Executive Summary

The United Kingdom finally left the European Union (EU) on January 31st, 2020 after 43 long months of difficult negotiating process following the June 2016 referendum. “Brexit”, or the exit of the UK from the EU, has very important ramifications. First, it sets the stage for the UK to negotiate a free trade agreement with the EU, which is to be concluded by the end of 2020. At the same time the UK will use the post-Brexit opportunity to negotiate a large number of bilateral trade agreements with third party non-EU countries, such as the USA, China, India and many other trading blocs such as the Gulf Cooperation Council (GCC). However, negotiating free trade agreements with major countries (the EU, the USA, China) with sharply divergent approaches to free trade would put the UK in conflicting negotiation positions and may trigger trade tensions among these nations.

With its liberal trade regime, the Emirate of Dubai is already a major global centre for commerce, finance, logistics and leisure and is expected to receive increased attention from British trade negotiators and businesses as the post-Brexit process evolves. There are several main channels by which post-Brexit could expand Dubai’s economic and commercial relationships with the UK.  Specifically, through foreign investments lead by the 4,762 British brands operating in Dubai and real estate investments by UK citizens (reaching AED 3.6 billion in 2019). The existence of over 100,000 UK residents in the UAE could also strengthen trade and cultural ties with the UAE and Dubai.

Tourism is another major sector that can be impacted in the post-Brexit period, as Dubai received over 1.2 million UK visitors in 2019, the third largest group. However, this sector is sensitive to the British currency against the AE dirham, which is pegged to the US dollar. An earlier study provided evidence that a decline in the income of an advanced economy (including the UK) by 1 per cent would lead to a decline in the number of tourists coming to Dubai by 0.8 per cent.

This second issue of the Economic Bulletin sheds light on the Post-Brexit scenario and the implications on future economic relationships between the UK and its key trading partners as well as the UK with the UAE and Dubai.

Background on BREXIT

The Referendum and the Withdrawal Agreement

In June 2016 the UK voted to leave the European Union in a referendum by 17.41 million votes to 16.14 million. Based on this result, the UK invoked Article 50 of the EU treaty in March 2017, which implied an exit on March 29th, 2019. This decision set in motion a complex withdrawal process that spanned 4 years, divided Britain’s political parties and led to a change in the Prime Minister, accompanied by contentious negotiations with members of the European Union.

When the UK government failed to enact in Parliament a Withdrawal Agreement (WA) negotiated by the Prime Minister Theresa May, the European Union agreed to an extension of the departure date of the UK until October 31st 2019. The WA remained controversial within the governing Conservative party, particularly regarding the terms on the border with Northern Ireland and the Republic of Ireland, which could keep the UK locked in a customs union with the EU (The Irish ‘backstop’). Pressure from within the party led to the resignation of Prime Minister May on June 7th 2019 and a leadership election was held.

A new Prime Minister, Boris Johnson, took power on July 24th 2019 and he was determined to renegotiate a new Withdrawal Agreement without the backstop or to take the United Kingdom out of the EU by the October 31st deadline without a deal — a ‘disorderly Brexit.’ A revised Withdrawal Agreement was reached with the EU on October 17th. However since the UK Parliament did not pass the new EU Withdrawal Bill, the government was forced to reluctantly request an extension for the UK’s exit until January 31st 2020, and the extension was granted, with equal reluctance, by the EU. In order to break the deadlock in Parliament, the UK government requested a general election to be held on December 12th 2019, which was approved by a majority on October 29th and became law two days later.

“Get Brexit Done”… but at a cost

Prime Minister Boris Johnson and the Conservative Party successfully influenced British voters with the policy — let’s ‘Get Brexit done’. The election result gave the Conservatives a majority of 80 seats in Parliament with 13.9 million votes — the largest voter response since 1992. The change in the Parliamentary arithmetic that resulted from the general election meant that the EU Withdrawal Agreement Bill (WAB), based on Boris Johnson’s revised agreement with the European Commission, was passed and received royal consent and became law on January 23rd, 2020. The following day members of the Council of Ministers signed the agreement, which was then ratified by the European Parliament by 621 votes to 49, on January 29th. The UK officially left the EU on January 31st at 11.00pm, 47 years after joining the then European Communities.

When the WAB passed as law, it repealed the European Communities Act which brought the UK into the EU, and addresses payments to be paid by the UK into the EU for years to come, sets out parameters for the treatment of the border between Northern Ireland and the Republic of Ireland (a EU member state) and contains a section on citizen’s rights. The legislation draws a curtain on the turbulent period of three and half years since the 2016 referendum that was characterized by much uncertainty. The long path to Brexit has negatively affected the UK economy, reduced inward foreign investment and depressed the value of the pound sterling. The present legislation raises the curtain of uncertainty again by reinstating the European Communities Act until the end of 2020 while the EU and the UK negotiate a future economic relationship.

The UK officially left the EU on January 31st at 11.00pm, 47 years after joining the then European Communities.

The UK and the EU are currently in a transition phase which lasts until December 31st 2020 by which time a trade agreement needs to be in place.

Post-Brexit Scenarios and Implications

Future UK-EU Economic Relationship on Free Trade

The trading relationships between the UK and the EU are currently in a transition phase which lasts until December 31st 2020 by which time a trade agreement needs to be in place. Trade negotiations can take years to complete, but the UK government has passed legislation that will not allow an extension beyond the end of this year.  This stance risks the possibility of future EU-UK trade carried out on a no- deal basis after January 1st 2021 under World Trade Organization rules.

The first round of negotiations concerning the future relationship between the UK and the EU are scheduled for March 1st of this year, but both parties have established some preliminary positions that remain far apart. The UK seeks a Canada-style free trade agreement known as the Comprehensive Economic and Trade Agreement (Ceta). Canada and the EU began negotiating the agreement in 2009 and it came into force in 2017, although it still has not been ratified by some EU member states.

The Ceta Agreement removes tariffs on virtually all goods traded between the EU and Canada, but some remain on agricultural products such as poultry and eggs. Quotas are raised rather than lifted. For example, quotas on EU cheese exports to Canada are raised from 18,500 tonnes to 31,972 tonnes per year and the agreement does not eliminate border checks. There is some cooperation on product standards under Ceta between Canada and the EU and on professional qualifications, copyright, patents and trademarks, but there is no alignment of regulatory standards in financial services, which is an attractive point for the UK’s future trading relations with the EU.

The EU in turn is willing to offer the UK a zero-tariff, zero-quota trade agreement that would be less disruptive to existing trade patterns in goods and particularly services than a Canada deal, but with conditions. In general, these terms cover a regulatory “level playing field” on financial services, taxation, state aid, labour standards, food and agricultural standards and the environment, with a continued role for the European Court of Justice (ECJ) as an arbitrator of disputes. More particular terms involve continued access to UK territorial waters for EU-based fishing fleets. Most of these areas will be subject to intensive negotiations over the coming year with the UK threatening with no-deal and trading on the basis of WTO MFN rules.  

According to the World Bank in 2018, the UK was the world’s fifth largest economy measured by GDP at current exchange rates[ref] and in July 2019, the IMF[ref] listed a no-deal’ Brexit as one of the main factors that could throw ‘off-course’ a world economy already vulnerable as result of US-China trade tensions, in addition to the recent COVID 19 pandemic which started in China and has rapidly spread around the world.

Banking and Financial Services: Top Trading Issue Unresolved

A key area that the regulatory positions of the UK and the EU will diverge is banking and finance, a sector that is very important to Britain. In 2018, financial services contributed £132 billion (AED 634 billion) or 6.9 per cent of the UK GDP, provided 1.1 million jobs or 3.1 per cent of total employment, and paid around £29 billion (AED 139 billion) in taxes for the 2017-18 financial year. Furthermore, the sector generated net exports of £45 billion (AED 216 billion) in 2017, which also partly offset the UK’s current account deficit in goods trade with the EU.

Currently, the financial services sector is subject to EU regulations that are tighter than those prevailing in the United States and other jurisdictions. The departure of the UK from the EU without an agreement on access to financial services, as a result of a move to deregulate, could result in the loss of some business to rival financial centres in Europe. However, failure to ease regulations could lead to the loss of business to other financial centres such as New York, Hong Kong, Singapore and Dubai.

Currently, the financial services sector is subject to EU regulations that are tighter than those prevailing in the United States and other jurisdictions.

UK Financial Services

in numbers

£132 billion

contributed
(6.9% GDP)

1.1 million

jobs
provided

£29 billion

paid
in taxes

£45 billion

net exports
generated

Future Trading Issues between the UK and Third-Party Non-EU Countries

The main focus for the UK government for the rest of 2020, as discussed above, is to negotiate a free trade agreement with the EU, which is to be concluded by the end of 2020. At the same time the UK will use the post-Brexit opportunity to negotiate a large number of bilateral trade agreements with third party non-EU countries such as the USA, China, India, Australia, Japan, New Zealand and many other trading blocs such as the Gulf Cooperation Council (GCC).

The UK’s position in trade negotiations with third party non-EU countries will be to enter negotiations with countries on a one to one basis, no longer as part of a 28 nation bloc. This position of weakness means that the UK will have to demonstrate the potential gains from bilateral trade with future partners to gain mutual access to each other’s markets without the threat of any substantive retaliatory trade measures. This implies that the UK will be ready to offer free trade deals to non-EU countries with the promise of relatively low or no-tariffs, no-high quotas and minimal non-tariff barriers.

In a speech given on February 3rd at Greenwich in London, PM Johnson stated that given the global trend towards protectionism, he saw Britain’s role was to act as a catalyst in pushing the world in the direction of freer trade. Given the trade tensions that have built up since 2016, particularly between the US, China and the EU, this international trade policy may be difficult to implement.

UK’s Potential Trade Conflicts with USA and EU

The most important country to negotiate a trade deal after the EU for Britain post-Brexit is the US. The US is the single biggest trading partner with the UK, accounting for 14.6 per cent of its total trade, ahead of Germany at 10.9 per cent. Furthermore, in contrast to trade with Germany, the UK earns a current account surplus on its trade in goods and services with the US exporting £118.2 billion (AED 567 billion) and importing only £72.4 billion (AED 349 billion) in 2018. President Donald Trump has signalled many times that the US is ready to negotiate a quick and comprehensive free trade deal with the UK to come into force post-Brexit, but the problem for the UK is that America and Europe are attaching sharply divergent conditions to free trade agreement. The US is likely to push for lighter regulations on financial services, agricultural products, data and access to public procurement tenders. Many of these conditions, if agreed upon, will make it harder to strike a comprehensive free trade deal with the EU.

UK-China Relationship Will Trigger USA Trade Tensions

Following the US, Germany, the Netherlands and France, the UK’s fifth largest trading partner is China, accounting for 5.2 per cent of UK total trade in goods and services in 2018. A closer relationship and a new free trade agreement with China might conflict with the ability to negotiate a free trade deal with the US under the current administration. The potential for these kinds of problems has already been demonstrated, after the UK has agreed to allow Chinese telecommunications firm Huawei to be involved in the construction of the 5G network. The official US line is that Huawei is under the influence of the Chinese government and poses a security risk.

The US is likely to push for lighter regulations on financial services, agricultural products, data and access to public procurement tenders.

A closer relationship and a new free trade agreement with China might conflict with the ability to negotiate a free trade deal with the US.

UK Trade with the UAE and Dubai – Past and Present

Despite the differences in their relative size and distance, the UAE and Dubai have been important trading partners with the UK with historic ties with trade far higher than would be predicted by a gravity model. In 2018, the UK exports[ref] to the UAE reached AED 50 billion (£10.5 billion) and the UK imports from the UAE amounted AED 31 billion. As result, the UK earned a trade surplus of more than AED 19 billion (£4 billion). Trade is expected to continue growing as the UAE economy continues to diversify. The Emirate of Dubai, with its liberal trade regime, is already a major global centre for commerce, finance, logistics and leisure and is a major entry route into the other Gulf Cooperation Countries (GCC) which acts as an important hub for re-export into these countries and beyond. As a consequence, it is to be expected, that the UAE will receive increased attention from British trade negotiators and businesses as the post-Brexit process evolves.

Uneven Bilateral Trade between UK-UAE

In the period up until the 2016 referendum on Brexit, the UK, as EU member, and the UAE saw a significant expansion in bilateral trade in merchandise goods. Official data from the UK’s Office of National Statistics (ONS) shows that the value of total trade (exports and imports) grew by 376 per cent from just over AED 9.5 billion (£2 billion) in 1999 to AED 45 billion (£9.6 billion) by 2016. Both countries benefited from this growth, but over the period the UK ran a consistent current account surplus with the UAE. In 2016, the UAE represented 2.2 per cent of the value of total UK exports, but the UAE contributed less than 1 per cent of the total value of goods imported. The UAE’s trade balance deficit with the UK has continued to rise and was over 41 per cent of total bilateral trade between the two countries by 2016 (Figure 1).

Figure 1: UK-UAE Trade in Goods (£ Million)

Source: Office of National Statistics, UK

Trade in Services: UAE Leading UK Trade Partner in GCC

The UAE is the largest trade partner with the UK in services within the GCC. In the first nine months of 2019, data from the Office of National Statistics (ONS) shows that the value of total trade in services (exports and imports) between the UK and the UAE totalled AED 27 billion (£5.58 billion) or 39 per cent of total UK-GCC services trade. Saudi Arabia was a close second with AED 23 (£4.83 billion) or 34 per cent.

In terms of exports and imports, the GCC region, including the UAE, has been running a persistent current account deficit with the UK in services trade. In the first nine months of 2019, the value of UK’s export of services to the GCC countries was AED 52.8 billion (£11.0 billion) while the UK imported services AED 15 billion (£3.14 billion) worth of services from the GCC region, producing a GCC deficit of AED 38 billion (£7.86 billion). Most of this deficit, 51.2 per cent, was due to an imbalance of trade between the UK and Saudi Arabia. Trade in services between the UK and the UAE is more closely balanced. In 2018, the UAE imported AED 19.7 billion (£4.1 billion) worth of services from the UK, but exported services worth AED 13.5 billion (£2.8 billion), resulting in a deficit of AED 6.2 billion (£1.3 billion). In the first nine months of 2019, the value of the trade deficit on services with the UK was only 9.0 per cent of the total GCC.

Growing Dubai-UK Merchandise Trade

Currently, the UK and Dubai are a significant trade partners in goods. Data from Dubai Customs showed that in 2018 bilateral trade with the UK accounted for 3.1 per cent of the value of Dubai’s imports and 1.4 per cent of its exports. In 2018, exports from the UK amounted AED 24 billion in goods to Dubai, which accounted for nearly half of the value of all UK exports to the UAE that year.

The relative importance of trade between Dubai and the UK has been growing. The value of total merchandise trade (imports and exports) between the UK and Dubai has grown by nearly 10 per cent from AED 23.4 billion  in 2015 to AED 25.7 billion by 2018. Over that period Dubai’s exports to the UK rose by 31 per cent in value while imports from the UK rose by just under 9 per cent.  However, trade between the two countries slowed in 2019, showing both Dubai’s imports from the UK decreased to AED 20.6 billion and exports to AED 1.6 billion. The balance of Dubai’s merchandise trade with the UK still shows a large current account deficit totalling AED 19 billion in 2019 (Figure 2).

Figure 2: Dubai total trade with UK (AED Billion)

Source: Dubai Customs

Dubai Advantages for Trade in Commercial Services with UK

Data on trade in commercial services are provided in a country’s balance of payments statistics and these are compiled only for the UAE as a whole, not just for Dubai. Nevertheless, a significant portion of the UAE services exports to the UK is likely to originate from Dubai. The Emirate has a comparative advantage in foreign trade in cross-border services in activities including transport (shipments, air transport and other transportation services), travel (including tourism), and other private services, such as brokerage, communication and financial services.

UK Foreign Direct Investment in Dubai

According to the Dubai FDI Monitor, Dubai has attracted from the UK more than US$ 4 billion (AED 14.8 billion) in Foreign Direct Investment (FDI) capital during the past five years (2015-2019). In 2019, the UK was the third largest investor in Dubai (after the USA and China), representing 10 per cent of all the FDI capital flow that entered the Emirate during that year. In terms of investment projects based on FDI capital, the 5 top sectors the UK invested in are: Accommodation & food services, management of companies & enterprises, non-residential building construction, Arts, entertainment & recreation; and Educational services; totalling US$ 3.4 billion or 85 per cent of all the FDI capital flow for the 2015-2019 period.

The lack of an existing agreement between the EU and the UK implies that if the UK fails to reach an agreement with the EU by the end of 2020, it is unlikely that there would be any specific negative effects on bilateral merchandise trade linkages between Dubai and the UK.

Post-Brexit Economic & Commercial Relations with the UK and UAE/Dubai

An expansion of future economic and commercial relations between the UAE, and by inclusion Dubai, and the UK will depend on the signing of a new free trade agreement  (FTA) covering predominately goods, services and investment. Since the UAE is a member of the GCC Customs Union, a GCC-UK FTA would replace the current situation whereby the UK has to trade on agreed terms by the relationship between the EU and the GCC Customs Union.

Post-Brexit Trade Scenarios for Dubai and UK

At present the EU and the GCC have no comprehensive free trade agreement in place, which provides an opportunity for a future agreement with the UK. In 1988 the EU and the GCC signed an Economic Cooperation Agreement and formal negotiations, which began in 1990, were suspended in 2008 and have not formally resumed. Nevertheless, trade ties between the UK and UAE are already strong, but a free trade agreement would simplify procedures and reduce the cost of doing business.

The lack of an existing agreement between the EU and the UK implies that if the UK fails to reach an agreement with the EU by the end of 2020, it is unlikely that there would be any specific negative effects on bilateral merchandise trade linkages between Dubai and the UK, apart from those resulting indirectly from a shock to global trade.

Services

Possible Post-Brexit Impact on Tourism

In 2019, Dubai received over 1.2 million visitors from the UK, 8 per cent of the total and the third largest group. One study provided evidence that a decline in the income of an advanced economy (including the UK) by 1 per cent would lead the number of tourists coming to Dubai to decline by 0.8 per cent.[ref]

The main channel through which a post-Brexit impact could be transmitted to Dubai is through the movement of the British pound against the AE dirham, which is pegged to the US dollar. For instance, in the case no agreement is reached between the UK and the EU, a weaker British pound is likely to impact Dubai’s services sector.

Pound versus Dirham Impact on Real Estate

Data from the Dubai Land Department shows that in 2018 UK nationals were the third largest investors in real estate acquiring AED 3.6 billion of property.[ref] The movement of the pound against the dirham would also impact the real estate sector. A weaker British pound as result of no trade agreement between the UK and the EU would negatively impact UK investments in Dubai’s real estate. However, this impact is likely to be muted by a more neutral effect from the British investors who work and reside in the UAE to the extent that they avoid sourcing their income in British pound (Figure 3).

Figure 3: UK Investments in Real Estate in Dubai, 2018 (AED Million)

Source: Dubai Land Department

Ongoing British Investment and Trade ties to Dubai/UAE

There are over 5,000 British companies operating in the UAE. This list includes BP, BAE Systems, Mott McDonald, SERCO, HSBC, John Lewis Partnership and Waitrose. Over 4,762 British brands have invested in the UAE and nearly 800 UK based commercial agencies operate in the UAE and mainly in Dubai. Trade ties are also strengthened by the existence of over 100,000 British expatriate residents in the UAE. For UK companies, Dubai will remain an attractive entry route into the GCC as an important hub for re-export into the Middle East region and beyond.

Datawatch

Brexit rivals: the cities competing for London’s crown

As the United Kingdom negotiates a future trade deal with the European Union, European capitals are competing to win financial business from London.

Chart below illustrates the City of London’s precarious economic advantage, based on a comparison of various costs of living in other world-class cities such as Dublin, Madrid, Milan, Amsterdam, Paris, Frankfurt and Dubai. These post-Brexit competitors will be vying to take London’s ‘crown’ as a location for international companies to maintain operations and attract employees.

The graph also shows that London is relatively more expensive in most factors deemed significant than all of its European rivals and Dubai apart from Paris in the prime office rent category and Milan, Dublin and Amsterdam in the cost of meals.

Brexit rivals: the cities competing for London’s crown (average costs)

Select the city to see the relevant costs

International primary school per year for one child (€)

Monthly rent for 3-bedroom apartment in city centre (€)

Price per m2 to buy apartment
in city centre (€)

Price per m2 to buy apartment outside of city centre (€)

Price office rent, Q4 2018 (€/m2 per annum)

Cost of a three-course meal in a mid-range restaurant (€)

4,000
19,000
1,500
4,000
4,000
16,000
2,000
9,000
300
900
40
60

SOURCES:
Numbers: Macrobond. FT graphic: Liz Faunce.

SOURCES FOR DUBAI:
• International Primary School: The average yearly school fees for one child (GEMS).
• Monthly rent for 3DR apartment and price per m2 (City Center and outside Dubai): Average price for Actual offers sample from Dubizzle in Dubai Marina, Downtown Dubai and Business bay for city center and Dubai land, RamRam for outside Dubai.
• Prime Office Rent: JLL - Annual report for UAE 2018.
• Cost of 3-course meal (Mid-range): Chili's restaurant menu.