Brexit Means Partition For Indian BusinessesBloombergQuintOpinion
Indians understand the uncertainties of 1945-47, the three years preceding the chaotic crescendo of the August 1947 British Partition of the Indian Subcontinent. Brexit is history repeating itself, but with irony. The three years since June 2016—when 51.9 percent of voting Britishers said “Leave” the European Union—have shown how Oxbridge graduates governing the United Kingdom, imprisoned in their indecisiveness voiced over with toff accents, undermine the rule of law, mislead their Queen, and disregard the global economic implications of their puerile politics. Now, Indians must prepare for a chaotic Brexit crescendo, not by retreating to barracks, as British troops did in summer 1947, but by partitioning from the U.K.
There are three crescendo scenarios:
- hard, i.e., no-deal, Brexit;
- deferred Brexit, with the deferral period uncertain, probably to Jan. 31, 2020; or
- Brexit on terms set on Oct. 17, 2019, by Prime Minister Boris Johnson and the EU, but not yet approved in a Withdrawal Agreement Bill by Parliament, perhaps before Jan. 31.
This October Deal, plus the nearly universal aversion to crashing out of the EU, render the first scenario unlikely. The PM is willing to gamble a general election (on Dec. 12) to avoid the second scenario, that is, a dilated delay (beyond Jan. 31), thus sending Britain to the polls for the third time in four years. So, it’s the second and third scenarios that matter most under the ‘flex-tension’ the European Council granted on Oct. 28. Moreover, the second scenario likely would occur on terms similar to the October Deal, because the EU will not renegotiate significant changes, regardless of pressures that might emerge from parliamentary debates on the Withdrawal Agreement Bill.
With the third crescendo foreseeable, Indian businesses need to understand and plan for the Johnson Deal. This deal entails a double Partition of Britain: Britain from the EU, and from itself (i.e., England, Scotland, and Wales from Northern Ireland) by creating a border at the Irish Sea.
Indian producer-exporters face a choice between two Partitions: leave the U.K. and relocate to the EU to service both markets; or, remain in the U.K. and divide their investments and supply chains for both markets.
Notwithstanding commentary to the contrary, Brexit always has been a simple proposition of what microeconomists call ‘constrained optimisation’, that is, achieving the best possible outcome amidst fixed constraints:
Constraint #1: Preserve The Integrity Of The Good Friday Agreement
The April 1998 Good Friday Agreement ended the 'Troubles', sectarian violence dating from the late 1960s between Protestants and Catholics in Northern Ireland, which flowed across the then hard border across its 499-kilometre frontier with the Republic of Ireland, and the Irish Sea to England. Over 3,500 lives (52 percent civilian) were lost. With that Agreement, the Irish island became blissfully borderless.
Re-imposing customs and immigration, let alone police and military, checks might re-catalyse the Troubles. For 2,000 years, Christians have brought on themselves violent internal divisions. By opening the Northern Irish-Irish frontier, the Agreement closed this anti-Gospel history. A new hard border might re-harden Protestant-Catholic divisions.
Radicals might be emboldened to attack checkpoints. Such attacks might spread across the island, and to the British mainland.
Constraint #2: Preserve The Integrity Of The U.K.
Sovereignty is a fundamental principle of international law. One of its hallmarks is supreme authority over territory, which means a sovereign nation has no lasting internal barriers to trade in goods and services, or to movement of lawful citizens and residents of that nation, imposed by any other nation. A border dividing England, Scotland, and Wales from Northern Ireland would undermine U.K. sovereignty.
For Indians, Goa offers a loose analogy. For 451 years, Goa remained a Portuguese colony on their territory. In December 1961, Prime Minister Jawaharlal Nehru had enough, sending Indian Armed Forces across the air, land and sea borders that demarcated Goa from the rest of India. The 36-hour Operation Vijay (Victory) established Indian sovereignty over its customs territory.
Constraint #3: Preserve The Integrity Of The EU
It is a fundamental principle of international trade law, specifically, Article XXIV of the General Agreement on Tariffs and Trade, that a customs union—the technical rubric for the EU’s trade arrangements—have no internal barriers to cross-border movement of goods or services, and share a Common External Tariff. The 28 EU members, which include the Republic of Ireland, and pre-Brexit, Northern Ireland (as part of another member, the U.K), enjoy the efficiencies of borderless trade. Those efficiencies flow from duty-free treatment, and from the elimination of non-tariff barriers thanks to common labelling requirements, technical and safety standards, and sanitary and phytosanitary measures. And, they enjoy the efficiencies of a CET. Tariff levies on merchandise are harmonized, thus a 10 percent duty applies to a Made in India car, whether it enters the EU at Dublin or Belfast.
Post-Brexit, the position of Northern Ireland and India vis-à-vis the EU become comparable. The U.K. no longer will adhere to the EU CET or common NTB rules. Whitehall will set terms of trade with the EU for England, Scotland, Wales, and Northern Ireland, which will be their own customs union.
From the EU’s perspective, whether Made in India or Northern Ireland, and whether shipped from Mumbai, Belfast, London, Cardiff, or Glasgow, the tariff on a car entering Ireland will be 10 percent, and that car must meet EU rules. Only a border at the Irish Sea protects this outcome.
Essence Of The Johnson Deal: Sacrifice Constraint #2
All three constraints cannot, and never could, be satisfied. A hard border between Northern Ireland and the Republic of Ireland preserves U.K. sovereignty and EU customs union, but drops the first constraint. Customs checks on the British mainland and Northern Irish ports of entry—that is, an Irish Sea border—preserve the Good Friday Agreement, and EU customs union. But, it relaxes the second constraint. A borderless Ireland and a borderless U.K. preserve the Agreement and British sovereignty, but sacrifice the third constraint.
With an unshakeable Franco-German-Irish alliance leading 27 EU members against the 28th, the U.K., the outcome of negotiations was a foregone conclusion. In his October deal, Prime Minister Johnson ditched the second constraint. Northern Ireland technically remains in the U.K. customs territory, but also is aligned with the EU customs union. The EU won: a post-Brexit Irish Sea border will preserve the integrity of its customs union, but undermine U.K. sovereignty over its customs territory. U.K. customs officials will staff that border to ensure goods crossing from England, Scotland, or Wales to Northern Ireland “at risk” of moving onward to the Republic, pay the EU CET and adhere to EU NTB rules.
Indeed, the EU won big: U.K. officials must collect tariffs on behalf of the EU, and hand them over to Brussels. EU officials will oversee, and can overrule, them. Disputes will land not in U.K. courts, but in the European Court of Justice.
Two Post-Brexit Partition Choices For Indian Business
No longer can Indian producer-exporters gain automatic, duty-free entry into the EU for their merchandise, whether Made in India or Made in the U.K. Rather, every such business must expect different tariffs, and different customs checks for NTB rule compliance, for goods destined for England, Scotland, and Wales, versus goods destined for Northern Ireland and/or the Republic of Ireland. That means Indian businesses have two partition options.
Option #1: Partition From The U.K.
Indian producer-exporters can divest from the U.K. and pull up their cross-border supply chains into the U.K. They can set up manufacturing operations in one of the remaining 27 EU members, such as the Irish Republic, and re-orient their supply chains directly to the EU.
They can supply England, Scotland, and Wales from their new EU-based factories and linkages, adhering to U.K. tariffs and rules for that line of commerce.
Also read: Why Emmanuel Macron Is Right About Brexit
Option #2: Partition Within The U.K.
They can retain their investments in, and supply chains to, the U.K. They can partition their U.K.-based operations into two lines: one for the EU, and one for England, Scotland, and Wales, with each line geared to different EU versus U.K. rules.
Three reasons point to the optimality of the first option.
- First, the EU is a party to 40 free trade agreements covering 70 countries (including Canada and Japan). Once it Brexits, the U.K. will have no FTAs. It will take years for Whitehall to forge an FTA network that probably never will rival that of the EU. Repositioning operations in the EU will position Indian companies to satisfy EU rules of origin and thereby plug into the EU’s FTA network.
- Second, the 27 EU members constitute a market almost seven times larger than that of the U.K. At 445.9 versus 66.5 million people (2018), respectively, the EU is one-third the size of India (1.4 billion), whereas the U.K. is half the size of Maharashtra (122 million). As for Northern Ireland, its 1.8 million people compare with Mumbai’s 20.1 million.
- Third, there’s no comfort in the U.K.’s commitment in the October 2019 deal to a level playing field between its post-Brexit labelling, technical and safety standards, and SPS measures with EU rules. Why Brexit for a trivial level playing field partition?
In 1962, Dean Acheson, who served as Secretary of State from 1949-53 to U.S. President Harry Truman, said “Britain has lost an empire but not yet found a role.” Today, Indian businesses need to plan for the irony that Britain had found a role in the world through the EU, but destroyed it with the Partitions that are Brexit.
Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.