11 November 2015

Concerns over Brexit are not scaremongering

By Dalibor Rohac

Few sayings encapsulate the attitude of British Eurosceptics towards the European Union better than Groucho Marx’s maxim: “I don’t want to belong to any club that would have me as a member.” Witticisms, however, are rarely a good guide to action, especially in a world where no political arrangements, domestic or international, are perfect.

The Heritage Foundation’s Nile Gardiner – probably the most outspoken representative of the British Eurosceptic tradition in Washington – is irked at the latest instance of what he sees as “the meddling by the Obama administration in the internal affairs of the British people.” In a recent article at CapX, he lambasts Michael Froman, the US trade representative, who recently warned that following a potential Brexit, the UK would likely face the same barriers in accessing US market as other countries without a free-trade agreement with the United States.

“The idea that the United States would not sign a free trade agreement with its closest friend and ally, the world’s fifth largest economy, is ludicrous,” responds Mr Gardiner. But is it? It may be worth recalling that, notwithstanding years of negotiations, the United States has not yet signed a free-trade deal with the world’s largest economy and arguably the world’s most significant community of liberal democracies: the European Union.

The reasons are not difficult to comprehend. As tariff barriers and other conventional forms of protectionism hit historical lows, their removal is becoming more and more irrelevant to genuine trade liberalisation. The United States, for example, maintains an average applied tariff rate of just 1.5 percent.

Markets across the Atlantic won’t become more integrated merely by the stroke of a pen abolishing tariffs or quotas. Instead, negotiators need to grapple with complex technical matters. Regulatory barriers can be dismantled by applying the idea of mutual recognition or, alternatively, by harmonising the underlying legal regimes. Complicated intellectual property issues arise in these negotiations, as well as questions of dispute settlement – and all of this is happening against the backdrop of interest groups lobbying vigorously against effective trade liberalisation.

What it means is that, in today’s world, not all free-trade agreements are created equal. The fact that “the US can negotiate free trade deals with Bahrain, Nicaragua and Morocco” says nothing about the market access that the UK would be able to negotiate for itself – especially given the fact that we no longer live in a world of ‘most favoured nation’ clauses, which would enable the UK to piggyback on other, pre-existing, trade arrangements.

The relevant question is not whether the next administration will “snub its nose at Great Britain,” but whether the conditions of an eventual trade agreement would lead to more market integration than the currently negotiated Transatlantic Trade and Investment Partnership (TTIP). Appeals to the ‘special relationship’ aside, the economic gains from to the United States from a comprehensive trade agreement with the UK are much smaller than with the EU as a whole, justifying a proportionately smaller investment of political resources. Moreover, some, such as Dennis Novy from the University of Warwick, add that the UK lacks the administrative capacity to carry on such negotiations better than the EU can.

Any trade negotiations with the United States would be further complicated by the fact that Brexit would be accompanied by protracted negotiations between the UK and the EU, regarding the conditions of the country’s access to the European single market. Irrespective of trade, the regulatory and legal uncertainty would generate costs of its own. London is a global financial capital because financial institutions use it as a gateway to access the EU’s markets. The majority of all EU financial services are conducted through the City of London, a situation that would not be sustainable if the UK was about to make a decisive break with the system of financial services regulation in the EU.

Perhaps the British people should not fear Brexit, as Mr Gardiner advises. But they have legitimate reasons to be concerned, if only because of the uncertainty surrounding its economic effects. While UKIP’s Tim Congdon might claim that the UK is worse off by roughly 11.5 percent of its GDP by being a member of the EU, many economists disagree. Researchers at LSE, for instance, estimate that the Brexit could reduce UK’s national income by as much as 9.5 percent (another LSE paper predicts a reduction of GDP by 1.1 percent under the most optimistic of scenarios).

Even if Brexit does not lead to massive economic dislocations, it is bound to have political consequences. Given the public support enjoyed by EU membership in Scotland, the future of the Union would be unclear. Worse yet, Brexit could be used as a model to follow by populists in other EU countries, typically with weaker democratic traditions. There, the consequences might be far more nefarious than in the UK.

Towards the end of his piece, Mr Gardiner makes a powerful plea for “the United States [to] be on the right side of history.” But America – and America’s defenders of free enterprise – will not be on the right side of history if they become cheerleaders for a collapse of the system of political cooperation in Europe, which has ushered the continent into a historically unprecedented period of prosperity and flourishing of liberal democracy.

Dalibor Rohac is a research fellow at the American Enterprise Institute in Washington DC. Twitter: @daliborrohac.