Why Brexit is (Still) a Bad Idea

The United Kingdom is going to leave the European Union (EU). The facts being created on the ground all point to that conclusion. Nevertheless, it is still worth pointing out that that a British exit from the EU (or ‘Brexit’) is a bad idea. There are many reasons Brexit is bad. The most important is that the campaign for leaving the EU rested on a fundamental misunderstanding of international trade.

Brexit supporters hoped that leaving the EU would offer two advantages. They could set their own regulations in Westminster rather than having to accept rules made in Brussels. And they could negotiate free trade deals with Europe and the rest of the world that more protectionist countries like France were reluctant to pursue. Both claims show an outdated understanding of global trade.

The major distortions in global trade markets have little to do with tariffs and quotas, particularly when we are talking about trade between advanced industrial economies like those found on both sides of the North Atlantic. Instead, most of the major trade issues deal with regulations — for product safety, environmental protection, worker rights, market competition, intellectual property, and quality assurance.

This distinction between traditional trade barriers and regulatory obstacles is important for how any one country interacts with all the rest. The reason is simple: countries can discriminate with tariffs and quotas because they take place at the ‘border’ between any two countries. By contrast, regulations are indiscriminate because they have to be applied beyond the border where the products are made or the services are provided.

To see this in practice, consider a country like Singapore. The United States can trade freely with Singapore in the traditional sense of having no tariffs or quotas on transactions between the two countries. Yet that tells you very little about what happens inside either country or how either country relates to the rest of the world. That is the scenario the pro-Brexit camp imagines for the United Kingdom outside the EU.

If we think in terms of regulations, however, the relationship between the United States and Singapore is very different. U.S. regulators have little or no interest in changing their practice to meet the requirements to enter into Singapore. The market in Singapore is too small, the cost of changing regulations for U.S. manufacturers is too large, and the implications for accessing other more important markets are too great to make any kind of regulatory convergence worthwhile.

For Singapore, however, the situation is different. Singapore regulators have a strong interest to encourage (convince, compel, require) domestic manufactures or service providers to do whatever it takes to penetrate U.S. markets. Moreover, that same logic applies to many other small countries. As a result, doing whatever is necessary to penetrate the United States is likely to make it possible to enter other markets as well. The adjustment to U.S. rules may be expensive, but the payoff is high enough to warrant the effort.

This illustration yields two insights. The first is not only that relative size matters more when we are talking about regulation than when we talk about tariffs and quotas, but also that the logic of relative size is totally different. Small countries can be ignored in both cases. But where ignoring small countries made it easier to promote free trade in the old agenda related to tariffs and quotas, relative size means that small countries have to adopt the regulations written in larger markets under the new agenda.

The second insight is that politicians hoping to have some influence over the regulations that define global trade have to have a voice in the regulation of larger markets. This is important for British voters who care about protecting the rights of workers and consumers, preserving the environment, promoting intellectual property rights, and all the rest. Without that voice in large markets, any influence is lost and what we think about as domestic ‘autonomy’ boils down to a question of trade-offs in terms of access and adjustment costs.

These insights are fundamental but they are not new. In fact, this argument lay at the heart of the project to relaunch European integration in the 1980s. It explains why Margaret Thatcher was such an advocate of completing Europe’s internal market. It has been an increasingly important theme at the global level through successive rounds of multilateral trade talks. When those talks became too complicated, this argument was used to launch negotiations for a transatlantic trade and investment partnership between the United States and the European Union.

Brexit is a bad idea because it takes British policymakers out of the regulatory conversation — both within the EU and across the North Atlantic. It makes Britain like Singapore. But that is a 20th Century model for success that is ill-suited to the 21st Century. Singapore can tolerate that fact because it has a strong domestic government that is accustomed to making difficult trade-offs. Singapore also does not have a choice. By contrast, the political constitution of the United Kingdom is ill-suited to making difficult trade-offs and British governments have a bad track record for building competitive industries at the expense of local autonomy. The UK also has a better alternative in the form of EU membership.

Rejecting that alternative was a mistake.

This essay was original published as part of a debate organized by John Kiernan for Wallethub.  You can find the original posting and the rest of the debate, including contributions from Harold James, Thomas Schwartz, and others, here.

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