INTERNATIONAL RELATIONS

MAINS CURRENT AFFAIRS 2017

BREXIT
Brexit is a term used to define United Kingdom coming out of EU. In a referendum
conducted last year in United Kingdom, UK voted by a narrow margin in favour of
Brexit.

CONSTITUTIONAL PROVISION OF BREXIT

Lisbon Treaty (Article 50) provides for exit of member countries from European
Union. For any country to come out of European Union, it has to negotiate a deal with
EU. The deal will provide for a settlement between EU and UK.

WHY THE CLAMOUR FOR BREXIT

Economic reasons The primary contention was that economically, Britain loses
more than what it gains.
1. The first issue being that of membership fees paid to the EU budget about 340
pounds per year per household.
2. EUs policies were too protectionist and did not favour competitiveness to the
extent that would be beneficial for the British economy.
3. Post the Sovereign Debt Crisis, EU introduced Fiscal Compact and tighter
control on national budgets. Britain was not comfortable with these ideas.
4. Germanys proposal to impose taxes on financial transactions (Tobin Tax) also
did not find favour with London, which is an important financial hub.

IMMIGRATION ISSUES
Under EU law, Britain cannot prevent anyone from another member state from
coming to live in the UK, while Britons benefit from an equivalent right to live and
work anywhere else in the bloc. The result has been a huge increase in immigration
into Britain, particularly from eastern and southern Europe.
1. Half of British legal migrants come from EU. There is this feeling that they have
a negative impact on UK born workers. Adding credence to local fears was the fact
that since 1997, 3/4th of jobs created are taken up by EU immigrants.
2. EUs obligation on its members to accommodate more refugees also did not find
favour with UK. Especially at a time when the refugee influx in Europe is at an all
time high in light of multiple crisis in Middle East and Africa.
3. There is also this perception that immigrants pose a threat to national security.

SOVEREIGNTY ISSUE
EU is a transformative idea in many senses. One of the things that it leads to is the
weakening of national sovereignty. EU has been pushing for creation of an Ever

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 Closer Union which would accord greater decision making powers to European
Parliament, while, limiting the authority of British Parliament.

IMPACT OF BREXIT ON UK
ECONOMIC
1. EU is a large market. 45% of British exports are directed towards EU. EU is
the largest market for UKs exports and one of the major sources of UKs imports.
Except Germany and Sweden, UK has a positive Balance of Trade with all
other countries of EU. Post Brexit, access to EU markets would suffer for UK.
2. Britain has emerged as a major financial hub. Post Brexit, the financial/services
sector in UK would take a hit. London Exchange has already soared down post
Brexit.
3. Immigrants to EU are better educated and skilled and offset the demographic
disadvantage. That advantage will be lost for UK.
4. UK Will have to chart new trade agreements with other countries, which will be
sceptical of the protectionist mindset in the nation. Former US President Obama
has warned that it could take 10 years for Britain to negotiate a new trade deal
with the US.
5. It will have to face the declined value of pound sterling in world market.
6. A study by the think-tank Open Europe found that the worst-case "Brexit"
scenario is that the UK economy loses 2.2 per cent of its total GDP by 2030.
However, it says GDP could rise by 1.6 per cent if the UK were able to negotiate
a free trade deal with Europe ie to maintain the current trade setup. Whether
other EU countries would offer such generous terms is one of the big unknowns
of the debate.
7. UK's status as one of the world's biggest financial centres will be diminished if
it is no longer seen as a gateway to the EU for the likes of US banks. By
leaving, the single market firms based in the UK would lose the rights to
"passport" freely across the continent. Since the Brexit vote, many banks and
financial firms have begun establishing EU bases to take their operations out of
the UK.
8. Fears that carmakers could scale back or even end production in the UK if
vehicles could no longer be exported tax-free to Europe were underlined by
BMW's decision to remind its UK employees at Rolls-Royce of the "significant
benefit" EU membership confers.
9. Companies operating in both the UK and the EU would have to verify that
theyre compliant with two sets of laws.
10. Brexit campaigners suggest that free from EU rules and regulations, Britain could
reinvent itself as a Singapore-style supercharged economy.

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11. Brexit would bring some clear-cut advantages. The UK "would regain control
over fishing rights around its coast, for example. But the most likely outcome
would be that Britain would find itself a scratchy outsider with somewhat limited
access to the single market, almost no influence and few friends.

GEOPOLITICAL
1. It raises questions over the future of Scotland and Northern Ireland. Their desire
to stay in UK was preconditioned on UK remaining a part of EU. The Scots have
already started demanding for a referendum on Scotlands futute in UK. Even in
Northen Ireland violence erupted post the Brexit vote.
2. Brexit could encourage England, Wales, Scotland, or Northern Ireland to appeal
for quitting the United Kingdom.
3. Britains place in the world: For Leavers, exiting the EU will allow Britain to re-
establish itself as a truly independent nation with connections to the rest of the
world. But Remainers fear that Brexit will result in the country giving up its
influence in Europe, turning back the clock and retreating from the global power
networks of the 21st century.
4. The UK will remain a member of Nato and the UN, but it may be regarded as a
less useful partner by its key ally, the US.

IMPACT OF BREXIT ON EU
1. The idea of EU stands challenged. EU whose origin lied in the centuries of war
that ravaged Europe was a transformative idea in international relations,
enmeshing countries in cooperation. With the exit of UK, there is a possibility of
other countries such as Greece etc to follow suit. Thus the idea of EU stands
challenged.
2. EU is currently under multiple crisis emanating from financial slowdown, Russian
challenge, security concerns. EU and Britain separately would not be able to
handle a resurgent Russia. Similarly to deal with the security threats in Europe
requires countries to act in concert and not independently.
3. Brussels being seen as the alternative to London, will need adequate
infrastructure and policy framework to handle the investment inflow.
4. Post Brexit, EU will have to deal with the uncertainty in value of euro as a
currency.

IMPACT OF BREXIT ON INDIA

NEGATIVE IMPACTS
India, unlike the British, sees the EU primarily as an economic and trading bloc,
not a political organization, and Indian businesses are acutely aware of the
potential of instability from a Brexit. There are over 800 Indian companies in the
UK, the top 10-15 of whom contribute $4 billion to the British economy.

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 Brexit might have an adverse impact on investment and movement of
professionals to the UK. Indian firms have base in the UK because they got
border-free access to the rest of Europe. It was one of the main reasons for Indian
companies to go to the UK. There might be less attractiveness towards UK and
this may have a bearing on future investment decisions of Indian companies.
Indian IT companies will have to establish separate offices and hire different
people for the UK and the EU which will put heavy expenditure burden on IT
companies in the near-term. Brexit will have a negative impact on the $108 billion
Indian IT sector in the short term.
Due to volatility of pound, it is expected that Indian stock exchange might be
affected. Sensex and Nifty may tumble in the short-run. Falling value of the
pound could render several existing contracts loss making. Many Indian
companies are listed on the London Stock Exchange. Volatility of Pound will affect
them also. Due to fall in the value of Pound sterling, Indian exports to the UK will
suffer. Cheaper rupee will make Indian exports, including IT, competitive. Indian
import companies operating in the UK may also report a loss. India is exporting
more than what it is importing from Britain.
It may also lead to greater investments by the British companies into India,
which will increase the overall outflows of the domestic market. Rupee may
depreciate because of the double effect of foreign fund outflow and dollar rise.
This may increase petrol and diesel prices to an extent. The government then may
want to reduce additional excise duty imposed on fuel when it was on a
downward trajectory. This may increase fiscal deficit unless revenue increased.
Indias Forex (currently a record 363 billion dollars) may diminish, particular if
the currency is stored in Euros or Pound (this comes around 20% of total forex).
Prices of gold, electronic goods, among others may also increase.

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POSITIVE IMPACTS OF THE BREXIT REFERENDUM TO INDIA
As investors look around the world for safe havens in these turbulent times, India
stands out both in terms of stability and of growth.
India might have some opportunities in the pharma sector of UK market due to
rising health concerns there and larger government procurement of generic
medicines from India if it positions itself properly.
Brexit might give a boost to trade ties between India and the UK. Britain will now
be free to discuss a bilateral trade pact with India. Britain might try to
convince Indian companies to invest there by providing much bigger incentives
in terms of tax breaks, lesser regulation and other financial incentives
because India is also a significant investor in Britain.
There are many benefits for India with a weakening British currency. With lower
pound value, Indian companies may be able to acquire many hi-tech assets.
Those who import from the UK will gain. Indian export companies operating in
the UK may also gain. More Indian tourists can afford to visit Britain in coming
days. More Indian students can afford to study in Britain (for higher education) as
the fees may seem cheaper.
Britain will need a steady inflow of talented labour, and India fits the bill perfectly
due to its English-speaking population.
The fall in the prices of commodities like crude, which will help India save a lot on
its import bill(every $1 drop in crude prices leads to roughly $1 billion savings
in Indias oil import bill), reducing its trade and current account deficits (CAD).
Brexit would weaken global growth and lead to a meaningful decline in
commodity prices. This is only going to enhance both the relative and absolute
appeal of India. Lower commodity prices will help the macro fundamentals: be it
fiscal deficit, current account deficit or inflation, which will give the
government more levers to pump up the investment cycle.

LATEST PROPOSALS
How this exit will take place, and what will replace it, is unclear. The U.K. proposed
two possible approaches to a new customs arrangement. First, a highly
streamlined arrangement in which the U.K. and EU trade with each other as third
parties but in a simplified regime; second, a new customs partnership with the EU,
with standards and tariffs exactly in line with the EU.

The government has also proposed a temporary, close association with the EU after
Brexit concludes until a new customs arrangement is in place to protect businesses in
the EU and U.K. from experiencing a cliff edge on the day Brexit concludes. Critics
have argued that a post-Brexit customs union with the EU that ends up being
identical to the existing Customs Union obviates the need to leave it in the first place.

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CONCLUSION
An easy access to European market was definitely a reason that enabled
London to emerge as a flourishing centre for trade and investment. So how will
be the trade relation among EU nations and UK, post Brexit, is important. If there is a
free flow of goods and services through FTA, then there might not be much problem
for Indian exporters. But if there is hard Brexit and UK is unable to export to EU
countries on the same terms, then the picture might be different. For example- At the
moment, Bangladesh has significant advantage over India in textiles because of the
tariff preferences which it receives from the EU. After Brexit, there will be an open
question whether UK would continue to grant Bangladesh those tariff concessions or
not. If UK reverses this policy, it would be advantageous for India.

While it is still early days to gauge its real effects, there are companies which are
looking at hedging their bets because Britain was a financial centre for important
activities. Indian companies and sectors such as auto, metal, IT, tours and travels
and education that have a notable exposure to the region are likely to see some
impact-both positive and negative- in the days to come.

In an interconnected world, being a part of multilateral organizations is key to

influence policy matters. No country can do it alone in a rapidly changing international
environment. Similarly UK would lose some of its leverage now that it has voted for
Brexit.

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