The United Kingdom’s referendum to exit from the European Union (EU) triggered panic in Europe and around the world. The British pound, which initially lost its value by 12 per cent, is recovering slowly. Financial markets are still smarting from the aftershocks. The British long-term credit rating was downgraded; and so was the European Union’s. Rattled investors in the UK are looking for safe havens for their investments. Even as the UK and the European Union prepare to engage on the withdrawal process, confusion prevails. One third of the British electorate believes the UK won’t leave the EU, an impression reinforced by Secretary of State John Kerry’s remark that the UK may not follow thorough its decision.
If the withdrawal goes forward, and at the moment all indications are that it would, I believe that the costs for Pakistan will be minimal and its alignment with the transition almost painless. Pakistan’s immunity to volatility can be attributed to its relatively insular economy and low volume of exports.
According to the European Commission, the total volume of trade between the UK and Pakistan is approximately $11 billion (or Euro 10.4 billion). Pakistan’s exports to the EU are about Euro 4.4 billion, while its imports are Euro 6 billion. The Pakistan-UK trade volume is roughly Euro 2.2 billion, out of which Pakistani exports are nearly Euro 1.5 billion. Pakistan is mainly exporting textiles, clothing and leather goods and importing mechanical and electrical machinery, as well as chemical and pharmaceutical products. Textiles and clothing are 75 per cent of Pakistan’s exports to the EU.
On January 1, 2014, Pakistan entered into the Generalized System of Preferences Plus (GSP+) arrangement with the EU under which the EU supports Pakistan’s sustainable development and good governance; and, in return, Pakistan exports to the EU markets 20 per cent of its goods at zero tariff and 70 per cent at a preferential rate. Pakistani textile goods are slated to enter the EU without any duties till 2017.
There would be no disruption in this pattern, although we should brace for some dip in our exports to the UK, if not the EU minus Britain. That necessitates remedial measures. The UK’s withdrawal arrangements would take some time to be effective. Until then, decisions on GSP + would remain operative. But before that, we will have to start a process, as would many other countries, to negotiate with the UK terms for Pakistan-UK trade that are comparable to GSP +. If the EU agrees to keep the UK part of the Customs Union, Pakistan’s GSP + may still continue. This, however, is a complicated process, and EU President Donald Tusk has warned that the UK would not be allowed to “cherry pick” its way into separation.
Although there is little cause for concern in the immediate future, we should not be complacent. Our real problem is not access of our products to the European and other markets but inadequate manufacturing and anemic exports. Lack of exportable surpluses, as well as export of raw material and semi-finished products fetch low returns in the international market. For decades, we have been planning to invest in value addition in industries producing textiles, leather, surgical and sports goods, but this effort has not taken off.
Against this background, the government has taken two steps in the right direction. It has tried to allay fears of our businessmen who are concerned by uncertainty created by Brexit. Second, it has asked its envoys in Brussels and other EU capitals to proactively reach out to trade ministries and business houses to maintain and expand the niche for Pakistani goods and services.
We will also have to closely watch the trends in remittances from the UK, being the third largest source of overall foreign remittances to Pakistan. The silver lining of the EU imbroglio could be transfer of large amounts by Pakistani expatriates in the UK who may feel that their investments have become vulnerable and would be more secure in Pakistan. The Finance Minister announced last Friday that Pakistan foreign exchange reserves had surpassed $23 billion, a historic first. This upward trend is likely to continue.
Last month, Pakistan was classified as an emerging market by MSCI raising hopes of new inflows of investment in Pakistan, including from Europe and the US. This may have to wait in the short run because of the spike in risks within the EU. But, on the other hand, British and European businesses, may find Pakistan a low-risk, high-profit market. This would not happen automatically though. Government officials, chambers of commerce and industries and entrepreneurs will have to mount an aggressive and coordinated effort to attract foreign direct investment from Eurozone and the UK.
Immigration and Islamophobia
In regard to immigration, right now the feud is intra-European not primarily directed against Muslims, though that undercurrent is there. The developed European countries were not able to integrate workers from Central and East Europe. That strain has been increased by the arrival of millions of refugees from Syria and other Middle Eastern countries. Poles are more discriminated against in the US compared to Muslims from South Asia. The EU-UK break up offers an opportunity to Muslims in Europe to be bridge builders, rather than paint themselves as victims. There are forces within Europe who are ready to fight Islamophobia to avoid fracturing their multi-cultural societies and polities. There could be a rise of xenophobia in Europe but collectively we need to find ways to reverse this trend.
China-Pakistan Economic Corridor (CPEC)
The CPEC gets some breathing space, as attention would be riveted on Euro-crisis. In the next two years, China and Pakistan should accelerate the speed of the implementation of its early harvest projects.
There are unintended consequences of Brexit, as it unleashes centrifugal and devolutionary forces within the EU and within its member states. While Europe will have to devise ways to stem erosion of the confederal structure of Europe and federations at the national level, the UK’s seminal political act could lead to replicable patterns elsewhere fueled by nationalism and populism. Fragile federations particularly have to be vigilant about the rise of transnational irredentism and intra-national secessionism.
A “Nuclear Brexit”?
An essay in the latest issue of Bulletin of the Atomic Scientists postulates that if Scotland decides to secede in a second referendum (the first was held in 2014), as demanded by its First Minister Nicola Sturgeon, this may well set in motion a process for the UK’s “unilateral nuclear disarmament”. The rationale given is simple: Scotland is opposed to the stationing of nuclear weapons on its territory; but all of the UK’s nuclear weapons, including warheads, missiles and submarines are stationed in Scotland. The essay underlines that there are no alternative sites in England. The UK’s “disarmament” could theoretically stimulate momentum for reduction in nuclear arsenals all around the world.
A study needed
Because of the speed with which Brexit unfolded, most of our reactions are based on guess work and focus on firefighting. We need to conduct a comprehensive study or a series of studies to understand the full impact of Brexit on our economy, and to come up with a set of policy recommendations suggesting appropriate responses and, more importantly, identifying new opportunities for us. In the short term, we should give relief to our export industry so that the developments in Europe do not further push down our exports.
Wish the UK well
As the people of the UK negotiate a difficult transition, the people of Pakistan should show understanding and solidarity towards them. We should hope that they would come out of this predicament either by separating from the European Union on most favourable terms or by reversing the decision to exit, which even the ‘leavers’ now realize was taken in haste. The welfare of our diaspora community in the UK, the unity of the British nation and continuation of Pak-US bilateral cooperation all hinge on sound decisions that would be taken by London and Brussels.
(The writer is Director General Institute of Strategic Studies and former Ambassador to the United Nations and China.)