How Brexit Could Damage Asian And African Economies

Economic damage from Brexit will not be limited to the UK, Ireland, and Europe.

While the public debate surrounding Brexit and its impacthas underestandably focused on Europe and the UK, Britain leaving the European Union (EU)could also have a major impact on distant developing nations. Some experts say that 1.7 million people living in Africa, Asia, and Latin Americaare at risk of falling into extreme poverty as the result of Brexit.

The alarming figure comes from a report bythe German Development Institute (GDI). The think tank says that a no-deal“hard Brexit”—and a return to World Trade Organisation tariffs—would mean that 49 vulnerable states will no longer have access to the UK market through an Everything But Arms (EBA) agreement that allows least-developed countries (LDCs) to export to the EU tariff-free. Cambodia—which relies on the UK for 7.7% of its exports—is expected to be the hardest hit.

“Cambodia is very dependent on the UK market,” Dr Clara Brandi of German Development Institute, tells Global Finance. “If market access to the UK were to become more difficult, this would hit Cambodia and aggregate exports of the country would fall. Among the LDCs, if market access to the UK were to be affected because of Brexit, countries like Nepal, Senegal, Malawi, Ethiopia and Madagascar would also be negatively affected.”

Not everyone agrees with the findings of the report. Hannah Timmis, a research assistant for the Center for Global Development, notes that GDIassumes that LDCs would lose all preferential access to the UK market following a no-deal Brexit, with the UK applying most-favoured-nation tariffs on LDC imports. “This seems rather unlikely,” says Timmis. “The government has said that it intends to replicate the EU’s EBA scheme, which provides duty and quota-free access for LDCs, before Brexit.”

Even so, Timmis does predict damage. She also agrees that Cambodia will be worst hit, followed closely by Bangladesh, which is highly dependent on UK exports via its textiles sector which could face tariff increases of 12% if the UK applied EU most-favored nation rates following no-deal. She adds: “I argue that under the most likely no-deal outcome, countries benefitting from EU free trade agreements would suffer some loss of access to the UK, while those benefitting from unilateral preference schemes,like EBA, would enjoy trade continuity.”

Timmis argues that the process for replicating EBA would be straightforward because it is a unilateral preference scheme—which requires no negotiation with third countries—and because the 2018 Cross-Border Trade Act allows the government to introduce unilateral preferences without the active approval of parliament.

However, it may not be so simple. Dr Dirk Willem te Velde, a principal research fellow and head of the International Economic Development Group at the Overseas Development Institute in London, notes that the Act is still waiting for secondary legislation to outline crucial details. This takes 40 working days in parliament but there are not 40 working days left until the March 29 Brexit Article 50 deadline.

“The UK is committed to a preference scheme which would continue preferences to countries such as Cambodia, but the current situation is only adding to the uncertainty for all countries,” says te Velde. “The UK government is aware but it is not acting with sufficient urgency. Further questions surround rolling over EU free trade agreements such as economic partnership agreements with the Caribbean and other countries, such as Kenya.”

Bernard Hoekman—a professor of Global Economics at European University Institute in Florence, Italy—says uncertainty regarding UK policy will be compounded by uncertainty over how products sent from the UK will be treated in the EU. “On top of that there will be uncertainty regarding the logistics and time costs associated with shipping goods into and out of the UK—if there are indeed bottlenecks or delays along the lines that have been predicted to arise, those exporters with perishable or time-sensitive products may be hit hard.”

A continuity agreement has so far been signed between the UK and eastern and southern African countries which affects up to six countries, but a no-deal Brexit will add complications if developing countries access the UK market via the EUor vice-versa. Professor of economics and director of the UK trade policy observatory in the University of Sussex Leonard Alan Wintersnotes that while the GDI report’s scenario may be extreme, thedisruption caused by Brexit in any form is bound to have an impact.

“There are a number of countries, particularly in the Carribean that are heavily dependent on the UK market with 60% of their exports going to the UK, so if the UK goes downhill or can’t organise itself to give them preferential access, then there is a lot that is at stake for them.”

The Overseas Development Institute’s te Velde makes a similar observation: “It is clear that the poorest countries are at risk of being seriously hit by a no-deal Brexit. Our own research has shown that African exporters have to confront $400 million additional duties in the UK if the UK’s preferences are not rolled over once it leaves the EU, accounting for the continuity agreement. While it should be relatively simple for the UK to stop this from happening, time is running out.”