Bully for Brexit

Benjamin L. Woodfinden
March 22, 2018
The one year countdown to Brexit has begun, and mostly unenthusiastic negotiators for the EU and the UK are trying to come up with an arrangement that minimizes the economic and political pain. Their work is complicated by the revival of a Cold War with Putin and a Trade War with Trump. Be that as it may, writes Ben Woodfinden, Brexit has the potential to revive Britain as a model global free trader and alternative to both suffocating supranational bureaucracy and rampant populist protectionism.

Bully for Brexit

Benjamin L. Woodfinden
March 22, 2018
The one year countdown to Brexit has begun, and mostly unenthusiastic negotiators for the EU and the UK are trying to come up with an arrangement that minimizes the economic and political pain. Their work is complicated by the revival of a Cold War with Putin and a Trade War with Trump. Be that as it may, writes Ben Woodfinden, Brexit has the potential to revive Britain as a model global free trader and alternative to both suffocating supranational bureaucracy and rampant populist protectionism.
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In just over a year, the United Kingdom will formally depart the European Union. While this has obviously created a huge rift between Britain and the mainland, as Aristotle observed, “a common danger unites even the bitterest of enemies.” Moscow’s recent escalation of deadly Cold War spycraft in London should remind Britain and her European allies who their real friends and foes are, which may help smooth the Brexit process.

Depending what political bubble you live in, Brexit represents either a welcome restoration of sovereignty and democracy, or a disastrous revival of protectionism laced with ethnic nationalism. Either way, it’s a unique opportunity to chart a new course for Britain. The result matters not just for Europe, but for the whole world. As US President Donald Trump escalates his assault on the international trade system, the way Britain redefines its relationship with Europe could create a new model for international trade agreements that lies somewhere between full-on globalization and rampant protectionism.

The narrative that has emerged since the start of negotiations last year is of a binary choice. The so-called “hard” Brexit would see the UK completely depart the Single Market, a central pillar of the European Union. The Single Market is a harmonized economic zone that not only eliminates tariffs and quotas but also ensures the free movement of goods, services, capital, and people among all members. Brexit naysayers insist leaving will be an economic disaster for Britain.

A carefully leaked government impact assessment in January claimed that leaving the Single Market and reverting to WTO trade rules would cut GDP growth by 8 percent over the next 15 years. A poll of economists conducted by Ipsos found that 72 percent expected a negative impact on UK real GDP over the next 10 to 20 years, while just 11 percent anticipated a positive impact.

Julian Jessop, chief economist at the Institute for Economic Affairs, has said that “lots of sensible Brexiteers accept there will be a short-term hit and it is unarguable that the economy is weaker [today] than it would have been, I would say between 0.5 and 1 percent weaker. As for the longer term, it’s all to play for. Brexit creates lots of opportunities; it is for the government to make the most of them.” Jessop has backed an alternative Brexit analysis that sees potential to positively reshape Britain’s long term economic outlook.

One option for a “soft” Brexit would see the UK become a member of the European Economic Area, along with Iceland, Lichtenstein, and Norway. This provides near-full access to the Single Market, but comes with an obligation to accept the free movement of persons. This seems a political impossibility in Britain. An exit poll after the 2016 referendum found that 33 percent of Leave voters said the main reason they voted for Brexit was because it “offered the best chance for the UK to regain control over immigration and its own borders.” Prime Minister Theresa May has since made clear that “free movement of people will come to an end” once Britain leaves.

Proponents of a soft Brexit have increasingly turned to the option of leaving the Single Market but remaining in a Customs Union with the EU as an alternative option. A Customs Union is an arrangement between countries who agree not to impose tariffs on each other’s goods, and agree to impose common external tariffs on goods from countries outside the union. This has appeal because it would allow the border between the Republic of Ireland and Northern Ireland to remain frictionless.

But British Conservative Member of the European Parliament and prominent Brexiteer Daniel Hannan has argued that “staying in the Customs Union after Brexit would be a disaster for Britain’s trade.” Members of a Customs Union are obliged to negotiate collectively with non-members and cannot negotiate their own trade deals. This means that any deal Britain negotiates with non-EU members would have to consider not only Britain’s interests, but the interests of all 27 EU member states. The UK would have to impose common EU tariffs on goods it does not produce domestically, such as bananas. The current EU tariff on imported bananas is 10.9 percent, which obliges Britons to pay more for a product that must be imported – to protect EU banana growers in places like Spain. Chances are a grocery shopper in Ealing would call that, well, bananas, especially since EU regulations governing the size and shape of the fruit were loudly ridiculed by Leave advocates during the referendum campaign.

The main economic argument for leaving the Single Market is that it allows Britain greater access to the global market. The EU is not a free trade zone. While it has zero barriers to trade internally, it imposes relatively large barriers to trade outside of the union. If the UK remained in the Customs Union it would be obliged to impose the external EU tariffs, which would make it very difficult to negotiate trade deals with non-EU states. Moreover, it would also be obliged to enforce EU common standards and regulations, such as the ones governing “bendy bananas”. The UK would not be able to negotiate these standards with non-EU members, because it is bound to them by its membership in the Union. In other words, membership in the Customs Union would be very far removed from anything resembling an independent trade policy for Britain.

A third, better, way  

The best choice for Britain is neither a hard nor a soft but a “clean Brexit”. This would restore British sovereignty and free it from the clutches of unelected Eurocrats. Operating outside the Single Market and the Customs Union, Britain would enjoy the regulatory and legislative autonomy needed to forge a new economic relationship with the rest of the world. One of the biggest problems with Whitehall’s gloomy post-Brexit outlook is that it did not allow for the possibility of a new UK-EU FTA, and a significant reduction in barriers to trade with the rest of the world.

When Britain joined the European Economic Community in 1973, it appeared that international trade was evolving towards several large trading blocs. Joining the EEC gave Britain access to what was at the time the single largest bloc. Today, however, the global economy is far more integrated, and the relative importance of the European bloc is declining. The EU’s share of global GDP has fallen from 30 percent in 1993 to 22 percent in 2016. The rise of China and other emerging markets has flattened global distribution of GDP.

Even as a member of the EU, UK trade is increasingly trending towards other markets. British exports to non-EU countries have grown on average by 6.5 percent annually since 1999, while trade with the EU has averaged less than 4 percent growth over the same period. The proportion of UK exports destined for the EU has dropped from 54.8 percent in 1999 to 44.6 percent in 2014. A clean Brexit will allow Britain to accelerate this shift. An FTA with the EU would still give Britain access to the Single Market, and both partners would have strong incentive to reach a deal that maintained current trade flows. There has also been talk of new agreements with Canada and the United States, to mitigate potential negative impacts of Brexit.

Overall, global trade has become much freer and fairer in the post-war era. First under the General Agreement on Tariffs and Trade, and later through the World Trading Organization, tremendous progress has been made in the reduction of protectionist tariffs and non-tariff barriers to trade. Assuming President Trump does not want, or could not singlehandedly orchestrate, a return to mercantilism, Britain should be able to transition to greater independence from the EU and greater interdependence with the wider trading world, without major economic disequilibrium.

As Jessop has pointed out “the UK’s departure from the EU is a once-in-a-generation opportunity to create a more open and dynamic Britain, adopting policies that better suit our own economy. It would therefore be wrong to place a lot of weight on the results of disputed Whitehall modelling that does not grasp fully the changing global economy and opportunity that lies ahead, and which suggests that the level of GDP might be a few percentage points lower over a period when the economy could otherwise be expected to grow by around 30 percent.”

Reclaiming sovereignty and democracy   

A clean Brexit would also disentangle Britain from a profoundly undemocratic supra-national organization. In theory, there are four key EU institutions: the European Commission, Parliament, Council and the Court of Justice. Each institution supposedly represents separate interests. The Commission represents the EU, the Parliament represents the people of the member states, the Council represents the Governments of the member states, and the Court interprets the law.

However, nearly all real power in the EU resides in the Commission, which is comprised of one appointed representative from each member state, atop an enormous bureaucracy. Parliament may request the Commission draft legislation, but the Commission can refuse to do so, and in practice the bureaucrats generate virtually all EU legislation, with the Parliament serving as little more than a rubber stamp.

The Commission’s power has centred on economic regulation, although it has recently moved into creating criminal law. Eurocrats have also contemplated the creation of an eventual European army, presumably under the command of the Commission. Fully one-sixth of British law now originates in Brussels, a trend which inspired one English judge to liken the flood of legislation from Brussels to London to “an incoming tide that flows into the estuaries and up the rivers.” That doesn’t include some 12,000 EU regulations that are not yet directly codified into British law (and will cease to apply once Brexit formally occurs).

Britain’s stubborn refusal to give up the Pound for the Euro was widely derided as an economic disaster in the making by many of the same politicians who warned against voting Leave. The argument for the move was that monetary union reduces exchange rate uncertainty and lowers transactions costs which leads to the easier flow of capital, goods, and people, which in theory increases productivity and prosperity. However, monetary union denies members of the Eurozone monetary tools to deal with domestic economic problems, like using interest rates to address inflation or unemployment. Eurozone members have diverse economies, and the European Central Bank has found it impossible to create a one size fits all approach that works for all Eurozone members, as many Greeks and Italians would attest. In hindsight, the British decision not to join the Euro was a wise one. Someday the decision to opt out of the union entirely may look equally prudent.

In an April 2017 column for The Week headlined “Why America Should Envy Brexit”, writer Michael Brendan Dougherty contended that “Brexit gives the United Kingdom a chance to do something that only comes after a disaster like war or worldwide depression, a mandate to scrape away the obsolete statutes and political cruft that accumulates for decades in any modern administrative state.” His point was that Brexit could make Britain great again in a way that Donald Trump could only dream of.

Indeed, the opportunity to simplify and deregulate has the potential to be an enormous boon to the British economy. This would ensure the UK is still an appealing place for foreign investment and help London retain its dominance in financial services. Britain could emerge from Brexit as the global beacon of economic liberalism envisioned by the likes of Adam Smith and Richard Cobden.

Unfortunately, it is looking more and more likely that Britain will end up in some sort of soft Brexit arrangement. Theresa May’s disastrous performance in last year’s election has limited her credibility and authority, leaving her attempting to please everyone while likely pleasing no one. Vladimir Putin may be handing her an opportunity to reverse course and emerge as the second coming of the Iron Lady that many had hoped for, but she seems as likely to fumble that as she did the opportunity to seize an ambitious Brexit strategy.

More’s the pity because a clean Brexit could provide an alternative model for western democracies looking to dampen the rise of mindless populism, in both its left and right guises. The return of sovereignty to Westminster could give British citizens a real chance to have their voices heard in the halls of power once again, and help make economic liberalism a system that works “for the many, not the few.” Because of the fundamental strength of its institutions and its founding principles, British soft power will endure regardless of the outcome of Brexit; its schools will still attract the brightest minds from across the world, and its cities will continue to be sanctuaries for rich and poor immigrants seeking civility, security, and stability.

The emergence of Britain as a global power was in part a result of the unique institutions and norms that developed over the centuries into a political and legal system that have been replicated across the globe. The Westminster and common law systems have proven to be remarkably successful and enduring ways of governing society. The European project is the antithesis of the British model. It represents the triumph of technocratic absolutism in which a toothless parliament is made subservient to unelected foreign technocrats.

In the lead up to the American Revolution, Edmund Burke castigated his colleagues in parliament for forgetting the rights and privileges the colonists were entitled to as inheritors of English customs and traditions. Rights for Burke were not metaphysical abstractions, they were an inheritance “working after the pattern of nature, we receive, we hold, we transmit, our government and our privileges, in the same manner in which we enjoy and transmit our property and our lives. The institutions of policy, the goods of fortune, the gifts of Providence, are handed down, to us and from us, in the same course and order.”

History may one day judge Brexit as a repeat of the Glorious Revolution in which Britons reasserted the supremacy of the ancient laws and liberties that Burke called the “rights of Englishmen.” This revolution was a bloodless rejection of the Hegelian centralization and groundless metaphysical abstractions that are at the core of the modern European project. Progressives see this as a step backwards, but as C.S. Lewis so eloquently put it “if you’re on the wrong road, progress means doing an about-turn and walking back to the right road; in that case, the man who turns back soonest is the most progressive.”

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