Brexit’s Dangers

Dan Hannan’s vision for Brexit is optimistic and rooted in the tradition of classical liberalism. But his sunny optimism is a minority view in the United Kingdom, and it is unlikely things will work out the way he wants.

Here is one minor illustration of what I mean. Recently my think tank published a paper on the safety of American-produced chicken, which is often washed in a chlorine bath to kill microbes. We argued that Britons would be better off if they could choose to buy these products themselves.

Though it was based on evidence from the most respected public health authorities in Europe and the United States, the paper’s proposals were immediately ruled out by a cabinet minister who had been a leading Brexiteer, who said Britain would never allow American chicken to be sold here. Many people asked if any trade deal with the United States was possible if we’d have to open our markets to American chicken.

I mention this to put Dan’s optimism in context. Britain is a country whose Conservative Prime Minister is preoccupied with forcing private businesses to put trade union representatives on their boards and cut their executives’ salaries in the name of “fairness.” The less said about Jeremy Corbyn the better.

Most people did not vote to Leave for classical liberal reasons. The “control” of Brexit is more likely to lead to more extensive government and less freedom for Britons. And the economic losses of Brexit are real and likely to get worse.

The costs and risks of Brexit are much greater than Dan suggests, and the future bleaker. We cannot plan for a freer future without acknowledging the difficult path ahead of us.

The idea that most Leave voters were classical liberals stretches credibility. Many, if not most, wanted control over immigration to cut it. Many others simply wanted to spend more taxpayer money on our health system. At the top of the Vote Leave website is its slogan, “Let’s give our NHS the £350 million the EU takes every week,” which was a centrepiece of the campaign.

This leaflet was posted nationwide by the Leave campaign. It highlights the numbers that move to Britain every year from Europe because “EU law means all members must accept ‘the free movement of people.’” Sovereignty was important, it said, because the EU was overruling Britain on counter-terrorism and immigration matters. A notorious anti-immigration poster launched by Nigel Farage (which the official campaign rejected, to be fair) echoed this anti-immigration message.

The British Election Study found that “many respondents mention both sovereignty and immigration together, showing that these two issues were closely linked in the minds of British voters.” Immigration was just behind sovereignty as a reason for voting Leave. Vote Leave’s Campaign Director has written that Leave could not have won without focusing on immigration and spending more money on the NHS.

Not that there is any real reason for this. EU immigrants pay more in taxes than they cost the state, are not associated with lower wages or fewer jobs, and don’t drive up crime rates. The only rationale for limiting their numbers is political. And, sure enough, the only thing that both the Conservatives and Labour have agreed on is that freedom of movement must end after Brexit – and a bureaucratic, centrally-planned immigration system set up in its place.

Maybe Brexit gives us the chance to reform areas the EU wouldn’t let us. Fishing and farming have long been some of Brexiteers’ biggest complaints about the EU, but so far there is little appetite for reforms like creating property rights over fisheries stocks or cutting farm subsidies. Pro-Brexit politicians have been given control over these areas but have been at pains to stress just how little will change. We already have full control over things like healthcare policy – and, with the National Health Service, have chosen one of the most centrally planned systems in the world.

So what does “taking back control” really mean in a country with no checks and balances and no codified constitution? Parliament is supreme in Britain. No domestic body can overrule it, and a Parliamentary majority is equivalent to an unlimited dictatorship.

This has served us well enough, though it is what allowed the post-war Labour government to set up a nationalized healthcare system and nationalise the entire energy sector, the railways, road haulage, the steel industry, and more, all virtually unopposed in only six years.

For decades the EU has acted as a check on that kind of state overreach: stopping the Scottish government from establishing a prohibitionist price floor on alcohol, forcing member states to open up state-dominated markets to private competition, and barring European states from subsidizing or otherwise protecting their native industries from foreign rivals. These policies were part of what helped the British economy to return to health in the 1980s, complementing and supporting Margaret Thatcher’s reform programme. The system is flawed – I have been a vocal critic of bad EU rulings over Google and antitrust – but it has proved better than the alternative.

Once the EU checks are gone, what comes next? Jeremy Corbyn is more popular than Theresa May, and Labour regularly polls ahead of the Conservatives. Corbyn is a long-time ally of Trotskyites, and his Labour party has been captured by the extreme left. The prospect of a Prime Minister Corbyn, who was a long-time supporter of Brexit, totally unconstrained by rules against subsidies, tariffs, and nationalizations, must make pro-Brexit classical liberals think twice.

Even if this does not happen, the barriers to trade that Brexit will create will make Britons poorer. As Dan notes, the Single Market is about eliminating regulatory barriers to trade, not tariffs, which are already very low between most developed countries. Single Market membership is a form of commitment mechanism that allows governments to mutually agree not to use things like subsidies, spurious safety checks, or labelling rules to keep each other’s goods or people out. Iceland and Norway are members without being in the EU.

Were we to follow their model we could avoid much of the economic damage of Brexit. But, because it requires free movement of people as well as goods, services, and capital, the British government is determined to leave so that it can cut immigration. Whatever deal we manage to get with the EU instead will either be as complex and bureaucratic as the sort of trade deal Dan attacks, or it will mean significant trade barriers for anybody who wants to do business between Britain and the EU. Either way, it will fall far short of the sort of freedom to trade that we have right now.

Just how much this will cost is an open question. The LSE’s Centre for Economic Performance uses a dynamic model to predict a long-term economic loss of between 6.3% and 9.5% of GDP; the UK Treasury predicts losses of between 4.6% and 9.5%; the National Institute for Economic and Social Research predicts losses of between 1.9% and 3.7%, or between 6.3% and 9.5% if productivity growth is affected, as seems likely.

These estimates are based on the “gravity” model, which weighs trade by the size and distance between economies, and has been described as “the most reliable empirical relationship in international economics.” This model explains why the United States exports more to Mexico and Canada than it does to the much larger European Union.

The benefits of freer trade with the rest of the world are not symmetrical to these losses. The United States is the only economy that is both large enough and close enough to matter much, but a comprehensive trade deal is only likely to make us 0.35% richer in the long run. At best, the GDP gains from free trade deals with Japan, the United States, the Anglosphere, India, and the ASEAN bloc would raise UK GDP by a maximum of about two percentage points. I have proposed that Britain open its borders unilaterally to the world’s poorest countries, which would help them, but would be unlikely to boost our own economy by more than a small fraction of one percent.

The astonishing collapse in the value of the pound reflects all this, and as it happened on the day after the Brexit vote cannot be explained away as a market “correction” (especially since the pound rose when markets were expecting Brexit not to happen). It was a recognition that we were going to be fundamentally poorer in the long run, and it explains much of Dan’s other economic data. Higher exports and stock market asset prices do not make us better off if they are driven by a depreciated currency – they mean we’re getting less in imports for what we make and sell in exports and assets.

There is no point in being hysterical. Brexit is not the end of the world and it may open some doors for better policy, out of necessity if nothing else. I will explore these in the subsequent discussion, as well as how we might minimise the harms of Brexit, aware of the costs and risks involved.

Right now we are about as rich, per person, as France. With the right economic reforms we could be perhaps as rich as Germany. After Brexit, our long-term living standards are likely to trend towards Italy’s. Italy is a fine country, but it’s not what I want Britain to be – especially without the weather.

Most Britons are not xenophobes, but they are not free market liberals either. The Brexit they voted for will make us less open to the world around us. We will be poorer as a result. Without the checks and balances that the EU, for all its faults, provided, politicians will be free to nationalise more industries and keep out more talented migrants from abroad. Attractive as Dan’s vision may sound, it is probably not what the future holds.

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.