Can trade save the post-Brexit economy?
The UK government may have survived the latest backbench rebellion over Brexit, but new figures from accounting giant EY illustrate the damage Britain’s break with Brussels is wreaking on its economy.
According to the report, overseas investment in the UK’s financial sector plummeted by 26 per cent last year while EU rivals, notably Germany, profited.
Uncertainty around the City of London, the jewel in the UK’s economy, is likely to increase the urgency of Britain’s push for new trading relationships. But with so much uncertainty hanging over the country, it is hard to imagine that this international charm offensive will be enough to compensate and sustain its current prosperity.
Ever since Britain voted to leave the EU in June 2016, rival financial centres have been making overtures to the country’s top financial talent. Frankfurt, Paris and Amsterdam have all launched aggressive marketing campaigns and held talks with London’s most senior executives, urging them to move across the English Channel.
The strategy is bearing fruit, with blue-chip companies such as Bloomberg and JP Morgan setting up new bases on the European mainland. Now even Lloyd’s of London, a firm as quintessentially British as barbecues in the rain, is planning to open three subsidiaries in the EU once Britain is due to begin its formal secession in March.
Lloyd’s plans emerged just days after the government published its Brexit White Paper, causing further alarm in the City.
Chancellor Philip Hammond had advocated that the UK financial system be wedded to its EU counterpart through mutual regulatory recognition, yet the Brexit blueprint falls well short of that. Crucially, it also concedes that UK financial services firms will lose their passporting rights – the ability to trade across the continent without red tape – if Brexit is complete.
Hammond has attempted to find positives in the white paper, stressing that British firms will now face fewer regulatory challenges, but his optimism is not shared by Britain’s bankers.
Catherine McGuinness, policy chairman of the City of London Corporation, has led the condemnation, describing the government’s Brexit strategy as inadequate and as a “real blow” to her sector.
Against this murky backdrop, Donald Trump’s recent visit to the UK provided an unexpected ray of light. The visit began frostily, with Trump suggesting May – who vehemently condemned his new steel tariffs weeks earlier – should be replaced as prime minister by Boris Johnson and warning that May’s Brexit strategy was inimical to a trans-Atlantic free-trade deal.
Yet this initial hostility thawed markedly during Trump’s visit and he ended by expressing confidence that the two countries will strike a “great” agreement. May’s trade minister, Liam Fox, has already penned an article stressing that he and his US counterparts are making active preparations to turn Trump’s positivity into a concrete free-trade agreement.
In addition to its old ally, the UK is reaching out to its former empirial dominions, notably India. London and New Delhi laid the ground for a possible free-trade deal in April, inking a series of deals worth up to £1 billion in total, and British sources have been keen to praise India’s bombastic leader Narendra Modi, despite the criticism he has received from rights groups over his hard-line Hindu nationalism.
Although India’s high commissioner in London has said the country is in no rush to strike a deal, the British appear rather more keen, pushing the creation of a £100 billion cross-border fund to open up new investment opportunities. With trade between Britain and India up 15 per cent last year, it seems Britain’s attempts to woo its former colony are already working.
But if the UK is going to survive Brexit without major damage, it needs to find new partners as well. This might explain the keenness to do business with states in the Persian Gulf, notably Qatar, which provides an estimated 90 per cent of Britain’s LNG and has been a particularly significant financial investor since the global meltdown of 2008.
Only days before Article 50 came into effect in March 2017, May announced at a Qatar-UK investment conference in Birmingham that the emirate would invest a fresh tranche of £5 billion in the UK over the next five years, adding to its existing investments of £40 billion in the country. The prime minister also announced that Britain would establish a joint economic and trade committee to help set the stage for a post-Brexit trade agreement with Qatar and other Gulf states.
Of course, the tiny emirate’s investments in Britain have not come without controversy, especially due to its stakes in flagship properties like Canary Wharf, the Shard and Harrod’s.
But given the UK’s obligation to find new investors if European ties loosen, as well as Qatar’s own need to diversify its investments outside of oil and gas, the economic rapprochement is only set to continue apace. Indeed, next week, Qatar’s Emir Tamim bin Hamad Al-Thani is meeting May in London to discuss, among other things, how Qatar has pushed ahead with its plans to become a global trade and investment destination despite a state of isolation imposed by hostile Gulf neighbours.
Yet no matter how many economic deals they strike, Qatari investors alone will be powerless to stop what is set to be a wave of exits from Britain post-2019.
The world’s foremost deal-making hub is clearly sceptical about Britain’s departure from the EU, and no matter how feverishly May and her emissaries work to build a new nexus of trading alliances, it seems unlikely that Britain can maintain the same level of appeal to potential trade partners if its best and brightest have quit the country for more stable climes.