The Brexit Fallacy
February 19, 2019 | As a British-American, I’ve spent much of the past two years—and particularly the past few weeks—agonizing over which country embarrasses me more: the US with its dysfunctional government perpetually on the precipice of a shutdown; or the UK where few people in government or otherwise fully grasp the ramifications of Brexit and yet are plowing ahead with it anyway. For now it seems like Britain is the bigger basket case particularly given the current status quo: Prime Minister May has a mandate to renegotiate the current Brexit deal in favor of unspecific alternatives. Quelle horreur.
By now it should be clear that Brexit is a fallacy. Britons were sold a vision of a clean break from the bureaucratic and sclerotic European Union—a move that would allow the UK to forge new, better trade agreements the world over particularly with the United States. But leaving the EU to negotiate with the US on a bilateral basis is disastrous for Britain, because America holds all the cards and is well-positioned to dictate terms to and extract concessions. Britain’s closest ally is already taking advantage of the situation by standing in the way of Britain’s attempts to agree a fast-track deal with the WTO. And now, as Brexit day approaches, the US is outlining the terms upon which it could consent to a trade agreement with Britain. Spoiler alert: all of these terms require British enterprises and institutions to adjust to US standards, not the other way around.
Vultures are already circling. US Trade Representatives have already signaled the key terms they aim to negotiate: lowering food safety standards, weaker data protection for consumers, sale of hormone-riddled and antibiotic-fed meat, de-regulating chemical management, multi-level marketing and genetically-modified foods; and undermining the ability of the NHS to procure drugs and medical equipment at low cost. It is simply not possible for the UK to strike favorable trade agreements with both the EU and the US: it must choose one or the other. If the UK acquiesces to US demands, it will fall foul of EU standards. Alternatively, if the UK aligns itself with European standards, America will not be motivated to pursue a trade deal with Britain.
In other words, many of the promised benefits of Brexit will not materialize. Meanwhile, many of the forewarned costs of Brexit are coming to pass, especially large scale capital flight. This is particularly damaging for Britain given how reliant the country is on foreign capital—it is the world’s third largest recipient of foreign direct investment. There are no domestic companies to take the place of the soon to depart Nissan, Sony and Airbus, particularly since UK manufacturing was gutted during the Thatcher years and has limped on ever since.
But Brexiteers promise that leaving the EU will unleash a wave of economic growth once Britain is finally untethered from slow growth Europe. This too is a fallacy as economic growth depends on population growth and productivity growth, both of which Brexit has blown apart. Firstly, population growth won’t happen in a country that has a declining fertility rate and aims to take back control by limiting immigration. Secondly, productivity gains can occur with technological change, but this is far less likely now that Britain is a less attractive place to invest. In addition, since the 2008 financial crisis the UK has experienced the worst slump in productivity growth of any western economy; a slump that shows no signs of abating.
Of course, all of this was known before the referendum took place. But that did not stop then Prime Minister David Cameron from staging a Brexit referendum to appease the rabidly eurosceptic wing within his own party. Nor has it stopped Theresa May try to avoid party fissure by bending to the same eurosceptics with a fatally flawed deal that robs the UK of access to the EU’s customs union.
And so we are left with the bluster of Brexit in which chest-beating Tory eurosceptics claim that signing post-Brexit trade deals will be easy, but then go on to deliver nothing. All of which suggests that with approximately forty days until March 29, Britain is hurtling towards the chaos of a no-deal Brexit. Stagflation is inevitable given that mass commercial exodus will slow growth and increase unemployment while a weaker currency and WTO tariffs on trade with Europe will accelerate inflation. And here’s the kicker: under such circumstances there is very limited policy slack—monetary or fiscal—to boost the economy.
In short, there are no good Brexit outcomes for Britain. It is only a matter of picking one’s poison. Brexit was, is, and will remain be a tremendous embarrassment. I will take a lying commander-in-chief that will leave office in 2020 or 2024.
Al Abedi is an alum of the MBA program at the University of Chicago Booth School of Business and currently resides in New York.
The views expressed in this piece do not necessarily reflect the views of other Arbitror contributors or of Arbitror itself.
Official White House Photo by Shealah Craighead.