Now Brexit has been triggered, does the Caribbean have anything to fear?
The ramifications of the United Kingdom’s (UK) decision to leave the European Union (EU), for Latin America, remain unclear. Indeed, the uncertainty that seems to pervade all things Brexit is likely to continue for the next couple of years as the UK and EU negotiate the terms of their divorce.
Having said that, we could reasonably assume that the repercussions of the UK-EU split will be transmitted to Latin America primarily via four channels – foreign direct investment (FDI), trade, development funding and political influence.
Once Article 50 of the Lisbon Treaty is invoked, the heightened uncertainty surrounding the ensuing negotiations could dampen growth in both the UK and the EU and depress outward FDI flows.
In addition to the balance of payment impacts, narrower investment flows could hamper the region’s economic diversification efforts which are now crucial for sustainable growth in the post-commodity boom years.
From the UK’s standpoint, a weaker pound sterling and heightened business uncertainty would lead to lower flows to economies that now receive UK investment. But on a more positive note, Brexit could provide an opportunity to craft modern bilateral investment treaties between the UK and regional economies.
The EU is Latin America’s second largest trading partner (after the United States), with this relationship underpinned by trade agreements with Mexico, Chile, Peru and Colombia, as well as the Central American grouping SICA. Today, over 70 per cent of Latin America’s exports to Europe are from the primary sector.
In contrast, Latin America’s trade with the UK is quite small at less than one per cent of regional exports. At this time, it is fair to assume that the EU-27’s trade policy vis-à-vis Latin America will remain broadly unchanged. However, if Brexit triggers a significant fall in EU demand for exports, deterioration in both external and fiscal accounts is probable.
The UK’s withdrawal from the EU would result in a loss of around £6 billion in annual contributions to the EU’s foreign policy and international development programme.
While development aid to the region is expected to continue post-Brexit, a review of existing mechanisms for funding disbursement would probably be required to ensure vulnerable recipient-economies continue to benefit from the smaller pool of funding.
A new global risk that is gaining momentum is “deglobalisation”. That is, growing discontent with globalisation amongst sizeable sections of the world’s population.
This is most clearly visible in the rise of populist movements in western economies and the emergence of leaders who propose greater protectionism and are less well disposed towards free trade as it exists today. Barriers to trade are already increasing.
For the region, Brexit highlights the need for renewed urgency in the push for deeper regional integration, structural reform, and the revision of existing models of economic growth and development.
If Latin America is to grow sustainably and thrive after the dust of Brexit settles, new approaches will be required to lift productivity, reduce inequality, drive economic diversification, encourage innovation, and build an appropriately skilled workforce at the same time as sharpening international competitiveness.
Michelle Campbell is a senior economist at British firm Dun & Bradstreet. She has worked as a visiting lecturer in the United Kingdom and in the Caribbean.
