when Prime Minister David Cameron resigned. The very first thought was “Alright, we need to deal with someone new” so that was the most immediate impact.
But actually, people weren’t really sure what it meant, they weren’t sure because the actual Brexit ‘leave camp’ never really spelled out exactly what they meant by Brexit—what is the range of things that could occur, will it be as bad as the ‘remain camp’ suggested it would be: will there be an economic disaster? People are trying to work it out.
Q. What are the long-term disadvantages of leaving the EU?
A. There would be a very prolonged period of uncertainty for business, we don’t really know how exactly Brexit will turn out, we could have a so called ‘soft Brexit’ where Britain stays within the single market or the differences to being in a single market are minimized; there could be a ‘hard Brexit’ where Britain leaves the EU and the single market altogether and goes back to dealing with EU on a World Trade Organization basis, and you might have tariffs that would provide much more of a shock to business.
So I think businessmen are particularly concerned about this, we just don’t know yet. That means if you are an investor, you’re looking to invest in the UK, chances are you will pause if your investment could be impacted by this. On the negative side, it’s a disincentive for investment if you looking at UK as a base to trading in Europe, it will probably slow economic growth in the UK.
Q. What impact will it have on the European Union?
A. Obviously it is a big blow to the European Union, the EU is losing one of its major members. The EU is weakened by the UK leaving. Compared to the rest of the EU, the UK supported more of a free market approach to regulation, and with that there will be more pressure from countries that are slightly more protectionist, they will have a stronger voice.
Also, you will see, Germany as the largest country in EU will have a correspondingly stronger weight and that’s a concern to a lot of smaller countries, so I think you will see changing dynamics inside the EU as well as a slight reduction in the EU itself but fundamentally, will the EU’s position in the world change as a result of this? No. And I don’t think the EU’s relationship with China or the US will change.
Q. What’s your evaluation of the changes brought to the China-UK relationship after the Brexit vote?
A. From China’s point of view, they have been lots of changes. They were looking for a long term partner within the EU, and the UK would have been a good base for investment for Chinese companies; also for a long term relationship with British politicians like David Cameron and George Osborne, who was the presumed successor of David Cameron, and now he is out as well. So I think from that point of view they are concerned about the continuity in the relationship and they are concerned about the fact that Britain will be leaving the EU and therefore will not be such a good base for Chinese investment in Europe.
Now, on the other hand, Brexit provides some advantages for Chinese companies. The pound has dropped over 10% since the Brexit vote and that makes Britain very attractive to investors. As I understand it, tourism from China is booming and investment in terms of things like real estate has jumped very significantly too. So I think if you look at the UK-China relationship, the potential for it has changed slightly, the base is changing, the potential is changing, but now it is still a very important market.
Q. Will the UK rely more on investment from China?
A. Certainly it is looking towards more trade with markets outside the EU, will it rely more on investment from China? In those terms then yes, but I would broaden the question. Post Brexit, Britain is looking to engage with the world outside the EU more than it has in the past.
Q. Do you think China will see the UK as a less important partner as it’s no longer a gateway to the EU? Does that mean China will have the upper hand in future trade deals?
A. Well, previously trade negotiations with the EU were handled by the EU, not the UK, so there were no trade negotiations between China and the UK directly so we can’t compare them. But if you are talking about it from a hyper-critical scenario, then yes I would expect that China will have a slightly stronger position when negotiating with the UK because if the UK leaves the EU then the UK needs to sign a deal with China, and obviously they need to negotiate that.
But if the UK is leaving the EU, the UK will have more freedom from outside the market, so obviously the UK will be more interested in a trade deal with China. Now, whether this means that the UK is in a terrible negotiating position, I don’t think so. The UK is still an important market. If there’s a hard exit from the EU, then the UK is less of an attractive base for investment into Europe, but we don’t know that yet, so there’s uncertainty. Certainly, the UK’s influence with other EU member states has definitely been reduced, I mean, immediately, but also once the UK leaves the EU even with a soft Brexit, of course the UK’s influence over the rest of the EU will be far lower than when it was inside the EU.
Q. How will the UK deal with the relationship with the Chinese government?
A. Previously, the UK government built some pretty good relations with Xi Jinping and the Chinese administration, this was under David Cameron and particularly George Osborne who was the architect of the Britain-China golden era, but now David Cameron has resigned and George Osborne is out of office, so this established relationship which China has built with British leaders has gone.
So I think it is very important to look at how Theresa May builds her own relationship with the Chinese leadership, and I don’t think she has had any opportunity to do that in the past, she was the home secretary and she didn’t really engage with the foreign leaders in the same ways you do if you are the Prime Minister. So I think it will be important to see how Theresa May engages with the Chinese leadership, and I think she is doing that right now, she will be seeking to build her relationship and her team’s relationship and to show that the Britain is not just about one issue like Hinkley Point investment. Britain remains an important partner and it wants to be an important partner, so I think it will be important to watch how that relationship progresses.
Q. So to a degree that’s possible, can you lay out several scenarios as to how the relationship between China and UK may evolve from here?
A. If all goes well in the UK and it signs a good deal with China, this would actually be an incentive for British industries to invest with China more. Just now you are seeing more Chinese investment into the UK as a result of the pound dropping, so it’s possible that will promise more British companies to looking into Asia as well. The British would then say, ‘yes we should be looking to more emerging markets rather than European markets that are stagnant.’ So that is one scenario, it might pump more engagement between Britain and China just like it might pump more between Britain and India or other markets around the world.
It’s also possible that Britain will suffer economically because of this period of uncertainty, there might be tariff barriers between the UK and EU, it would be a lose-lose for both sides if that happens. And if that happens, maybe Chinese investment into the UK will die off. Previously we were looking at the so called ‘golden era’ for UK investment in China, we don’t know how that will change.
Q. Will Brexit affect China’s relationship with other nations, especially the US and Germany?
A. I don’t think Brexit will really impact China’s relationship with the US because that is changing for too many other reasons. Obviously the UK is less important to the US. President Obama directly called Britain to ask them to stay in the EU. Why? Because the UK helps to influence the EU in a way that the US wants, it was in the US’s interests to do it. With the UK leaving the EU or threatening to do so now, immediately that influence has dropped. But I don’t think fundamentally that will change China’s relationship with the US.
If you look at China’s relationship with Germany, I think Brexit will make a difference. Because Germany has now become even more important in the EU than it was before, Germany is already the largest nation and economically the most important state in the EU, and that has become even more obviously important now. Just to get a sense of priorities, recently we just had the G20 Summit in Hangzhou China, at the beginning of the Summit, President Xi welcomed each of the foreign leaders in turn and shook their hands in front of the camera, they started off at the beginning and they finished with the most important country at the end, and the most important country at the end was not the US and president Obama, it was German Chancellor Merkel, I think this shows you where was Germany in terms of the importance to China.