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Britain's Brexit Challenge Gets Harder—and It's Britain's Fault

Leaving a regional trade bloc is much more difficult than entering it, as the United Kingdom is finding out. The European Union (EU) has integrated itself so much into the everyday workings of British commerce that extracting the country from the web is proving a huge challenge for Prime Minister Teresa May’s government. So much so that the adoption of a document setting out the Prime Minister’s stance provoked the resignations of the foreign and Brexit secretaries and several ministers.

Unfortunately, it appears that the UK government is trying to have the best of both worlds, something that is likely to be unacceptable to either the European Union or to “Leave” voters and their champions in Parliament. This is precisely the situation Rory Broomfield and I warned about in our paper on post-Brexit policy, Cutting the Gordian Knot.

For instance, on regulation, the government would like to maintain very close alignment on regulation of goods—by adopting essentially the whole of the EU’s regulatory requirements—while maintaining a looser relationship on services, with greater regulatory variation, especially on financial services.

Not only is this jettisoning one of the great benefits of Brexit—resulting in the ability to vary regulatory standards—but it is likely to be wholly unacceptable to the EU, which has said bluntly, “Preserving the integrity of the Single Market excludes participation based on a sector-by-sector approach.” Moreover, the EU will not cede any lessening of authority of the European Court of Justice in relation to interpretation of its rule book.

Such a supine adoption of the EU rule book would make a free trade agreement between the UK and U.S. extremely difficult. The great benefit there would be in mutual recognition of regulatory systems, leading to regulatory competition that could improve both parties’ rulebooks. With the EU retaining control over Britain’s regulations, the scope for that benefit is lessened.

The white paper also proposes a novel institutional arrangement for the collection of customs duties, whereby the UK would act as a tax collector for the EU for no discernable reciprocal benefit. However, given the lack of control the EU would have over these arrangements, it is again unlikely that the EU would agree to them.

Other proposals, such as the idea that the EU should maintain membership of arrangements overseen by the European Court of Justice or that there should be little change to immigration from the EU, are just as likely to be unacceptable to “Leave” voters.

If the white paper is a negotiating position, it is a poor one. As Daniel Hannan MEP notes, “If the EU insists on imposing harsher conditions than these—full customs union membership, acceptance of all social and environmental standards, perhaps a mechanism for the automatic harmonisation of future laws—then the calculus would change.” Given the EU’s stated negotiating position, this is a virtual certainty. As Hannan goes on, “No deal would be better than what would unquestionably be, in those circumstances, vassal status.”

There were only ever two viable options for Britain to leave the EU:

  1. The “EFTA/EEA option,” whereby Britain would remain bound by EU regulations but leave the Common Agricultural and Fisheries Programs and regain control over foreign trade deals; and
  2. The “Clean Brexit” option, whereby the UK would leave the EU entirely and then negotiate a free trade deal with the EU as a third party.

The EU always anticipated the latter route, and made no special arrangements in advance of the trade deal. Prime Minister May’s attempts to create a halfway house were always going to bear only bitter fruit.

Preparing for Clean Brexit would require a wholly different set of policies than the ones the UK government is currently pursuing. They are the ones Rory Broomfield and I recommend in Cutting the Gordian Knot: substantially reduced regulation, a market-based immigration system, unilateral free trade, and truly free markets in agriculture and energy. Such a transition from the EU’s system would come with the costs we noted—an economic shock leading to high unemployment before a sharp rebound as the new free economy of a truly global Britain took off.

It is incumbent on the UK government to warn the public about these costs and promote the benefits of free market policies, but it appears it has neither the appetite nor the energy for either.

Instead, it looks like the UK will leave the EU and become a third party with no preparation whatsoever, leading to a sustained economic slump. The dread specter for free marketers after that is that British voters might turn to a Labour Party led by Jeremy Corbyn, who appears eager to turn Britain into a North Atlantic Venezuela.

There is still time for Britain to get a grip and appreciate the realities of the situation it faces, but it is rapidly running out.