Download How Brexit Can Change Britain`s Relationship with Africa

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How Brexit Can Change
Britain’s Relationship
with Africa
This article was originally published on Law360 on September 30, 2016.
by Tina Blazquez-Lopez
Tina Blazquez-Lopez
Finance
+44.207.847.9577
[email protected]
Tina Blazquez-Lopez is a counsel in Pillsbury’s
Finance practice. She is based in the firm’s
London office and focuses on project finance,
international banking and finance and
transactions in the energy and infrastructure
sectors.
The decision by the United Kingdom
to leave the European Union—Brexit,
as it has become known—after four
decades of membership was both
momentous and unprecedented.
Though it is still unclear what
the long-term consequences of
Brexit will be or how it will impact
Britain’s relationship with Africa,
the immediate impact of the vote
was largely adverse. Sterling fell and
the financial markets came under
significant pressure in a number of
sectors, including construction and
banking. The service industry, which
accounts for more than two-thirds
of the U.K. economy, has seen a
drop in activity (both it and the
manufacturing sector have since
rebounded, due in part to a boost in
the U.K.’s exports precipitated by the
plummeting valuation of sterling).
And interest rates have now been cut
to a historic low of 0.25 percent—the
lowest level in the Bank of England’s
322-year history—as it expands its
program of quantitative easing in an
attempt to stave of recession.
Prime Minister Theresa May has said
repeatedly that “Brexit means Brexit.”
However, it is clear that Brexit means
different things to different people.
The primary question remains:
what model will the U.K. pursue to
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facilitate its exit from the EU? At this
stage it is unclear whether the U.K.
will adopt the “Norwegian model,”
the “Swiss model,” the “Canadian
model,” or proceed to chart its own
course with a completely different
relationship with Europe. Whatever
the path chosen, Britain’s exit from
the European Economic Area—and
more specifically, its access to the
single market—needs to be carefully
managed and negotiated with the
EU. This uncertainty, in conjunction
with a global economy facing low oil
prices, a fall in commodity prices, a
slowdown in China, and an increased
cost of borrowing in Africa, is indeed
worrying. But it also presents some
unique possibilities for the continent.
This article will examine some of
the potential opportunities and
challenges that Brexit will pose for
U.K.-Africa relations.
Trade
The EU single market is the worlds’
largest trade area, and the EU is
Britain’s most significant trade
partner, accounting for approximately
half of the U.K.’s trade. The EU is
also West Africa’s largest trading
partner and the main export market
for West African agricultural and
fisheries products. South Africa,
however, is the EU’s largest trading
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partner on the African continent,
with an increasingly diverse portfolio
of exports that includes machinery
and transport equipment, mining
products and other semimanufactured products. According to Moody’s
Investors Service, South Africa
is most exposed to Brexit largely
because of its dependence on foreign
money to finance its current account
deficit. This explains why the South
African rand fell 8 percent following
the Brexit vote.
recent G20 summit in China, U.S.
President Barack Obama reiterated
to May that Washington’s priorities
remained with the Asia-Pacific
and the EU, and that post-Brexit
Britain was way back in the queue
for a trade deal with the U.S. This
all-around misalignment in priorities
is likely to mean that the U.K.-Africa
trade relationship is neglected for
some time while individual country
priorities realign with those of a
post-Brexit Britain.
The uncertainty surrounding when
and how Britain will exit the EU is
likely to lead to lower U.K.-Africa
trade in the interim. Britain will be
looking for trade agreements with
the world at large, beginning with an
EU deal and most likely followed by
agreements with robust economies
such as the United States, China and
India that do not currently have full
trade deals with the EU. Recently
appointed Foreign Secretary Boris
Johnson announced that the U.K. has
already been contacted by Singapore,
Malaysia, Australia and India over
trade deals, although trade deals can
take a number of years to complete.
The EU and India have seen their
trade talks mired over the last
few years.
A post-Brexit Britain would remain
a member of the World Trade
Organization and could continue
to trade under WTO rules using
preferential trade agreements.
However, if not managed correctly,
the U.K. exporting sectors, such
as food, beverages, cars, chemicals
and pharmaceuticals, aviation,
services (financial and otherwise)
and insurance could all potentially
be subject to tariffs. Similarly, a
post-Brexit Britain may impose
import tariffs on EU and other
country products. The alternative
would be for the U.K. to adopt a zero
tariff policy across the board, though
such an approach would be politically
fraught, putting some sectors, such as
agriculture, under particular pressure.
Britain will have to renegotiate the
terms of its membership with the
WTO’s 163 other members, extract its
obligations from the EU schedules,
and develop these into independent
commitments. This is likely to be
complex and time-consuming.
Although some have argued that
Brexit will bring a renewed focus
on Britain’s relationship with its
Commonwealth partners—many of
which are in Africa—the unfortunate
reality is that African countries are
likely to be significantly down the list
of U.K. priorities for trade deals. It is
also questionable whether what some
have termed “little England” will be
a priority for the African countries
that are already trading and doing
business with China and other world
superpowers. Furthermore, at the
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Given that the U.K.’s accession to
the EU came with some preferential
treatment for Commonwealth
countries, it is reasonable to assume
that Britain’s exit from the union may
adversely impact Africa’s continued
access to the single market. Britain
has traditionally been a principal
market for much of Africa’s exports
to Europe, including, for example,
for Kenya’s profitable horticultural
industry. If the U.K. economy
slows—as it is almost certain to do
following Brexit—this will inevitably
reduce the U.K.’s appetite for African
exports. What is most interesting,
however, is that the International
Monetary Fund has predicted that by
as soon as 2019, the Commonwealth
will have exceeded the EU in terms
of global output. The numbers
show that the EU’s share of global
gross domestic product is declining
while that of the Commonwealth
is rising, underpinned by Africa’s
strong demographics.
Recent numbers from the Office
of National Statistics also indicate
that by a small margin, the U.K. now
exports more to the rest of the world
than it does to Europe but that many
of those exports will be under preferential trade agreements negotiated as
part of the single market. Although
Britain’s economic power within the
Commonwealth ended when the
colonies did, the chance for a Britain
outside of the EU to reengage with
Commonwealth Africa, albeit on
different terms, is an interesting one.
Brexit presents an opportunity for the
U.K. to compete more aggressively
for trade and investment and to strike
new and more competitive bilateral
trade deals with the rest of the world—
on its own terms and timetable and
without Europe’s perceived or real
bureaucracy. Although Britain will
lose the clout of being in a trade
bloc of approximately 500 million
people compared to approximately
60 million in the U.K., this is an
opportunity for Britain to make
itself more attractive to the world by
How Brexit Can Change Britain’s Relationship with Africa
undercutting the EU on tax, ease of
business environment, and ability to
draw in the best talent from around
the world. Ironically, this opportunity
to effectively compete is what will
make the Brexit negotiations both
difficult and protracted. Brussels
is unlikely to concede on areas,
including free movement of people,
which will threaten the EU project.
Economic Partnership Agreements
The principal framework for
Africa’s relations with the EU is
the Cotonou agreement (signed in
2000), which replaced the 1975 Lome
Convention for African, Caribbean
and Pacific countries. The Joint
Africa-EU Strategy adopted in
2007 sets additional parameters for
Africa-EU relations.
Economic partnership agreements
(EPAs) have been a key part of this
relationship since the signing of
the Cotonou Agreement. EPAs are
free-trade agreements that the EU
has or is currently negotiating with
several African countries as well as
with regional communities such as
the Economic Community of West
African States (ECOWAS) and the
West African Economic and Monetary
Union. EPAs encourage African
countries to open up approximately
80 percent of their markets to
European imports in exchange for
tariff-free access to European markets
for African goods.
While providing some benefits, EPAs
have (in certain instances) been used
as a tool to threatened local industries.
For example, last year, the Kenyan-cut
flower industry was exposed when
Europe imposed tariffs on the exports.
This hurt the Kenyan flower trade
industry and, after some pressure,
Kenya eventually signed the proposed
EPA. Similarly, the EU threatened
the Namibian beef industry with
the imposition of tariffs during their
EPA discussions.
The issue is that EPAs assume a
level playing field. In reality, African
economies simply cannot compete
with the U.K., France or Germany and
therefore unrestricted EU imports
into their markets are unsustainable
(particularly in agriculture). Infant
industries and services suffer if
they must compete with heavily
subsidized cheaper imports from
Europe. EPAs have inadvertently
impacted country fiscal and monetary
policy, as tariffs on imports are one
of the few policy tools that African
governments have to support and
protect nascent and key industries
such as agriculture. The revenue
generated may be applied toward
further investment in such industries
or toward other government public
spending priorities.
An area of potential cooperation
between a post-Brexit Britain and
Africa is in agricultural biotechnology.
EU policies in this area have made
it difficult for Britain to engage
on this unilaterally, and strict EU
provisions have meant that Africa has
turned to countries such as China
and Brazil, which have invented new
technologies in agriculture. It is not a
coincidence that Africa’s trade with
Asia, especially with China, has grown
over recent years and that Chinese
investment in Africa across numerous
sectors has steadily increased. The
U.S. has been trying to keep up with
China’s involvement and increased
influence in Africa with various
U.S.-led, Africa-focused initiatives,
such as Obama’s Power Africa
initiative. This new positioning for
Africa by other global superpowers
has threatened to diminish
U.K.-Africa trade relations. Brexit
provides an opportunity for Britain
to regain some of this lost ground on
a bilateral basis, while also showing
that it can lead the way to develop
fair and mutually beneficial trade
agreements that do not undermine
local or regional development
in Africa.
In terms of regional integration in
Africa, some may now use Brexit as
an example of what could go wrong.
ECOWAS and the other African
regional communities should indeed
learn the Brexit lessons. However,
it would be unfortunate if greater
efforts toward regional integration in
Africa are put off track. Brexit is an
opportunity for Africa to use its solid
demographics as a bargaining chip
and also to leverage its developing
relationships with China and the U.S.
to negotiate with Britain as a united
continent and, at the very least, using
its regional communities.
Common Agricultural Policy
Agriculture and the European
Common Agricultural Policy (CAP) is
another area that may potentially see
some change following Britain’s exit
from the EU. The CAP is designed
to protect European farmers who
are currently subsidized up to
approximately £40 billion each year
(accounting for around 35 percent
of the whole EU spending budget).
The CAP has been criticized for
promoting inefficient agricultural
practices that encourage significant
overproduction, which the EU has
then sold cheaply to developing
countries. This “dumping” of cheap
products has hurt the subsistence of
farming communities in rural Africa,
which simply cannot compete.
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Britain has traditionally opposed the
EU subsidies and has been the main
critic of the CAP within Europe. With
Britain out of the EU, it is unlikely
that the remaining EU member
states will be inspired to significantly
change the CAP. However, Brexit
gives Britain an opportunity to
renegotiate with Africa and to
develop a different policy with
respect to agriculture that addresses
the needs of some of these economies.
With over 60 percent of Africa’s
population working in agriculture,
this is a huge opportunity.
The U.K. government has hinted
it will continue to support U.K.
farmers as CAP subsidies are
stopped. If that happens, there will
still be longer-term pressure on the
U.K. government to reduce these
subsidies, as it either needs to cut
U.K. government spending or other
industries that do not receive any
government support will demand
similar state support.
Investment
Inbound Investment
The U.K. is the world’s fifth-largest
economy and its economic fundamentals remain strong. This is supported
by laws, institutions and structures
that make the U.K. one of the most
competitive places in Europe—if
not the world—to do business. It is
not yet clear if Brexit will mean exit
from the single market,but if the
U.K. is able to retain its passporting
rights for financial services (as
Johnson has claimed), then London
will undoubtedly continue to be an
attractive place to invest and to do
business long-term.
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The uncertainty of the Brexit vote,
however, will still cause some
investors to postpone or, in some
cases, even halt investment in
U.K.-based projects. This could
make the cost of borrowing higher,
though the fall in Sterling has also
made U.K. assets more attractive for
some investors. The recent takeover
by Japan’s SoftBank of leading U.K.
technology company ARM demonstrates that Britain remains attractive
for inward investment, especially in
the immediate aftermath of the Brexit
vote, when investors saved some 10
percent due to the fall of sterling.
Furthermore, the manufacturing
sector saw solid growth during
the month of August following an
initial downturn.
investment to a 10-year low. The
report attributes the decline to the
fall in commodity prices, though
it anticipates that investment will
pick up again as African countries
continue to liberalize their economies
and privatize key state-owned
companies. Nonetheless, if there is a
downturn in the U.K. economy, it may
reduce the U.K.’s appetite for foreign
direct investment in Africa, traditionally considered high-risk. The
recent issue of low foreign exchange
liquidity and the difficulties faced by
corporates in sourcing and repatriating U.S. dollars in Nigeria, Angola
and other African oil-producing
countries has highlighted some of the
very real challenges of doing business
in Africa.
Foreign Direct Investment
The U.K. has traditionally led the way
in Europe in terms of the amount
of foreign direct investment (FDI)
in Africa. South Africa and Nigeria
have benefited enormously from U.K.
FDI, with Nigeria being the largest
recipient of U.K. FDI in Africa in
2015. More recently, Mozambique,
Uganda, Ghana and Zambia have also
received substantial investment from
the U.K. Much of the investment has
been focused on the resource and
extractive industries, although infrastructure, construction, retail, media
and technology have also benefited.
Aid
In June, the United Nations
Conference on Trade and
Development released its annual
World Investment Report, which
shows that FDI flows to sub-Saharan
Africa had declined by 7 percent.
According to the report, South
Africa has also seen a fall in foreign
The EU provides billions of euros
to African countries, which have
generally been applied toward
poverty reduction, democratization
and the promotion of development on
the continent. The EU also provides
military assistance to some countries
(such as Somalia and Mali) to fight
terrorism. In terms of developmental
assistance, Britain is one of the
largest contributors to the European
Development Fund. Though Brexit
could mean the EDF will no longer
receive these funds, it is more
likely that Britain will continue to
contribute through the U.K. government’s Department for International
Development. Outgoing Prime
Minister David Cameron consistently
said that the increase in Britain’s
foreign-aid budget is his “proudest
achievement” in government. Britain
gave £11.4 billion last year and, for
the first time, met the United Nations
How Brexit Can Change Britain’s Relationship with Africa
target of spending 0.7 percent of
national income on international aid.
No other G8 country has met this
target, and after the U.S., the U.K.
is now the world’s second-largest
aid donor.
It could be that Africa will benefit
from Brexit as the continent receives
aid from both the U.K. and from
Europe. However, if Britain goes
into recession, it is unclear if May’s
government will be as outwardlooking in terms of international
developmental assistance. The fear
is that the U.K. will become more
inward looking and isolated in an
increasingly more interconnected
world. Brexit does however provide
Britain the opportunity to take greater
control of how its foreign-aid contributions are allocated and applied. As
it looks to strengthen its relationship
with the Commonwealth, Africa may
stand to benefit.
Immigration
The free movement of persons is one
of the cornerstone principles of the
European Union. Ironically, it is this
principle that some would argue led
to the Brexit vote, with many Britons
seeing Brexit as the only way to
control the U.K.’s borders, particularly
with other EU citizens who have the
automatic right to come to the U.K.
The paradox is that many BritishAfricans also voted to leave the union.
African Brexiters were concerned by
the increased number of Europeans
entering the U.K. and were keen to
preserve their longstanding position
in the U.K. They highlighted reduced
job opportunities—especially in
sectors where they traditionally
dominated (e.g. the National Health
Service and the care sector)—reduced
housing and school places for
their children.
Many failed to consider, however,
that a Britain outside the EU would
not necessarily guarantee improved
conditions for non-EU migrants.
Many also seemed to have forgotten
the important role that immigration
has played and continues to play in
the U.K. economy. While May has
said that Britain would not be moving
toward a points-based immigration
system such as that implemented
in Australia, it is clear that she
wants more government control
over immigration. This is likely to
be selective in some form and in
any case based on skills or work
permits. The previous points-based
system introduced by the Tony Blair
government was canceled by May
when she was home secretary. She is
not in favor of a points system, which
controls quality but not numbers. The
clear message from Europe, however,
is that Britain may well have to
concede on the free movement of EU
citizens if it wants to retain access
to the single market for goods and
services. This is likely to be a real
sticking point in the Brexit negotiations and there will undoubtedly be
some trade-offs.
Conclusion
The outcome of the June 23 vote
was predicted by almost no one. The
ensuing uncertainty is going to be
a challenge, and for some time to
come there will continue to be more
questions than answers. The cards
have been thrown up into the air and
haven’t as yet fallen. The U.K. has
entered a sort of phony war as the
country knows something is going to
happen but when and what remains
to be seen. Financial markets are
understandably uncomfortable with
all this.
Extraction talks will involve all of the
27 member states as well as all key EU
institutions, including the European
Parliament, European Council and
the European Commission. On
the U.K. side, there are also varying
interests to consider, including those
of Scotland, Wales and Northern
Ireland. Furthermore, the interests
of each sector of the U.K. economy
will need to be carefully and properly
considered if exit talks are going to
be a success. There are also other
political uncertainties that may
impact when and how the U.K. will
leave the EU, including the Italian
constitutional reform referendum in
October, as well as the French and
German elections in 2017.
Britain has entered unchartered
territory and it is unclear how the
negotiations, when they start, will
unfold. We do know, however, that
trade negotiations can take several
years to conclude and that legally, it
may not be possible for the U.K. to
get a new trade deal with the EU
until it has formally signed an exit
agreement. This means that we may
be facing up to a decade of trade
talks. Moreover, it is unclear who
will be negotiating on behalf of
Britain. Britain does not currently
have enough trade negotiators simply
because it has not needed them.
Australia has kindly offered to provide
some of its own negotiators on loan
and the government may well turn to
the private sector for other aspects
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How Brexit Can Change Britain’s Relationship with Africa
of this expertise. But care must
be taken not to put newly trained
negotiators up against the highly
experienced negotiators of the EU
(and other nations).
For U.K.-Africa relations, all of this
may present a golden opportunity.
EPAs, the CAP and other EU policies
have inadvertently undermined
inter-Africa trade and encouraged
Africa to remain a raw material
exporter. Brexit is an opportunity for
the U.K. to step up and support Africa
so it can begin to feed its own people,
refine its own oil, and process its own
cocoa and coffee, among other things.
Britain has historic knowledge of the
continent, sharing both language and
cultural ties. A post-Brexit Britain
may afford the latitude and flexibility
needed to meaningfully engage with
Africa in a way that it never has before.
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