STRATFOR ANALYSIS

The double edge of the Brexit

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After a tough week, British Prime Minister Theresa May is trying to look beyond the Brexit. May arrived in India on Sunday for a three-day trade visit, her first such mission since taking over the premiership in July. The visit has symbolic value, providing an indication of what the United Kingdom’s priorities will be once it departs from the European Union. But it also revealed some of the difficulties that will plague May’s government during and after the United Kingdom’s exit from the bloc.

Perhaps the most glaring problem that May encountered on her trade trip is that her administration cannot negotiate new trade deals until it has left the European Union. Since the final rupture is unlikely to take place before 2019 at the earliest, May and her Indian counterpart, Narendra Modi, could talk only informally about what a hypothetical trade deal between their countries might contain.

Last week’s British High Court ruling has only added to the uncertainty and may further delay a trade deal between London and New Delhi. Unable to speak in concrete terms, May and Modi were limited to discussing the importance of trade between their countries and their intentions to boost it. Their promises might have been more convincing if May’s predecessor, David Cameron, had not also made increasing trade with India a priority in the early stages of his administration, to little effect. In fact, from 2011 to 2015, the value of the United Kingdom’s exports to India, its 18th-most important export destination (and 17th-most important import source), dropped by nearly $3 billion.

Nevertheless, London values its relationship with New Delhi, even if a trade deal is more aspirational than realistic at the moment. Once outside the European Union, the United Kingdom will theoretically be free to sign trade deals with new partners, and among emerging markets, India has been almost unique in its ability to sustain high growth levels in recent years. But May’s meeting with Modi revealed a bump that they could hit down the road in negotiating a future trade agreement: New Delhi has put a high priority on visa liberalization for Indians traveling to the United Kingdom, a demand that London may have trouble meeting.


Visa liberalization a high priority for India
Over the past decade, immigration has become an increasingly sensitive subject in the United Kingdom. The Cameron administration, in which May was interior minister, made an early commitment to bring net immigration levels down below 100,000 per year. Instead of dropping, though, the figure grew continuously, hitting 333,000 in 2015. Of the 333,000 migrants entering the United Kingdom in 2015, 55 percent hailed from another EU country. As the “leave” camp stressed throughout the Brexit campaign, membership in the European Union precluded the United Kingdom from shutting its borders to migrants from elsewhere in the bloc, thanks to EU freedom of movement rules. Compared with its counterparts on the Continent, however, the United Kingdom did not experience the migrant crisis as acutely. The English Channel buffered the island nation somewhat from the influx of refugees. In addition, the United Kingdom preferred to donate money to refugee camps in the Middle East rather than taking in large numbers of newcomers, as Germany and Sweden did.

Though non-EU migrants accounted for the remainder of the United Kingdom’s migration in 2015, they often arrived in the country with either money to spend or skills to provide. The United Kingdom, and particularly London, has long been a haven for affluent foreigners looking for a stable place to live, work and store their wealth. Since British companies often operate at the high end of the value chain, they need highly competent individuals to work for them, in quantities that exceed the domestic education system’s output. This education system, moreover, is respected all over the world, enticing wealthy foreigners to send their children off to school there. For Britain, which has a sizable current account deficit, such sources of foreign capital have proved invaluable.

Still, to try to meet its immigration target without flouting EU rules, Cameron’s administration was forced to clamp down on non-EU migrants. Consequently, visa requirements for non-EU visitors increased, and foreign students found that they were no longer welcome in the country after graduation unless they quickly found full-time employment in accordance with new laws. Not only did these initiatives fail to bring immigration to its target level, but they also cost the United Kingdom’s academic institutions. Comparing British institutions with their competitors in Australia and the United States, many students found their post-graduation prospects brighter in the latter countries, diverting their tuition money from the United Kingdom.

After the Brexit, the picture facing May will be different, but not radically so. Once outside the bloc, the British government may end up with full control over who enters the country, regardless of EU citizenship. As London changes its policies to require high skills or wealth from all new migrants, the number of arrivals from the European Union could fall steeply. Even so, it will not drop to zero, or anywhere close. May will still be in charge of a country that vehemently opposes immigration and that remembers the impossibly low target level that her predecessor set. Given the circumstances, the British prime minister will face a predicament in negotiating trade deals even after the Brexit has been finalized. Though such agreements will be vital to the United Kingdom’s future, accepting large numbers of new migrants as part of their terms will be politically unfeasible for its government. And so, despite the smiles and nebulous promises of future partnerships that characterized May’s meeting with Modi, the United Kingdom’s trade relationship with India is sure to encounter significant hurdles even after the Brexit.

© STRATFOR

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