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Zhang Jian Strategic Impact of Brexit Zhang Jian Strategic Impact of Brexit Zhang Jian* Abstract: Following Brexit, major changes are expected in the UK, the EU, and the relationship between the two, with far-reaching strategic effects on international politics that may develop truly unexpected aspects. Beyond the near-term challenges, the UK is likely to face new developmental opportunities in the long run. The internal power balance in the EU will undergo major changes, possibly leading to progress in diplomacy and defense but with increased internal suspicions, leading to a series of new contradictions. Regardless of its success, Brexit will long trouble the EU. A troubled UK may come to resent the EU, but it is also possible that a well-developed UK will create a development model that is different from those of the EU member states, setting an example for other members considering revaluating their relationship to the EU. The resulting instability may even change it to a free trade area. The UK is an important country, with global influence. Changes in UK-EU relations will have profound geopolitical consequences, and we can expect great changes in UK-American, European-American, UK-Russian, and European-Russian relations and larger relations between East and West. The competition and cooperation among major countries will gain complexity. Due to its close relationships with the UK and the EU, China will also be extensively and profoundly affected. Keywords: the UK, Brexit, Europe Union, geopolitics he UK election of December 12, 2019 will likely be the most important Tin the country since World War II. This election will define the long- term economic, political, and security relationships between the UK and * Zhang Jian is a research professor and director of the Institute of European Studies, China Institutes of Contemporary International Relations, mainly engaged in the research on European integration, EU diplomacy and Sino-EU relations, EU-US relations and so on. 50 CIR Vol. 30 No. 1 Strategic Impact of Brexit the EU, probably resulting in a wide range of geopolitical effects. Unlike most elections, livelihoods are not the central issue, replaced by Brexit as the most attractive topic for voters. It was impossible to predict the results with the then-existing information. It is expected that the UK will leave the EU in some form, likely based on the Brexit agreement reached between the two sides. In any case, the end of the withdrawal process may be around the corner. The impact of this major and continuously unfolding event on contemporary international politics has not yet been completely revealed, and it has received less attention than its due. There has been little discussion of its strategic impact, including on geopolitics. In fact, its long-term strategic impact may exceed that of Trump’s success in the 2016 US election, as most US foreign policy remains the same, with only a small degree of adjustment. Unfortunately, major changes are expected in the UK, the EU, and the relationship between them after Brexit. These changes will have far-reaching strategic effects on international politics, which may even exceed our current expectations. Impact on the UK Brexit will have both positive and negative impacts on the UK, and both may unfold at the same time. On the one hand, the wide-ranging changes expected in its relationship with Brussels will have a negative impact on its economy, politics, and international influence. On the other hand, Downing Street will be free to take a different path from the EU after Brexit, and the proactive strategies and policy choices it will follow in the future may bring positive and profound changes. Let us consider the negative possible effects first. From an economic perspective, the EU and the UK have been integrated into a community with a shared destiny for the 46 years since the UK joined the European Economic Community (EEC). The EU is the UK’s largest trading partner and top export market. UK exports to the EU were worth £291 billion in 2018, accounting for 45 percent of its total exports, and its imports from CIR January/February 2020 51 Zhang Jian the EU were valued at £357 billion, or 53 percent of the total.1 Moreover, the financial industry, a pillar of industry in the UK, contributed £119 billion to the UK economy in 2017, representing 6.5 percent of the country’s total economic output. Financial services are also a major contributor to the public purse. The sector paid £27.4 billion in taxes in 2016 / 2017, 4.8 percent of the country’s total tax receipts and the highest contributor to them. The industry directly employs more than 1.1 million people, accounting for 3.2 percent of the UK’s entire workforce, and it creates even more work indirectly. The financial industry is also the UK’s largest export industry and accounts for 10 percent of UK exports to the EU and the rest of the world, and it produces the country’s largest surplus in trade.2 However, this industry is highly dependent on the EU market. For example, although the UK is not a eurozone country, it is the world’s largest euro trading center. The arrangement whereby financial institutions in the European Economic Area (EEA), namely, from the 28 EU members, Norway, Iceland, and Liechtenstein, are free to operate within the EU, serves as a guarantee for British financial institutions to do business in the EU single market. Financial companies outside the EEA but with established branches in the UK can also operate in the EEA area after approval. Without this financial passport, the cost of delivering financial services in Europe will increase significantly, and some businesses and their related employment, such as those engaged in the clearing of euro-denominated products, will slowly move to the financial centers of the euro zone. Although the UK’s trade and financial relationships with the EU will continue in some form after it departs, there is no doubt that this relationship will be much weaker than what existed previously. That will at least have a negative impact on the economy of the UK in the short to medium term, and it may even cause a large shock to the economy, as acknowledged even by the Conservative government. 1 Statistics on UK-EU Trade, November 1, 2019, accessed November 11, 2019, https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7851#fullreport. 2 Joshua Warner,“How Will Brexit Impact UK Financial Services?,”accessed November 11, 2019, https://www.ig.com/uk/trading-strategies/how-will-brexit-impact-uk -financial-services--181114. 52 CIR Vol. 30 No. 1 Strategic Impact of Brexit Politically, the future integrity of the UK, which is composed of England, Wales, Scotland, and Northern Ireland, may come into question. England and Wales supported Brexit in the referendum overall, while the latter two voted for the opposite, and some in both have since expressed separatist thoughts. After the UK’s divorce from the EU is complete, this separatism will likely develop further. In the current UK-EU agreement, Northern Ireland will remain in the EU customs union, leading to strengthened economic ties to its co-insular Republic of Ireland, while its ties to other parts of the UK will gradually weaken. Over the long run, anticipated demographic changes of Northern Ireland and worse economic prospects than those of the Republic of Ireland may accelerate a unification between the two. A survey shows that the number of pro-Irish unification Catholics in Northern Ireland has surpassed the number of pro-UK union Protestants, and slightly more than half of the people in Northern Ireland support a united Ireland.1 Scottish nationalist sentiment has also risen, and there are calls for another referendum on independence. Although Prime Minister Boris Johnson has stated that he would not support Scottish independence, he has not ruled out the possibility that a future British government might do so under the pressure from Scotland. Importantly, English residents, the dominant group in the country, do not strongly oppose either Scottish or Northern Irish separatism, and some English nationalists even positively approve if those countries wish to break ties. It has been found that most Conservatives are resolute in their desire to leave the EU, even at the expense of Scotland and Northern Ireland.2 The UK’s international influence will certainly experience damage over the short term. For example, as the UK has become more and more involved with its divorce from the EU, its presence in international affairs has declined significantly. 1 Tony Barber,“Brexit Raises the Spectre of the UK’s Break-up,”Financial Times, October 22, 2019. 2 James Cook,“Will Brexit Break Britain, and Would England Care?,”July 23, 2019, accessed November 11, 2019, https://www.bbc.com/news/uk-scotland-49053233. CIR January/February 2020 53 Zhang Jian The positive effects also merit mention. At present, it is difficult to draw any clear conclusion on the size of the impact, allowing for only a predictive analysis. As Chinese President Xi Jinping has said, history is the root of reality, and the today of any country is rooted in its yesterday. It is only by knowing where a country comes from that we can determine where it is and where it might go.1 To consider how the UK’s policies will change and how it will reshape itself, we must first review the common history of the UK and the EU to find the origins of Brexit. A wrong move by then-Prime Minister David Cameron may be a main reason for the UK’s departure.