Brexit Explained

The British problem – or, from a UK perspective, the European problem – is easily stated. The British people always wanted a common market in Europe, not a common government.

That’s why we didn’t join when what became the EU got going in the 1950s. The UK had argued for a broad free-trade area, based on what is now the OECD, closely tied to the United States and open to world trade, but that argument only spurred the original six members to push ahead more quickly with their plan for political union.

The same issue derailed our two membership bids in the 1960s. As General de Gaulle put it when he vetoed one of them: “England in effect is insular, she is maritime, she is linked by her interactions, her markets and her supply-lines to the most diverse and often the most distant countries.”

In 1972, when we took the decision to join, the leaders of all the main parties were careful to refer to the European political entity on their doorstep as “the Common Market.” In 1975, when we held our first referendum on whether to leave, the Government explicitly assured people that there were no plans for political or monetary union.

By the time the Maastricht Treaty was signed at the beginning of the 1990s, it was clear that these assurances had been false. The EU could no longer be portrayed as an association of states co-operating for commercial purposes. Maastricht extended the jurisdiction of Brussels into many non-economic fields, including criminal justice, immigration, foreign and defense policy, citizenship rights, and culture.

From then on, it was only a matter of time before Britain sought a different relationship with its European allies. Although we wanted the strongest links with neighboring countries, there was no support for political union.

In 2015, David Cameron announced that he was looking for a new deal with the EU, and that there would be a renegotiation followed by a membership referendum. Had the renegotiation resulted in any significant repatriation of power, he would have won the referendum. All he needed was to come back with some competence returned, and to say, “Look, I have set the precedent. Powers can pass downwards as well as upwards. We won’t be drawn into a United States of Europe.”

In the event, though, he came away with empty hands. Perhaps he asked for the wrong things, or perhaps the other leaders never took the threat of a “Leave” vote seriously. Whatever the explanation, the effect on British public opinion was immediate. “If that is how Brussels treats its second largest financial contributor before we vote,” people said, “how will it treat us if we vote to stay?”

Having failed to get a looser deal from the inside, we are now seeking one from the outside. Theresa May keeps stressing that she wants the closest possible friendship with the EU: one that preserves our military alliance and our security links as much as our trading relationship. Almost no one in the UK seriously disagrees.

Think of the relationship between Canada and the United States. Canada has a political union on its doorstep. It has the closest partnership with that political union possible short of joining it. Both sides are happy with the deal.

Could Britain do something similar? Yes. Having taken back legal sovereignty – in other words, having left the jurisdiction of the European Commission and the European Court of Justice – Britain can replicate some of its current arrangements through bilateral treaties.

For example, the real basis of the Single Market is the ban on discriminating against goods or services from another member state. Almost everyone in Britain supports this idea, which benefits consumers.

Likewise, we may want to participate in European programs where there are benefits to all sides, on such issues as police co-operation, educational exchange, and scientific research. Several non-EU states participate in these programs: not only countries like Norway and Switzerland, but also those as distant as Israel and Canada.

As for freedom of movement, the objection is not to EU nationals coming to Britain for the purposes of work or study. It is to the lack of control. During the referendum campaign, for example, the ECJ issued a preliminary judgment overruling the deportation of a convicted criminal, the daughter-in-law of a notorious Islamist hate preacher. She was not a UK or EU national, but her son had been born in the UK, and the EU court ruled that repatriating her would violate his rights as an EU citizen.

When we cease to be EU citizens, such rulings will become impossible. But that doesn’t mean that we want to close our borders. We have offered to guarantee the rights of all EU nationals already in the UK, and I expect the eventual deal to allow people to work and study in each other’s countries, albeit through reciprocal treaty entitlements rather than by right as EU citizens.

I realize that all this may sound jarring. Overseas media tend to portray Brexit as nativist and protectionist. The UK papers that have significant overseas circulation, above all the Economist and the Financial Times, have taken a similar line, as has the BBC. If the New York Times were your sole source of information, you could be forgiven for thinking that the UK had become a racist hell-hole, from which decent citizens were fleeing in search of EU passports.

In fact, had Leave fought the kind of nostalgic campaign that Remainers imagine, we’d never have come close to winning. We fought and won chiefly on the issue of democracy: Our internal polls, like the published polls, showed that by far the biggest motivating factor for Leave voters was wanting decisions to be taken more closely to the people they affected.

For example, an exit poll of 12,369 people found that 49 percent of Leavers had been motivated by the desire to bring decisionmaking back to Britain, and only 33 percent by wanting more control of immigration.

I’ve learned in politics, though, that almost no one listens to the other side. Rather than going to source, people read their allies’ reports of what the other side is supposed to have said. If a British person tells you that the vote was “all about immigration,” I can almost guarantee that you are talking to a Remainer. Those among my friends who voted to stay in the union didn’t weigh and then dismiss the economic and democratic cases against European Union membership; they never heard them.

The same confirmation bias can be seen in their determination to find bad economic news. Yet here is a selection of recent news headlines from the UK:

  • Unemployment fell by a further 57,000 to 1.48 million in the 3 months to June. It has dropped every month, without a break, since the referendum last year, when it stood at 1.67 million. There have never been so many British people in work.
  • Manufacturing demand is, according to the Confederation of British Industry, at its highest level since August 1988.
  • Retail sales, official figures show, are up 2.9 percent on this time last year.
  • Exports are up 16 percent, helped by the long-overdue correction of the exchange rate. Remainers like to point to the fall in sterling, but rarely mention that, before the vote, the International Monetary Fund and the Bank of England agreed that Britain’s currency, seen as a haven from the travails of the euro, was artificially expensive.
  • Continental Europeans evidently still regard the British economy as attractive; more of them are working in Britain than ever before.
  • As for the supposed decline of the City of London, a number of European banks, including Deutsche Bank and ING, have moved there since the referendum. Last year, Wells Fargo spent £300 million ($392 million) on its new European headquarters — in London. According to the latest survey by Morgan McKinley, hiring in financial services is up 16 percent since the vote.
  • In July, the UK budget was in surplus for the first time since 2002.

Now you may think I’m simply indulging a confirmation bias of my own and cherry-picking good news stories. But it’s only fair to contrast what has happened since the Brexit vote with what was predicted during the campaign. Remain campaigners told us to expect a recession in 2016; in fact, Britain grew faster in the six months after the referendum than in the six months before. They told us that the FTSE-100 index of leading companies’ share prices would collapse; in fact, British stocks are the best-performing in Europe. They told us that Scotland would leave the United Kingdom; in fact, support for separatism has collapsed, and the Scottish first minister, Nicola Sturgeon, has shelved her planned independence referendum.

Things may yet go sour, of course. We haven’t abolished the economic cycle. Indeed, all Brexit does, in a sense, is throw the responsibility back to us. If we have lower, flatter, and simpler taxes, we’ll flourish; if we don’t we won’t. Either way, it’ll be up to us, not the EU. If we have lighter regulation, we’ll succeed; if we don’t, we won’t. There’ll be no point in thanking or blaming Brussels. If we have free trade, we’ll… oh, you get the picture.

Actually, it’s this last item, free trade, that offers the most immediate gains. For more than 20 years, there were desultory talks between Washington and Brussels about market liberalization, but they always ran up against the protectionist interests of France and various southern European states.

There is now the prospect of a tie-up between the world’s largest and fifth-largest economies. Unofficial talks began in July between U.S. Trade Representative Robert Lighthizer and the British Trade Secretary, Liam Fox. The potential gain is vast. Here are two countries linked by language and law, habit and history. Each is the other’s main investor. Every day, a million Americans turn up to work for British-owned companies; and every day, a million Brits clock in to work for American-owned companies. But, until now, London has not been free to negotiate its own trade deals.

The challenge is to make sure that the eventual US-UK deal is open, competitive, and consumer-led. This wasn’t always the case with the US-EU talks that were being conducted under the Obama administration, known as the Transatlantic Trade and Investment Partnership (TTIP). In fact, there’s a clue in the name: these deals don’t even call themselves free trade agreements anymore, because they are at least as much about regulatory control as they are about mutual product recognition.

Sure, there were liberalizing elements in TTIP. But there was also evidence that American and European corporates were colluding to harmonize and extend regulations, and so raise barriers to entry.

We now have the opportunity to do something bolder and better. We can negotiate a trade deal based on the principle that what is legal in one country is legal in the other. If a drug is approved by the FDA, that should be good enough for Britain. If a trader is qualified to operate in the City of London, that should be good enough for Wall Street. And so on.

Easier said than done, of course. Everyone is in favor of free trade until some local lobby interferes. Because competition brings dispersed gains but concentrated losses, politicians often act against the national interest to prop up a particular sector, especially if it happens to be located in an electorally significant region. For example, sugar in the United States is roughly twice as expensive as on world markets because a handful of sugarcane planters happen to be politically active in the swing state of Florida.

Still, if we absolutely must privilege certain industries over others (six jobs are lost in food processing for every job held in sugar production), then let’s not do it through tariffs or quotas. A straightforward subsidy, though still wrong in principle, is far, far cheaper.

We can expect Floridian politicians to back their sugar growers, just as politicians in Dearborn Michigan or in Port Talbot, Wales, back their steel mills. But the rest of us need to raise our voices on behalf of consumers. Imagine, for example, how much the mutual recognition of pharmaceuticals would lower the price of drugs in the United States. Imagine how much money Americans would then be able to spend on everything else, and how much that spending would boost other industries.

We won’t get another opportunity like this. It’s not every day that a G7 country gets to draw up a new trade policy from scratch. Let’s seize the moment.

Also from this issue

Lead Essay

  • Daniel Hannan reviews what Britain stands to gain by leaving the EU, as well as what it should seek to preserve. An economic common market has always been a desirable goal, he argues, but the same cannot be said of a common goverment. Obstacles to free trade tend to be local and concentrated interests, while consumers tend to benefit most, albeit in a dispersed way. Britain’s economy is healthy despite the naysayers, and it will be better able to pursue free trade agreements outside the EU once Brexit is completed.

Response Essays

  • Dalibor Rohac challenges the claim that Brexit wasn’t about immigration. Leave voters overhwlmingly wanted to restrict immigration, and they responded to anti-immigration messages issued by various groups in the Leave campaign. As a result of the vote, Britain’s place in the Single Market may be in danger, and without it, economists generally agree that the British economy will suffer. The promised free trade agreements that were to arise before Brexit seem not to have materialized. All of these, he says, are sound reasons for concern.

  • Ryan Bourne sketches the way forward for an independent Britain. He begins by looking at what Leave voters appear to have wanted, namely, a return to parliamentary sovereignty and a rejection of political integration into a supra-state. Leave voters were not anti-trade so much as they were in favor of using local institutions and local rule as the instruments to oversee it. The current political leadership may be less than inspiring, Bourne writes, but Brexit is a long-term proposition, and it tends toward greater freer markets, he believes.

  • Sam Bowman of the Adam Smith Institute explains why he does not view Brexit with much optimism. The best available models predict that trade will probably suffer on net. This is already reflected in a drop in the value of the British pound. Not only that, but socialism remains popular at home and will now face no EU controls to slow it down. Most Britons are neither xenophobes nor free market liberals, and the political climate is unsettled enough that Britain stands to suffer genuine harms from leaving the EU.