Geopolitics and doing business in Hong Kong and China.

I am often asked by people who pick up on my English accent about the UK’s decision to leave the the European Union and what it means for the country as a continuing base for operations in that part of the world. This blog attends to political issues and then moves onto business – please bear with me!

To be upfront, If I had had a vote – and no Briton living overseas had that opportunity – I would have voted to remain. To me, the benefits of having closer links with the EU was always a good idea and I even felt that a closer union would be a good thing too. From my view, since the 1956 Suez Crisis, the UK ceased to have the level of independent action that it had as a world imperial power on entry to World War 2. This middle power status also has implications for how it can grow economically.

There are undoubted problems with how the EU works and the need to better attend to the democratic deficit is but one. This has only been partially addressed by the European Parliament and the Council of Ministers, but the evolving disruptive behaviour of Russia and the rise of China means that Europe needs to act together. The EU to me was always work in progress and the UK could have continued to play a strong part in that evolution.

For leaver friends, however, this ever-closer union is claustrophobic and restrictive of sovereignty with the economic benefits of being trading globally offsetting any loss of economic access to the EU. Geopolitical issues never seem to form part of their thought as is evidenced by the lack of consideration of the potential for a border in Ireland, or the regional weakening of Europe. I have to say that I don’t believe the economic fall out will be a catastrophe if Britain has an orderly exit, but I do not think, either, that free trade will be quite the Nirvana many think it will be.

Brexit must occur. David Cameron held a referendum but never thought much about its structure which was of an advisory form with a simple majority. As a result, the die was cast for a major split in the country. The people, however, believed they were making a decisive vote and it is for parliament to now resolve both sides to an exit that can accommodate all sides. A huge challenge indeed.

There is no doubt that if remain had won then the leave side would have argued just as strongly that the result was not conclusive enough. But, that’s just politics for you. Other countries that use referenda for constitutional change have either super-majorities or a confirmatory second referendum to ensure the people are happy with the outcome. This didn’t happen in the UK and it is this poor mix of direct and representative democracy that is at the core of the political mess that is now facing the country. The current battle between the Executive and Parliament has strong echoes with the 17th century tussles between the monarch and parliament – and that took a civil war and later Dutch invasion to settle matters.

A simple referendum is a winner takes all result which means the minority is expected to accept the outcome regardless of their views. In representative democracy the parliamentary legislative process, through amendment to bills, aligns some of the interests of the ‘winners’ and the ‘losers’. The absence of this process with referenda means that the current ‘one person one vote once’ outcome has angered a very large minority: 52:48 has the feel of a close rugby score but for a democratic country, creates division. Furthermore, people are asked to ‘believe in Brexit’ and this has added to the cultish nature of the debate. All this would have also happened had remain won – it is also the very nature of the debate and the problem facing the country.

The above outline of the political environment is necessary to understand what is happening. With any strategic assessment of a market, carrying out a PEST (political, economic, social, and technology) review can be useful. For the UK now the P has become an area for essential study.

But, should you invest in the UK? There are three answers: Yes, Maybe and No.

Yes:
If you are focused on the UK as a market, or, maybe, want to pick up an undervalued business, there will be continuing opportunities in the UK. Although recent IMF analysis has suggested that the UK will slip in PPP (purchasing power parity) terms to around 9th in comparative GDP rankings in 2019, following Indonesia and Brazil. It is, however, still a developed and sophisticated market with a GDP valued at around $3 trillion. For Australian companies, there are some benefits in terms of culture, language and common law that makes the country attractive as an investment destination. However, the recent experience of Wesfarmers acquisition of Homebase shows that taking some of this for granted, particularly regarding retail culture, can be costly. A recent conversation I had with a smaller business also suggests that finding the right agent and distributor can be fraught with challenges, too. Australia is likely to be one of the first to settle an FTA and as the UK will be keen to agree this quickly, the outcome could be engineered to Australian (or other country) advantage.

Maybe:
Even outside Europe there may still be good reasons to be based in the UK. It is likely that some form of deal will be done – although at the time of writing there seems to be a fetish taking hold to ‘crash out’ (remain view) or ‘have a clean break’ (leaver view). If there is an agreement with the EU, and if the pound continues to fall and compensates for any new tariffs, it may still make sense to be based there. This is a tenuous argument as the prudent thing to do is to consider how long the post Brexit adjustment will take to stabilise. There is no rush to enter the UK market before you are clear on how these matters evolve and, in the meantime, you could conduct deeper analysis in preparation.

No:
If you are looking to Europe as a core trading strategy, then it would clearly make sense to base yourself in an EU country. For an anglophone country like Australia, you have several choices. English and common law regimes exist in Cyprus, Malta and the Republic of Ireland and all three would make a useful services base. They all suffer from not having direct links to the continent of Europe which means that trade in goods could be challenged, but if you are a physical goods trader or manufacturer I would tend to go for the Netherlands. Here they speak English better than most first language English speakers and it is very easy for expatriates, consequently, to be based there. It also has great logistic hubs in Rotterdam port and Schiphol airport with fast motorways connections across Europe.

There are many other countries that would make a suitable base and your choice needs to consider where you see the European opportunity. Developing any foreign investment strategy requires full analysis of all aspects of the market characteristics and how they suit your product offering, together with a clear idea of the cost of implementation to ensure that the overall business benefit is achieved. In the world today considering local politics and broader geopolitics has never been more important. The UK will continue to offer opportunities, but the argument is less compelling now that they are distancing themselves from their closest market.


Gary Garner

Gary is a senior executive, management consultant and corporate adviser. His extensive international business experience and technical knowledge enables him to achieve strategic change for clients with an international focus and advise business leaders on new market entry. Gary has special expertise in advising on financial feasibility; market analysis; corporate and project finance His preferred areas of geographic focus are China and the Middle East and he works across a range of industries with clients in Hong Kong, Shenzhen, Wuzhen-Tonxiang and Dubai.

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