Staying the Course: Brexit Uncertainties and the Fight for Free Trade

RECENT ELECTION RESULTS IN THE U.K. HAVE MADE IT EVEN HARDER to predict how Brexit negotiations will impact the future of free trade in Europe. Of course, there are endless perspectives on whether Brexit was a good idea in the first place, even among free trade enthusiasts who typically see eye to eye. While the media covers the big political stories, the important question for free trade advocates is how do we stay focused on a post-Brexit strategy that stands the best chance of ushering in a new era of increased free trade where everybody wins.

Matthew Elliott served as CEO of the “Vote Leave” campaign, which the U.K.’s Electoral Commission designated as the official pro-Brexit campaign. Elliott, who also earlier founded both the TaxPayers’ Alliance and Big Brother Watch, and now serves as a senior fellow for The Legatum Institute, pointed out that “Vote Leave” explicitly called for more free trade and migration from all over the world.

“There were some people who saw Brexit as being a closed-Brexit,” Elliott said. “They saw it as pulling up the drawbridge and retreating back into ourselves, and perhaps becoming more protectionist and having zero migration to the U.K. But there’s this other group of people who want to see an open-Brexit — those people who campaigned to leave. They wanted Britain to become more free-trading, to play a bigger role on the international stage, to have more free-trade deals, and to have controlled migration but migration across the world rather than just within the EU. And, thankfully, in the [months] since the referendum result, the people who were advocating the open Brexit have won out the day.”

Prior to the recent snap election, U.K. Prime Minister Theresa May had advanced this open-Brexit idea in speeches, Elliott pointed out, voicing support for continued trade and migration between Britain and EU members, as well as forging new agreements with other countries. Rather than an insular retreat into protectionism, Elliott explains, this opens new possibilities for the U.K. to become more of a global player.

Details of future arrangements are still uncertain, however, and it remains to be seen whether rhetoric can match reality, particularly as the new coalition government enters negotiations somewhat weakened. This, on top of the fact that prior to the election the European Court of Justice ruled that each individual EU parliament must agree to new international trade and investment deals, which creates a tremendous logistical hurdle for the U.K.’s post-Brexit ties to EU member nations.

AN UNCERTAIN FUTURE

As people try to plan for the future, this regime uncertainty limits their options.

“The moral impact is enormous,” said Gaspard Koenig, president of GenerationLibre in France. “Many EU nationals living in London for years and feeling at home there have been shell-shocked and now feel rejected. Many of them are planning to go back to their country of birth. This is a slow process, but anecdotal evidence shows it is taking place for real. The very basic engine of the U.K. economic growth is now at risk. Throughout the centuries, the U.K. made its fortune by leveraging the wealth and brains from the rest of the world. By shutting down, the country is about to let go of its most valuable resources — foreign cash and foreign skills.”

Navigating this uncertain future is also a problem for long-range business planning.

“It is likely that reaching a divorce agreement with the EU could be a long and difficult process,” said Eamonn Butler, co-founder and director of the Adam Smith Institute. “In the meantime, business faces great uncertainty. Costs could be high, as the EU is demanding ongoing payments towards existing programs and civil-service pensions. Universities fear that EU research grants could be cut. Exporters fear that the EU may impose punitive tariffs against the U.K. The financial services sector, one of the U.K.’s largest, fears that it will be kept out of EU markets. And ‘Remainers’ say that the U.K. would have a louder voice on the world stage as part of a bigger region.”

On the other hand, without EU oversight and interference in international trade deals, Butler explained, Britain may be able to open more opportunities than it loses.

“Free trade is the biggest opportunity,” Butler said. “Already, the U.K. is negotiating new trade deals with countries such as India, China, Korea, and America, as well as the British Commonwealth countries of New Zealand, Australia, Canada, and many more in Africa. If the U.K. is brave enough, it should announce that it will remove all tariffs and controls on goods and services from other countries. In the case of the poorer countries, that would cost almost nothing but would create a huge boost to their trade.”

Being brave and staying the course will be important now more than ever. Not least because extracting the U.K. from under the thumb of EU bureaucracy could also carry a wide array of other economic benefits, pointed out Mark Littlewood, director general of the Institute of Economic Affairs, as long as new trade deals and industrial policy don’t mimic the worst excesses of the EU system.

“Brexit provides us with a once in a generation opportunity to radically trim the size of the state and cut the regulatory burden,” Littlewood said. “The European Union, for all its internal free trade benefits, had become a regulatory straitjacket that harmed the U.K. economy. By leaving the EU, we now have the chance to roll back the regulatory burdens, which account for up to 71 percent of the regulatory burden in the U.K. economy, and take advantage of simultaneously leaving the Customs Union, which allows for freer trade with the rest of the world.”

This course of action is not a done deal, however, Littlewood pointed out.

“The risks are that we leave and do not do these things,” Littlewood said. “The risk is that once we leave we keep the worst elements of EU policy, such as replacing inefficient EU agricultural subsidies with inefficient domestic ones and automatically transposing all EU regulations into U.K. law, while using leaving as an opportunity to indulge in the government intervention that the EU prevented — putting added tariffs on Chinese steel, for example, or a major increase in state aid for failing companies.”

A HOUSE DIVIDED

The dangers of increased homegrown British regulation are very real, Koenig argued, and are too quickly brushed aside by Brexit supporters.

“The free marketers who thought the U.K. would become ‘free’ to further liberalize should now acknowledge the extent of their delusion by looking at the various parties’ manifestos,” Koenig said. “The State is back. The complexity of the hard Brexit wrongly chosen by Theresa May, with no mandate from the voters, is beyond any administrative task ever contemplated by a democratic government. From agricultural subsidies to scientific research to airspace regulations — and not even mentioning trade agreements — every single area of public policy has to be entirely rethought.”

Littlewood also worries about the prospects for free-market reform within Britain given the current rhetoric of its political parties.

Brexit has ramifications not only for the direction that Britain will take, but also for the EU itself. With the U.K. no longer playing a direct role in shaping EU policy, other member states may find it more difficult to keep the increasing bureaucracy at bay.

“Brexit will likely have a major effect across Europe, on everything from the euro to the contributions each nation makes to EU budgets,” Littlewood said. “There is a risk that once the U.K. leaves the EU, the position of those trying to move the EU away from a big-state regulatory organization and toward a looser free-trading organization will be significantly weakened — although possibly it will lead to a discussion about the future of the EU in which freedom-promotors across Europe might have a major role.”

Not all of those freedom promoters are so hopeful about their prospects after the U.K. leaves, in part because its absence will alter critical alliances of member states within the EU.

“For Sweden, Brexit is a disaster,” said Karin Svanborg-Sjövall, CEO of Timbro. “It dramatically shifts the balance of power within the EU, as the U.K. has always been the key member and spokesperson for the informal Nordic/Baltic alliance, which has stressed the need for structural reform and resistance to protectionist demands. Sweden has always counted on the U.K. to fight for free trade and the Single Market. Now, this group is left without a leader, leaving us in a much weaker bargaining position at the very point when the main direction for the project is being decided.”

Clemens Schneider, co-founder of Prometheus – The Liberty Institute in Germany, also worries about the regulatory direction that the EU may take without the U.K. to serve as a voice for deregulation and free trade.

“We deeply regret the Brexit vote because despite all its flaws the European Union still provides many safeguards for liberty, and the more countries that participate in this framework of free trade and free movement the better for everyone,” Schneider said. “Also, Britain has been a pivotal corrective in the debates inside the European Union countering the calls for more redistribution and regulation. Without Britain, we can expect an imbalanced discourse and subsequently a policy shift towards redistribution and regulation, maybe even the implementation of such things as European unemployment insurance. Overall, everybody lost by this decision, not least the British, since Prime Minister Theresa May seems determined to strengthen the state in every regard.”

CHARTING THE PATH FORWARD

Britain’s absence from the EU creates more space for new alliances, such as the announcement from French President Emmanuel Macron that he hopes to work “on a common roadmap for the European Union” with German Chancellor Angela Merkel.

“The U.K. government has not yet realized how little the Europeans care about their Brexit,” Koenig said. “The Macron-Merkel axis opens new arrays of issues and debates that will absorb all the energy of EU leaders and institutions. As a proponent of classical liberalism, I believe in multilateralism, not in nation-state bravado.”

Brexit sets a precedent, however, that the EU may want to avoid repeating with other countries. Although free-trade alliance countries within the EU may struggle to find their footing post-Brexit, the disruption could serve as incentive for the EU to adopt internal reform to discourage other defections.

“The best case scenario is that Brexit provides the wake-up call that the EU desperately needs — that we need to refocus, moving away from the grand plans of a federal union and back to the core: the four freedoms” – the free movement of goods, services, capital and labor – “and developing the Single Market,” said Svanborg-Sjövall. “We don't need a big welfare state on the national arena, and we certainly don’t need it on a pan-European scale.”

The best way to maintain the benefits of trade between Britain and the EU after the political bond is severed, Schneider argued, is to remember that free trade is beneficial to both sides while tariffs and other punitive measures can bring only harm. A “soft” Brexit would allow Britain to retain access to Europe’s Single Market and the customs union, but some argue for more of a “hard” break that would give Britain greater control over its borders and future international trade deals while having to renegotiate access to trade within the EU.

“It is of utmost importance that the Brexit is implemented as soft as possible,” Schneider said. “Especially the remaining countries and the European commission should resist the temptation of ‘punishing’ Britain. Even if the British government should decide in favor of a hard Brexit the EU should not ‘retaliate’ but rather choose to be soft unilaterally. Nobody benefits from a hard Brexit.”

THE FUTURE OF FREE TRADE IN EUROPE

It’s important for classical liberals in Europe to educate people about the benefits of free trade in general, Elliott argued, because protectionist sentiments are cropping up around the world — not only in several European parliaments, but even in both of the two primary political parties in the United States.

“I think we need to start making the case again for free trade,” Elliot said. “As a free-market movement, I think that’s an area we really need to focus on in the coming years.”

In the meantime, he said, it’s critical for the U.K. to negotiate a trade deal that allows its participation in the European Free Trade Association and the Single Market.

“I think the key thing is to make sure we get the EU/U.K. free-trade deal,” Elliot said. “Now, we already have perfect free-trade between the U.K. and the rest of the EU — you know, tariff-free, quota-free. We have the same regulations as the Single Market. So there’s no real reason why they shouldn’t just say: right, let’s just continue as we are now and keep that free trade going.”

For think tanks in the Atlas Network, particularly those in Europe, the Brexit roadmap to freer trade may seem murky, complicated, and uncertain. In the end, the naysayers may turn out to be right. In the meantime, and amidst all the political maneuvering, the opportunity remains for a chorus of voices to focus the Brexit debate on what is certain: freer trade, if we can achieve it, is a good deal for everybody.