Membership in the European Union has obvious benefits from a free-market perspective. It facilitates a tremendous level of trade and labor mobility, allowing resources and people to flow to more productive uses and generate new wealth and prosperity. Unfortunately, the increasingly centralized, bureaucratic, and regulatory approach of the EU toward its member nations also provides serious drawbacks. On June 23, the United Kingdom passed a voter referendum to withdraw its membership, a controversial “Brexit” from the EU that the London-based Institute of Economic Affairs (IEA) has followed and studied closely from the proposal’s inception.
“Today’s vote to leave the European Union presents the UK with a great and exciting opportunity to look outwards to the rest of the world, to take a more internationalist approach and move towards a position of free trade on a global basis, with the EU but also beyond it,” said IEA General Director Mark Littlewood. “The UK government must now prioritise securing a mutually beneficial trade deal with the EU and outside the EU, taking the first step towards a more independent and global future.”
The day before the referendum, IEA researchers Phillip Booth and Ryan Bourne released a report that carefully analyzed both the benefits and drawbacks of both potential futures following the “Brexit” vote. The authors note that Nobel laureate economist Friedrich A. Hayek had written in potential support of the idea that an economic union of states could promote both prosperity and peace.
“The theory was simple,” Booth and Bourne wrote. “Nationalist interests were the biggest threat to economic liberty. A federation comprised of a zone with rules eliminating tariff barriers and instituting freedoms to move and trade would increase prosperity through gains from trade, increasing interdependence and providing more resources to protect from outside threats. Importantly, a federation would prove a strong counterweight against nationalist protectionism. The banning of tariffs and the discipline of internal competition created through states being able to vary their tax and regulatory systems would prevent and deter governments using national interest arguments to justify protectionism or intervening too much in economic activity.”
Although this Hayekian vision has proven true in some respects, the report explains that this ideal of economic freedom has been increasingly undermined over time, as the politicized EU bureaucracy molds and shapes international markets through uniform centralized regulation rather than reducing trade barriers across the board — at the same time taking power away from politicians who are more directly accountable to voters.
“Perhaps most pertinently for Hayek’s vision, the centralisation of regulation creates pressure in several ways for higher levels of regulation overall,” Booth and Bourne continued. “The institutions of the EU all have an incentive to promote centralisation as this increases their power. … This centralised power to regulate, underpinned by a social democratic view of the nature of competition, has also led to more frequent calls for process regulation to prevent some states from ‘undercutting’ others in areas such as workers’ rights. Far from just ensuring freedom of trade, the EU has broadened its scope, not least through Court decisions, to try to ‘level the regulatory playing field’.”
This EU project of “harmonizing” regulations between different countries hampers competition and subverts the innovative potential of entrepreneurial markets. Economic conditions, local cultures, and available resources can vary widely between countries, so a uniform regulatory system can prevent countries from learning what works best for them through their own market discovery process and through comparison with other international markets.
“Regulation that is appropriate for one country may not be appropriate for another,” the authors noted. “Regulation, by necessity, has to be more complex if it is to cope with widely varying situations.”
Although the politicized debate over the referendum has often tried to paint the “Brexit” as isolationist, insular, and protectionist, University of Geneva economist Frank Hollenbeck explained in a recent commentary for the IEA that EU membership is not necessary for the United Kingdom to trade and engage with international markets.
“Trade restrictions and capital controls are no longer a countries’ choice: either you participate in the world economy or accept living standards equivalent to that of North Korea or Venezuela,” Hollenbeck wrote. “So the issue is NOT whether the UK will continue to trade mostly freely with the EU: it will, because today there is no other choice, and the same is true for the other countries of the EU. Despite French threats of a ‘bloody’ Brexit, Germany, which runs its second largest bilateral trade surplus with the UK, has little interest in starting a trade war, nor do most of the private interests in the rest of Europe.”
Now that the United Kingdom has voted to leave the EU, there are two primary courses of economic policy that it can follow, either becoming more protectionist or more liberal in its global economic stance.
“In the long term, the UK should seek to move towards a position of free trade on a global basis, rather than attempting to obtain it through a series of bilateral arrangements with others or operating within the protected EU customs union and Single Market,” Booth and Bourne wrote. “This is something the UK should push for at a global level through its independent seat and membership of the World Trade Organization. But Britain should anyway lead by example by declaring unilateral free trade — stripping away all domestic tariffs from both EU and non-EU countries. This would deliver reductions in consumer prices, and a recalibration of the economy towards currently unprotected areas, enhancing productivity as Britain trades in areas of significant comparative advantage.”