Grim future

Print edition : July 22, 2016

U.S. President Barack Obama and German Chancellor Angela Merkel inspect a military guard of honour in Hanover on April 24, when they met for bilateral talks. Photo: TOBIAS SCHWARZ/AFP

The decision to leave the E.U. holds few economic advantages for Britain and has only served to create political turmoil in the country.

UNITED STATES President Barack Obama travelled to London prior to the Brexit referendum to lend support to the “Remain” campaign. He warned Britain that a vote to leave the European Union (E.U.) would entail great economic hardship; Britain would go to the “back of the queue” in trade agreements and would suffer as a consequence, he said. Talk of a United Kingdom-United States trade agreement to compensate for any losses from Europe was not to be given fuel.

“I think it’s fair to say that maybe some point down the line there might be a U.K.-U.S. trade agreement, but it’s not going to happen any time soon because our focus is in negotiating with a big bloc, the European Union, to get a trade agreement done,” he said. What Obama has in mind is the Transatlantic Trade and Investment Partnership (TTIP), a companion of the Transpacific Partnership, both of which are mega trade deals that would cement flagging U.S. power on both flanks of Eurasia.

The TTIP, Obama’s flagship European policy, will end up liberalising about 30 per cent of world trade. Part of the impetus for this deal is to secure agreements within the West, which it has a hard time pushing through the World Trade Organisation (WTO). China’s economic growth continues to rattle Western powers, with the U.S. hoping that the TTIP and the Transpacific Partnership will put it in a favourable position vis-a-vis the Chinese and to a lesser extent the other BRICS (Brazil, Russia, India, China and South Africa) nations. It is clear that for the White House the priority is the TTIP as well as the expansion and strengthening of the North Atlantic Treaty Organisation (NATO) military alliance. These are the main aspects of U.S. investment in Europe. Britain’s tantrum around the E.U. has served only to complicate what should have been a simple consolidation of Atlantic power.

Britain’s relationship with the U.S. is more emotional than economic. These two “cousins” do not have as robust an economic link as might be imagined. Britain is not even in the top five of the U.S.’ trading partners: it has stood seventh for three years now, behind China, Canada, Mexico, Japan, Germany and South Korea. The E.U. as a whole does five times as much trade with the U.S. as Britain. There is no question that when it comes to trade, the E.U. is far more important to the U.S. than Britain.

Exports to the U.K. from the U.S. amount to just over 13 per cent of U.S. economic output, which is not negligible. However, for the U.K., the U.S. is essential as its exports to the latter amount to about 30 per cent of its output. This imbalance suggests that the U.K. will seek some kind of arrangement with the U.S. if and when it goes ahead with its Brexit plans.

Mood ‘horrid’

A U.S.-based banking executive who works for one of the major banks said that the mood in the offices in London and in New York was “horrid”. There is a grim prognosis for the future of London as the centre of the trade in currencies (including the euro). Already, there have been rumours that major U.S. banks in London will transfer their currency desks to Frankfurt or even Paris. This might lead to the loss of tens of thousands of jobs from the banking sector.

Since Brexit may not actually happen for two to three years, there is no precipitate reason to shift the operations now. The denials came quickly so as to settle a turbulent market. Sterling lost a great deal of its value, falling to 1985 levels. Conversations about shifts in address did nothing to bring stability to the markets. That is the reason why bankers hastily avoided such talk. It does not mean that it will not happen.

“They shot themselves in the foot,” said the banker, when asked about what he thought of the Brexit vote. “They thought it would feel good, but it won’t.”

But, in the end, he did not seem particularly unhappy about the outcome. Whether he has to fly from New York to Paris or to London is irrelevant. Money is there to be made, loyalties of language are irrelevant. London cannot count on the American banks to stand with it. The TTIP and the currency markets make the E.U. a far better prospect than Britain.

An analyst from the research department of Goldman Sachs said that he was unsure if British voters had been sufficiently apprised of how Brexit would fail to kick-start manufacturing in Britain. One of the typical thoughts is that devaluation of a currency would allow for exports to be cheaper, therefore enabling the country to develop its industrial base to take advantage of lower prices.

However, given the integration of the world economy through the “global commodity chain”, industrial concerns must also import large amounts of raw materials and partly finished goods for their production. This means that a devalued currency will make these materials more expensive and raise the prices of the goods made for exports. When sterling fell in the 2000s as a result of the global credit crunch, it had almost no impact on manufacturing in Britain. “There will be little improvement of industrial production with the enforced devaluation. I don’t think the pro-Brexit people had thought enough about the global commodity chain. Their economics is out of date,” the analyst said.

A few days after the Brexit vote, U.S. Republican presidential candidate Donald Trump arrived in Scotland. He congratulated the U.K. on its vote to leave the E.U. Trump is sympathetic to the bilious rhetoric against immigrants that marked a great deal of the pro-Brexit campaigning. The detritus of neoliberal economic policy, namely the deindustrialisation of middle England, found currency in the debate around immigration. Immigrants became the scapegoat for unemployment, against all evidence. This is a politics that appeals to Trump. However, he made these comments in Scotland, which voted overwhelmingly to remain in the E.U. Trump was pilloried on Twitter and in the Scottish media. The ruling Scottish National Party has committed itself to a multicultural Scotland, with an eye on its own membership in Europe. Trump’s brand of anti-immigrant politics plays poorly among the Scottish nationalists, although it is echoed south of the Hadrian’s Wall.

With the Brexit vote now in, Obama and Republican leader Paul Ryan have both suggested the need for a special dispensation for the U.K. Ryan wants the U.S. and the U.K. to frame a new trade deal.

Obama is more circumspect; the TTIP is the priority. He has urged Britain to follow Norway and become a “non-member state” of the E.U. If this happens, “the average person is not going to notice a big change”, Obama said.

In other words, as far as economic and military policy go, there is going to be no change. What the Brexit vote has done, rather, is to create political turmoil within Britain and send a sharply discordant message to immigrants in the old colonial metropole.

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