Impact Of Boris Johnson’s Brexit Deal And A Slowdown In The Chinese Economy

The United Kingdom and the European Union on Thursday 17 October 2019 reached an agreement for a planned and orderly withdrawal of the United Kingdom from the European Union, also termed as ‘with deal Brexit’. The deal is a sigh of relief for the people and businesses of both sides who have suffered months of uncertainty and turmoil which has had a material bearing on their livelihoods and fortunes. There are still challenges however, as the deal must be ratified by the respective parliaments of the United Kingdom and the European Union.

The gradual withdrawal of England from the European Union (Brexit) following a country vide a referendum on 23 June 2016, is proving to be a greater unbundling of trouble for both England and the European Union than the opening of the mythical "pandora's box". The tearing apart of many interwoven and interdependent businesses following the withdrawal will surely push back business activity in the two regions by several years. On the top of it if the withdrawal turns haphazard, it would not only push the economies further back but would create such structural defects in their respective economies, which will be very difficult to amend.

However, this is not the first time both the parties have arrived at an agreement on a planned Brexit withdrawal. Erstwhile prime minister and predecessor of Boris Johnson, Theresa May too had arrived at an agreement with the European Union on three occasions but was snubbed by the British parliament on all three occasions which eventually led to her resignation.

Ever since talks began between the United Kingdom and the European Union for an orderly Brexit, more than two years ago, the major irritant to a deal has been to find a way to ensure free flow of goods and people across the border between the European Union member country Ireland and Northern Ireland which is part of the United Kingdom of Great Britain and Northern Ireland, and the only land border between the United Kingdom and the European Union bloc. An open border is essential to the regional economy and also supports Northern Ireland's peace process.

The previous deals contained a provision called backstop that left Northern Ireland in harmony with the European Union trade and customs rules and did away with border checks. But that was rejected by for-Brexit British members of parliament, who cautioned that it would undermine the country’s ability to strike new trade deals with countries outside of the European Union and insisted that all of the United Kingdom - including Northern Ireland - must leave the bloc's customs union. This would have essentially meant border checks and tariff imposition.

The new deal however, addresses the issue by keeping Northern Ireland aligned with the rules of the European Union single market for goods and services- eliminating the need for border checking - and also doing away with customs checks at the Irish border. Instead, customs checks will be done, and tariffs imposed by Britain on goods that enter the Northern Ireland territory having destinations in the European Union.

European Union from its side has also given concessions to the British side too as part of this deal, by allowing Northern Ireland special access to its single market.

Slowing Chinese economic growth

The Chinese Government on 18 October 2019 reported that the Chinese economy grew by as little as 6 per cent during the third quarter of 2019. The growth was slower than the 6.2 per cent growth rate it had witnessed in the second quarter of this year. The 2019 growth rate, however, fall within the government's annual goal of between 6 and 6.5 per cent, but the slowdown is significant compared to preceding years performances. It is the slowest growth rate that the Chinese economy has witnessed since 1992. Real GDP in China grew by just 6.6 per cent in 2018, the weakest growth since 1990. China which is already battling weakened domestic spending, is also fighting a prolonged trade war with the United States that has hurt its exports.

Recently, China and the United States had announced that they had made some headway in talks aimed at ending the 18-month of the trade war between the two economic giants. A potential deal between the two had earlier prompted the United States to suspend a major tariff hike on billions of dollars’ worth of Chinese goods which was set to come into force earlier during the week. Both Chinese imports and exports have suffered under Washington's tariffs regimen as well as with the falling trade volumes with the United States. Prominent media houses in the United States reported that the deal could pave the way for a larger bilateral agreement later during the year, although the existing tariffs on hundreds of billions of dollars’ worth of goods between the countries remain as they are for now.

The IMF has cited the Chinese slowdown as one of the major external risks that the global economy is facing in 2019. The IMF anticipates the global economy to grow at 3.5 per cent in 2019 and to grow at 3.6 per cent during 2020 and argues that a cyclical slowdown in the Chinese economy will act as a drag for much of the world economy.

Impact on the United Kingdom Economy

The weakening Chinese economy can impact the British economy in several ways-

Chinese economy is significantly larger than the British economy and has a distinguished impact on the world economy. A percentage taken out of or added to the growth rate of that economy adds or takes away significant demand from the world economy as well. If the world demand slows down, the demand for British exports will slow down, affecting the fortunes of the British exporters.

China is also a significant trading partner of the United Kingdom. Presently, the United Kingdom has a trade deficit with China. With Chinese demand slowing down, China will be buying less of British goods but will push more of Chinese goods into the United Kingdom. This will widen the negative trade deficit between the countries.

There are many businesses that have made a significant investments in China to take advantage of its large size economy to expand its revenue base. With the Chinese economy slowing down, the gestation period on such investments will only lengthen, which could even make some of them unviable. Companies like JLR land Rover will be the most affected who have made significant investment in capacity expansion in the country.

One of the major sources of revenue for the United Kingdom has been the inflow of Chinese tourists and students into the country. Not only do they bring in revenue for the country but also bring in significant numbers of intellectual capital and cultural diversity to the countries education system. British Universities and tour operating companies will be significantly impacted by Chinese Slowdown.

China is also a major importer of primary commodities. A slowdown in demand for primary commodities will cause prices to drop and production to slow down in these commodities, leading to an economy vide slowdown. The central banks may have to take measures like easing of monetary policy and other such measures to meet with the deteriorating situation.

Brexit deal and the British economy

The deal entered to by Prime minister Boris Johnson with the European Union is a sigh of relief for the people and businesses of both sides who would now know what to expect and will have a better opportunity to prepare to deal with the same. The deal, however, will have to be ratified by the British parliament which has previously rejected may such attempts to pass a Brexit deal by the predecessors of the current prime minister.