Brexit and the Caribbean

26 July 2016


Background

The United Kingdom (UK) joined what was referred to as the European Economic Community (EEC) on the 1st January 1973. Her membership of the EEC – which later morphed into the European Union (EU) – has never been a “full membership” with the UK opting to remain outside the Euro allowing it to retain the pound as its currency and maintain control over its own monetary policy.

On the 23rd June 2016 the UK voted by a margin of 52% to 48% to leave the EU. The process of leaving – should it in fact happen – will take at least two years, and the Caribbean as a region will need to plan for the consequences.

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Triggering Article 50

The UK will not begin the process of leaving the EU until Article 50 is triggered. Article 50 of the Treaty of the European Union provides for the withdrawal from the EU by any member state. The leaving process is in the realm of completely “untested waters”.

Although Greenland left the EEC in 1985, following its own referendum, no state has ever left the “morphed into EU”. Therefore, it is far from surprising that there is considerable uncertainty about the impact of a potential Brexit on the EU, the global economy as a whole, and the Caribbean region (amongst others).

The impact within the EU is unlikely to be favourable – for anyone. The United Kingdom is the second largest economy within the EU (ranked by GDP), and the third largest by population.

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Impact on Trade and on Tourism

The UK ranks as a major trading partner for many Caribbean countries in respect of both imports and exports. For the commodity exporting countries such as Suriname, Belize, and Guyana, the UK remains within their top 5 export markets.

Perhaps of greater significance the UK is a major source of tourist arrivals for the Caribbean region with over 1.1 million UK tourists visiting the Caribbean for a holiday in 2015. For many of the tourism based economies, for which the UK is a major feeder market, their economic fortunes are tied to the economic fortunes of the UK, the health of the UK economy, and perhaps of greater significance, the value of the pound.

In this regard, the fall out of Brexit is likely to be felt greatest by Barbados – see below

Impact on Trade Agreements

The Economic Partnership Agreement (EPA) signed between the EU and CARICOM will continue. This means that CARICOM can continue to trade with the EU as it currently does.

At the point that the UK leaves the EU the EPA will no longer apply to the UK since it was negotiated primarily with an organisation that the UK is no longer a member with. This means that CARICOM will have to negotiate a new trade agreement with the UK, a process that is likely to take some time – see low down in the pecking order below.

The impact on Barbados

The economic fortune of Barbados is strongly linked to the economic fortune of the UK for two reasons. First Barbados is an important holiday destination for UK visitors. Secondly, a large proportion of Barbados luxury real estate is owned by British Nationals. The recent softening of the pound has according to the press in Barbados already led to a softening in demand from the UK for luxury Barbadian real estate.

A foreign policy “black hole”

Because of her colonial past in the region, and her ties to countries within the commonwealth, the UK remains most Caribbean countries closest ally in Brussels. Should the UK leave, she will lose her power to influence EU policy, and accordingly the Caribbean as a region would effectively lose an important voice to raise issues and concerns in Brussels.

This might seem moot at first glance, but in 2020 the Cotonou Partnership Agreement which covers the economic cooperation between the EU and countries in Africa, the Caribbean and the Pacific will expire and require some form of renegotiation. Without an ally at the table this negotiation process will not be an easy one.

The special case of the UK dependencies in the Caribbean

The UK has four remaining dependencies in the Caribbean – Anguilla, the British Virgin Islands, the Cayman Islands, and Montserrat. To this list, although not technically within the Caribbean Sea, can be added the Turks & Caicos, Bahamas and Bermuda. These dependencies, although not part of the EU officially, as dependencies of the UK receive EU funding and preferences in trade that will cease to apply once the UK leaves the EU.

A reduction in aid to the Caribbean from the EU?

With the UK leaving the EU, the EU budget is greatly reduced. This means that not only will the UK market be removed from the EU but so too will be her hefty budget contribution. Part of this contribution is used to fund official aid and investment in areas outside of the EU including the Caribbean. The danger is that the remaining 27 countries within the EU, which have no historical relationship with the Caribbean, and no historical link through Colonialism, will not feel obliged to continue the assistance that has been granted in the past.

The reduction in aid – should it happen – will have a significant impact on many of the economies in the Caribbean (such as Dominica) that rely extensively on that aid. This impact should not be under estimated. The day after the vote the Prime Minister of Dominica, Roosevelt Skerrit, stated:

 “The decision to leave the EU is going to have major, major impact to developing economies like ours which rely heavily on development assistance from the EU,”

Low down in the pecking order?

Prior to 1973, when the UK entered the EEC, trade between the UK and the twelve countries that now form part of CARICOM was conducted under the auspices of the Commonwealth Preference Scheme. At the point the UK entered the EEC, the trade agreements under the Commonwealth Preference Scheme fell away, although some of the terms were effectively adopted by the EEC.

Once the UK leaves the EU it will have no formal trade agreements with any country. Its first task will be to negotiate access to markets in the EU, and the United States. These negotiations are likely to take some time and
accordingly negotiating trade deals with CARICOM is very likely to be left lower down on the pecking order because the CARICOM market is of less significance to the UK (CARICOM collectively only represents a market of approximately 7 million people).

Next Week

Next week we look at the Banana Industry in the Caribbean and the EU.

Closing thoughts – time to consider your investing strategies

Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@nullfirstlinesecurities.com or at 868.628.1175, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

 

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