China: The #1 Brexit Beneficiary?

Over the past few months, more and more analysts have been publishing potential scenarios which revolve around the idea that the number one Brexit beneficiary may very well end up being… China. As strange as it may seem, there are actually sound numbers behind that statement, but with a very significant caveat: the fact that the best possible Brexit scenario for China would involve a no-deal Brexit.

In other words, if no negotiated Brexit deal is reached, there is a no-deal possibility which revolves around the United Kingdom simply reverting to the rules of the World Trade Organization. Needless to say, the entities with which the United Kingdom currently has a preferential relationship would suffer (with European Union nations in the spotlight, of course), whereas everyone else would stand to gain, including economic superpowers such as Japan, the United States and China.

To put some figures behind this statement, numbers provided by a recent United Nations Conference on Trade and Development study indicate that in the event of a no-deal Brexit, Chinese exports to the United Kingdom would grow by 17% or in nominal terms, we’d be looking at a roughly $10 billion increase. While other nations would also be on the receiving end in terms of a no-deal Brexit, it’s worth noting that in nominal terms, the Chinese increase represents about as much as the US and Japanese increase combined, with $5.34 billion for the United States and $4.9 billion for Japan.

The fact that countries such as Germany, France or Italy would no longer take advantage of lower tariff rates and might end up paying as much as China, the US or Japan most definitely represents a game changer… but how likely is the no-deal Brexit scenario really? Not very, and therein lies the key to understanding the proper context surrounding the question which constitutes the title of this article.

To put it differently, yes, current estimates seem to indicate that China would indeed be the number one Brexit beneficiary, but only in the event of a no-deal scenario… which is anything but likely for a series of reasons, such as:

1. It’s not just the European Union’s economy that is benefiting from the preferential agreements that are in place with the UK… it goes both ways. In other words, more likely than not, the economic shock of a no-deal Brexit would be significant enough (from market jitters to supply chain disruptions when it comes to vital products such as medicine) for this fear alone to represent a significant deterrent
2. Leaving economics aside altogether, a no-deal Brexit would have political consequences that are hard to predict. Actually, it would be unbelievably difficult to implement the no-deal Brexit deal in the first place due to the fact that, for example, an obvious implication would involve a hard border being placed between the United Kingdom and the European Union. In light of the fact that Ireland is an EU nation, this would have to lead to a hard border between Ireland and Northern Ireland, something as close to impossible to implement as it can get
3. The two entities have a wide range of negotiation options at their disposal. From dramatic status quo changes such as another referendum being organized to various scenarios which involve a soft/negotiated Brexit, there are so many potential options on the table that the likelihood of none of them being considered better than a no-deal Brexit is quite low. Especially in light of the fact that both parties are well aware of the elephant in the room: that if an alternative deal is not reached, a no-deal Brexit with all of its implications becomes the only choice

Can we be 100% certain that a no-deal Brexit is out of the question?

Of course not. If there’s anything recent political events have taught us (in the United Kingdom and elsewhere), it’s that the improbable should never be ruled out altogether.

Still, we cannot help but conclude that whenever there are two entities involved in a negotiation process that benefit tremendously from increased trade and which would have quite a bit to suffer from many perspectives in the event of a turbulent divorce, it’s quite likely that some kind of an agreement that is superior to a surgical excision will be reached… leaving more or less belligerent rhetoric aside.