Philippe Legrain is a senior visiting fellow at the London School...
Global Britain or Little England?
A cartoon on Brexit
On March 29, Britain formally notified the EU of its intention to leave. To where is it headed?
Great Britain may be leaving the European Union, but it has a bright future as a “Global Britain”. That was the essence of the optimistic vision for a post-Brexit Britain that Prime Minister Theresa May sketched out in January. But by turning its back on foreigners and going it alone just as globalization is going into reverse, Britain actually faces a much bleaker future as a “Little England”.
As it stands, the UK is already a global Britain geopolitically. Its EU membership gives it influence over EU decision-making and thus a greater say in international negotiations on everything from trade to climate change. Its close ties to the United States bolster its clout both in the EU and globally, while its EU membership enhances its value to the US. It enjoys an outsized role in international institutions, not least permanent membership of the United Nations Security Council, while the post-imperial Commonwealth ties it to 51 countries across the world. The English language, UK universities and the appeal of British culture – from the Queen to pop music – provide soft power. London is a dynamic, global city par excellence; 39% of the people in inner London were born abroad, two-thirds of those outside the EU, and its commercial and cultural connections to the rest of the world are unrivalled.
But Brexit will diminish, not enhance, Britain’s global reach. May was the first foreign leader to visit US President Donald Trump after his inauguration, but she went as a supplicant, desperate to show that Britain still mattered to the US and that it could count on a post-Brexit trade deal. Her offer, at the recent summit of EU leaders in Malta, to act as a bridge between the EU and the US was rebuffed; as Lithuanian President Dalia Grybauskaite put it: “I don’t think there is a necessity for a bridge. We communicate with the Americans on Twitter.”
Post-Brexit Britain will have an independent voice in international forums such as the World Trade Organization (WTO), but a smaller one. And given Trump’s disdain for international rules and institutions – and seeming intent to wreck them – its UN role will matter less. A return to great power politics will shine a cruel light on Britain’s lost clout. While some Brexiteers’ nostalgia for empire leads them to dream of an Anglosphere centered around Britain, the world has moved on. Australia and New Zealand are always keen to do trade deals, but they look primarily to Asia now. India, which aspires to be a great power, scarcely looks fondly on its erstwhile imperial master.
Economically, going global would seem to make eminent sense – witness how China’s long boom has swelled German exports. The EU-27 (as they will be after Britain leaves) account for 18.4% of the world economy (measured at market prices) and Britain for 3.5%, so seeking to sell more to the other 78.1% is sensible – especially because the rest of the world is growing faster than Europe, which accounts for only an eighth of global growth.
But whereas Germany exports more to the rest of the world in addition to selling to the EU, the British government believes that higher global exports can substitute for sales to the EU. That is delusional. Leaving the EU’s single market and customs union – a “hard” Brexit – will slash UK exports, while the plausible gains from new trade deals with non-EU countries are small.
Worse, the UK is actually closing itself off. May’s priority is controlling immigration, from the EU and elsewhere. Net migration to Britain – arrivals minus departures – was 273,000 in the year to September 2016, with EU and non-EU inflows evenly matched; she wants to cut the total to less than 100,000 a year.
Slashing immigration entails becoming less global. It also has an economic price. Britain’s flexible labor market and dynamic business environment have attracted young, hard-working, ambitious types from around the EU. Some do low-skill jobs that not enough Britons want to do; others high-skill ones that not enough Britons can do; many start businesses. Jonathan Portes of King’s College, London, calculates that reversing half of the impact of EU free movement would cut living standards by 1-3% by 2030; reversing it entirely would make Britons as much as 5% poorer. Moreover, the Office of Budget Responsibility, the UK government’s independent fiscal advisory body, calculates that halving net migration, predominantly of young workers, would cause public debt to soar as a share of GDP. Britons would need to retire later, or make do with lower pensions.
Keeping out foreigners will also hamper trade. Allowing in fewer international students will reduce education exports. Preventing Polish builders from coming to work in the UK is, in effect, a trade barrier, since Britain will no longer be able to import construction services from Poland. Denying visas to Indian IT workers limits UK-based companies’ ability to outsource.
Politics magnifies that economic price. Since EU leaders rightly insist that freedom of movement is an essential element of single-market membership, controlling EU migration entails leaving the single market, as May has finally admitted. That will disrupt trade more broadly. UK-based services providers – not just financial firms, but also business consultants, architects, advertising agencies and others – will lose their “passporting” rights to export freely to the EU. And as Indian Prime Minister Narendra Modi made clear when May visited last November, India is unwilling to negotiate a trade agreement unless Britain offers more work visas to Indians – something May refused.
In order to be able to negotiate “free-trade agreements” with non-EU countries, Britain also intends to leave the EU’s customs union. Setting its own schedule of import tariffs and other commitments at the WTO will enable it to negotiate deals offering preferential access to some countries. But that entails the return of costly customs controls on trade with the EU – to verify that paperwork is in order, check whether goods conform to EU standards, determine where a good is deemed to originate and thus what import duty is due, ensure payment, and so on.
While May suggested that Britain would seek “associate membership” of the customs union, this is impossible. Nor is the EU likely to allow sector-by-sector cherry picking, which is also impractical and illegal under WTO rules.
Customs controls will be particularly disruptive to businesses that rely on just-in-time, international supply chains, notably the car industry. Cars “made in Britain” are assembled from parts from various EU countries that cross borders repeatedly during the manufacturing process. Since UK-based car factories mostly export to the EU, they may end up relocating there.
That too would make Britain less global. While foreigners invest in Britain for many reasons, one of them is access to the EU market. The UK car industry is almost entirely foreign-owned; Japanese companies such as Nissan and Toyota invest directly, while Jaguar Land Rover is Indian-owned. Likewise in the City of London, almost all the big investment banks are foreign.
As well as becoming less open to foreigners and less appealing to global investors, a post-Brexit Britain is likely to trade less too. The EU is by far Britain’s biggest trading partner, accounting for nearly half of its trade. A study by the National Institute of Economic and Social Research (NIESR) estimates that leaving the EU single market and customs union would slash UK services exports to the EU by up to 60% and goods exports by a similar proportion – and by 40% even if the UK agrees a free-trade deal with the EU. Overall, both services and goods exports would fall by nearly a quarter. Losing the benefits of the trade agreements that the EU has negotiated with the likes of Mexico and South Korea would dent them further.
That is a huge hole for a post-Brexit Britain to try to fill with higher global exports. Yet International Trade Secretary Liam Fox, who is a primary-care doctor by training, glibly insists that technology is creating a “post-geography world”. Brexiteers also seem to believe in a post-politics world, where free trade just happens when governments get out of the way.
But international trade is slightly more complicated than that. Even in a digitizing world, countries tend to trade primarily with their rich neighbors; the US’s biggest export market is Canada. While that may eventually change, it will not do so imminently. In any case, Britain’s record at exporting to emerging economies is particularly poor.
Nor is politics conducive to going global. Granted, there are some advantages to leaving the EU: Britain’s negotiating mandate will not be hamstrung by the political objections of Italian food producers, French film makers or the Belgian regional parliament of Wallonia. But the downsides are greater: the much smaller, mostly open UK economy will have much less leverage in trade negotiations, especially because it will be desperate for deals.
To make matters worse, trade is no longer growing as a share of world output, so export opportunities are scarcer and resistance to opening up to imports is greater. No big global trade-liberalization deal has been agreed for more than two decades; the WTO’s Doha Round has been dead for years. While bilateral deals have proliferated, these tend to offer limited gains, especially to weaker powers. None offer anywhere near the opportunities for exports of services, in which Britain specializes, that the EU’s single market does. The NIESR study reckons that even if Britain concluded deals with all of the big English-speaking economies and all the large emerging economies, these would scarcely lift services trade and boost goods exports to those countries by only a quarter. Overall, even with those deals, a post-Brexit Britain would export a fifth less.
Brexiteers cling to the hope that President Trump will give the UK a sweetheart deal. But since exports to the US account for only a sixth of UK trade, even a very favorable deal could scarcely substitute for a collapse in trade with the EU. Besides, the US, whose economy is six times larger than the UK’s, tends to drive a hard bargain with weaker powers, even its allies. A one-sided deal that gave US companies preferential access to UK markets but scarcely opened up new opportunities for British businesses would be of little benefit to Britain.
This US President is likely to drive a particularly hard bargain. “America First” implies – at best – Britain second. Having bashed US car companies for exporting from Mexico, he is hardly going to open up US markets to Japanese car companies based in Britain. And in financial services, New York is London’s biggest rival, while US regulators resist international entanglements, and Trump even more so.
Modern trade deals are not just about opening markets; they are often about grabbing a bigger share of economic rents – and can thus make weaker countries worse off. For instance, the US is likely to insist that Britain pay more for US drugs for its state-run National Health Service. Trump is also sure to demand that Britain open up to US exports of chlorinated chicken, hormone-treated beef and genetically modified foods – which may be fine, but which British voters reject.
The Brexit vote was a catastrophic blunder; the prospect of a hard, possibly chaotic exit is alarming. While Britons’ appetite for borrowing and spending has propped up the economy so far, breaking with the EU will be a severe blow. Any future gains from global exports will take time.
Striking out alone is especially perilous now that Donald Trump threatens to start trade wars and fragment the global economy into regional trading blocs. Britain has little in common with the protectionist, pro-Putin, populist US president. In contrast, Britons have a shared interest with other Europeans in limiting EU disintegration, resisting a revanchist Russia and impeding the rise of authoritarian nationalism. Britain would be better placed to navigate the looming global storms by sticking close to its European partners.