How India and China view Brexit

Kadayam Subramanian July 20, 2016 2:58 AM (UTC+8)
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While Indian businessmen think Brexit could harm their investment in Britain, China expects solid manufacturing opportunities in the long run under its global Belt and Road connectivity program. Brexit also provides geostrategic benefits to China. Since the mood in Europe is turning inward after the historic vote, France may drop its demand to send EU patrols to defend ‘freedom of navigation’ in the South China Sea.

Brexit was a seismic event that evoked divergent responses in India and China.

A European Union flag is held in front of the Big Ben clock tower in Parliament Square during a 'March for Europe' demonstration against Britain's decision to leave the European Union, central London
A European Union flag is held in front of the Big Ben clock tower in Parliament Square, central London, Britain July 2, 2016. REUTERS/Paul Hackett/File Photo

It was not a blow against globalization but a “vote against greater economic integration under the European Union (EU) beyond the free flow of goods, services and capital” which needs countervailing measures, according to C. Rangarajan, a former Governor of the Reserve Bank of India.

India views Britain as an attractive investment destination and a convenient gateway to the European market of over 500 million people. It appreciates Britain’s robust legal system, tax regime and ease of doing business. Besides, English is a widely used business language in India and Britain.

Hence, Indian business leaders have warned against Britain leaving the EU although the ‘leave’ campaigners have repeatedly advised trade within the Commonwealth as an alternative.

The Federation of Indian Chambers of Commerce and Industry (FICCI) says Brexit would harm Indian investment in Britain.

Britain-India trade has been growing and India is the third largest source of foreign direct investment in Britain after France and the US, creating thousands of jobs and safeguarding many more, according to a British official report in 2015.

Secretary General of the FICCI said that though the decision to leave EU is a sovereign matter for Britain and its people, Indian industry cannot ignore it. Britain is a valued economic partner for India and such a decision would create considerable uncertainty for Indian businesses and adversely affect investments and movement of professionals to Britain.

Several other important businessmen and politicians in India fear Brexit could create considerable risks for Indian business. Further, economic recession in the EU is likely to affect depending on the extent to which Britain is open to trade with India.

Tata Motors is the best known Indian business in Britain employing 110,000 employees. Others include major information technology, pharmaceutical, creative and financial services firms.

The subsidiary of Tata motors, Jaguar Land Rover, is Britain’s largest automobile company contributing about 90% of the Tata Motors’ operational profit.  Cars assembled in Britain are now freely sold across the EU without tariff. Brexit will affect this.

Indian tea is a major item of export to Britain earning millions of dollars.

A recent study has noted that Brexit will have an “adverse impact” on investments in India.

Over 800 Indian companies have their presence in Britain. The fastest-growing Indian companies in Britain reportedly generate a turnover of over £ 26 billion. After Brexit, India would need to find a European city other than London, which could operate as a gateway to Europe.

The Development Bank of Singapore (DBS) has said Brexit is a tail risk for India, which is the third largest investor in Britain in terms of the number of projects. The Bank opines that the direction of oil prices warrants close attention as it matters most to India.

Impact on China

China thinks the unequal distribution of benefits of globalization has had social consequences in Britain resulting in Brexit which could affect Chinese investments in Britain (about $16.6 billion). In the long run, however, there would be solid manufacturing opportunities for China under its global Belt and Road connectivity program.

China has already rekindled first rate manufacturing in the Eurasian super continent under its massive global development program with its Belt and Road connectivity template.

In June 2016, finance ministers from almost 60 countries attended the first annual meeting at the Asian Infrastructure Investment Bank (AIIB), Beijing, an institution set up to finance these projects. The ‘One Belt-One Road’ (OBOR) policy is China’s “biggest foreign economic policy initiative.” The projects are vast and 900 deals worth $890 billion are underway.

Following China’s accession to the WTO in 2001, manufacturing jobs in a variety of sectors had moved to China, making it the “workshop” of the world. It is expected that post Brexit, China could potentially become the “locomotive of the reindustrialization of Britain.”

Alvin Cheng-Hin Lim, research fellow with International Public Policy, has pointed out instances of China’s success in planting heavy industry abroad.

He observes that in the post-Brexit situation, “a concerted effort by China to establish industrial parks and invest in heavy industry in Britain, Europe and the US, could meet the popular demand in the West for the return of manufacturing jobs, generate popular goodwill for China and help reduce industrial overcapacity in the Chinese economy.”

Interestingly, Brexit provides geostrategic benefits to China as well.

Following Brexit, the mood in Europe is turning inward with the likely ascendency of nationalist parties. This would prevent France from pressing its proposal to send EU patrols to defend ‘freedom of navigation’ in the South China Sea.

Second, the North Atlantic Treaty Organisation (NATO) is twinned to the EU, which has been weakened by Brexit. Any dissonance in the NATO will benefit Moscow and its Eurasian Economic Union (EEU) project. Since the West is a common threat, China and Russia are likely to fuse the EEU with China’s Belt and Road plan along the Eurasian economic corridor.

The Eurasian connectivity would be important as a building block for the transitioning of China’s economy. New channels would open up for export of China’s excess manufacturing capacity into industrial parks, cyber cities, railways and highways along the New Silk Road.

After Brexit, Germany could emerge as a major player in the Eurasian Great Game and cooperate with China on its Belt and Road initiative. Brexit has thus the potential to breach the Atlantic Alliance and enable Germany with China’s support to enter a new cycle of revival. In turn, with Eurasia as the core and the decline of US influence, China’s dream of the emergence of a multipolar world would be nearer achievement.

Post-Brexit, India is yet to develop its own comprehensive global development strategy as China has done with its OBOR initiative. At the Raisina Dialogue held in early March 2016 at New Delhi attended by over 40 nations, the Indian Foreign Secretary rubbished China’s OBOR explicated by its Foreign Minister Li Zhaoxing, as unilateral and ‘hard-wired to influence choices’ and advocated an Indian initiative which he called ‘Security and Growth for All in the Region’ (SAGAR).

However, while the Chinese project is linked to about $4 trillion expected to be assembled by China’s Asian Infrastructure Investment Bank (AIIB) for over 900 deals costing $800 billion across the world, no such details are forthcoming on the Indian project.

Perhaps participants at the conference felt that India’s negative reaction to the Chinese OBOR was because Indian foreign policy was getting increasingly aligned to that of US which is anti-China in orientation.

References:

Ailawady, Aayush, 2016 ‘Why should India Care about Brexit?’ Bloomberg, Quint, www.the quint.com June 13

Aneja, Atul, 2016 ‘Short-term Pain’, Frontline, July 22

Alvin Cheng-Hin Lim 2016, ‘How concerned should China be about Brexit?’ www.ippreview.com

Rangarajan C 2016 ‘Making Sense of Brexit’ the Hindu, July 14

 The writer is a former Director of the Research and Policy Division of the Union Home Ministry in New Delhi and former Director General of Police in Northeast India. He is the author of several books including ‘State, Policy and Conflicts in Northeast India, Routledge, 2016

Kadayam Subramanian
Kadayam Subramanian is former Director, Research and Policy Division, Union Home Ministry, Government of India, and former Director General of Police in Northeast India. He is the author, among others, of Political Violence and the Police in India, Sage, 2007, and State, Policy and Conflicts in Northeast India, Routledge, 2016
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