After Brexit: Will an Economic Goodbye to Europe Mean Hello to the World?
As with any divorce, Brexit faces its greatest fear, pain and outrage in the initial legal wrangling. Since Britain’s June vote to break with the European Union (EU), a growing list of legal complications seems to have raised more uncertainties than loomed immediately after the results were tallied. It will take a while before anyone knows where Britain or the EU stand. But daunting as all this is, the success or failure of any separation depends less on the initial pains of the break than on how the principals pursue the rest of their lives.
This longer-term strangely has clearer prospects than the immediate future. Effectively, the country has two choices. Britain can continue to pursue the Europe-centered economic orientation it adopted when it joined the union over forty years ago. If it does, its economy will suffer all the disadvantages of dependence on Europe with none of the advantages of union membership. Alternatively, Britain can use its new independence to open itself to the world’s faster-growing economies more thoroughly than it ever could as a member of the EU. Should the country choose this path, its prospects would improve dramatically. It would also offer the world a wonderful irony indeed—that a seemingly inward-looking vote, mostly to secure what some would call a narrow national sovereignty, helped create a more thoroughly internationalized British economy.
The vote, of course, had little to do with either economic alternative. If exit polls and subsequent commentary are any guide, British voters considered economics and trade little. Constitutional matters dominated their concerns. They wanted to rid the country of EU dominance—the ability of the European Courts and the EU’s administrative structures to dictate labor, environmental and safety regulations, even law. British voters especially resisted the EU’s insistence that the country keep its borders open to migrants from any union member. Even if British jurists, bureaucrats and representatives would have made the same regulations and laws as Brussels, which is not unlikely, voters clearly wanted the decision made in Britain under British procedures and not by the EU. Those who voted for exit and acknowledged the economic costs of separation saw them as an acceptable price to pay for constitutional principle.
Those costs have now become clear. Until the UK secures new trade agreements with EU members, it seems poised to lose a portion of its huge trade with the continent, half the total at last count. Now that the EU no longer represents British trade to the rest of the world, the economy also stands to suffer until it can secure its own trade agreements with nations outside the EU, including with economic powers such as the United States, China, India, Australia and Canada. Because Britain will no longer have easy access to the huge continental market, it will suffer further as third parties, notably Korean and Japanese interests, rethink their previous practice of using Britain as a base for Europe-wide operations. Perhaps most troublesome is the potential squeeze on Britain’s dominant financial and business services sectors, more than 10 percent of the UK economy. With exit, this sector will lose the ability to serve clients freely throughout Europe, what the EU calls passporting. Many firms in the area, unwilling to wait for new arrangements, have already formulated plans to move parts of their business out of London onto the continent to the immediate detriment of British employment and income.
Estimates of how much economic damage the country will suffer vary from minor to devastating. Her Majesty’s Treasury, noting that exports of goods and services constitute more than a third of Britain’s economy, has calculated that exit could cost it some 7.5 percent in real income between now and 2030, about half a percent of growth a year. Those on the “leave” side have come up with more moderate estimates, while some on the “remain” side have arrived at more frightening figures. Much depends on how quickly London can make new trade arrangements with the rest of the world and the EU, including passporting facilities for its financial sector. In the interim, however, much should mitigate the worst of these effects.
For one thing, Britain has become less dependent on European business in recent years. Some ten years ago the EU absorbed about 12 percentage points more of the country’s trade than it does now. Nor would the absence of agreements impose tariff barriers as onerous as it once might have. With no special arrangements, EU-British trade would fall under what the World Trade Organization calls “most-favored-nation” rules. Tariffs under these have already fallen to only 4 percent on average, well down from 7 percent twenty years ago and nearly 10 percent before that.
Promising to mitigate Britain’s economic strains further is the clear need of continental European business to sustain trade. The British market absorbs almost 8 percent of German exports, over 7 percent of French exports, over 5 percent of Italian exports and almost 10 percent of exports from the Netherlands. Business leaders in these countries hardly want to lose even a portion of this business. Other impediments notwithstanding, these economic interests will push hard to protect such sales by clarifying trade relationships as quickly as possible.