Britain Has Six Months to Avoid the Trap of Economic Nationalism
With the end of the “Brexit” transition period in sight, Britain looks set to exit the EU without a trade deal with its continental neighbors. On the horizon instead is a move toward protectionism — economic “statism” in the homeland of Adam Smith. It appears that those of us who feared Brexit would become a nationalist enterprise are about to realize our nightmare.
UK-EU negotiations remain uncooperative, and the smart money is on a “no-deal Brexit” when the transition period ends on January 1. Prime Minister Boris Johnson has proclaimed a far more open stance on trade than has President Donald Trump, but disagreements over EU rules, access to fisheries, and the role of the European Court of Justice have perhaps changed his tone.
There was a time, not so long ago, when Brexit looked like a tremendous opportunity. Free marketeers envisioned Britain reconnecting with its Smithian roots and becoming a beacon for free trade; a counterbalance to the reemergence of European protectionism. Tariffs would be cut, trade barriers rolled back, and consumers would reap the benefits of inexpensive imports from all over the world.
Instead, there is a very real risk that Britain will abandon the principles that it has done so much to further, and upon which the EU was formed after decades of disastrous European conflicts.
When F.A. Hayek proposed “interstate federalism” in 1939, he demonstrated how limiting the economic powers of individual states could lead to great rewards. Trade agreements underscore international relations, promoting interstate competition and cooperation that contribute greatly toward peace and prosperity. Free trade drives economic growth, enhances efficiency, increases innovation, and allows consumers to buy more, better-quality products at lower costs.
The many ominous estimations of the costs of tariff and other trade barriers tell only half the story. Uncertainty around the terms of Brexit and what they mean for market access, the availability of migrant labor, and product regulation have rendered some businesses powerless to make informed decisions about investment and hiring. In the wake of COVID-19, market conditions are sure to be volatile for some time. The only way for Britain to successfully navigate Brexit in the midst of so much global volatility will be to allow labor and capital to move freely between markets and flow where it is most necessary and productive.
This starts with finding a way to establish a free-trade deal with the EU. As of 2019, the European Single Market remained Britain’s largest trading partner, accounting for around 50 percent of Britain’s exports and 60 percent of its imports.
What exactly would a no-deal Brexit look like? Its island-bound consumers would pay a premium for a wide variety of international goods and services that are subject to barriers to trade. Already-struggling businesses would continue to suffer as the prices of raw materials and other inputs rise, losing some of their long-held competitive advantages in Europe.
If a compromise cannot be reached quickly, British politicians should face reality: Brexit should not be finalized on deadline at all costs. If it means leaving the EU without a free trade deal, then they will need to swallow their pride and request an extension of the transition period.
That, of course, is not what seems to be happening. In a move straight from the playbook of the Trump administration, Boris Johnson’s government recently set out its post-Brexit tariff regime. Tariffs will protect “key UK strategic sectors,” such as the car industry and agriculture. The policy will achieve its purpose in transferring wealth to politically favored, protected industries — but only because the government has mandated that consumers subsidize these industries by paying the higher prices that result from stifling international competition.
As a leading free-market advocate within the EU for so many years, it is disheartening to see Britain adopting the very same policies that it long opposed. It appears that the misplaced faith in protectionism that is currently ravaging consumers in the United States is indeed contagious. When America sneezes, Europe catches a cold.
The transition period is quickly running out. There are three possible outcomes. Britain could emerge with an agreement that allows for free trade, extend the transition period, or it could leave the EU without a trade agreement, subjecting its people to tariffs and other barriers to trade — both from its own government and from its neighbors. By choosing option three, Britain would cut off its nose to spite its face.
Early optimism that Britain could emerge from Brexit as a torch bearer for free trade and openness seems to be waning. Instead, like so many others, it’s falling for the lure of nationalist sentiment. But, six months still remain.
Patrick O’Connor is a second-year MA student in the GMU economics department and Mercatus Center MA fellow. Donald J. Boudreaux is an economics professor at George Mason University and a senior fellow with the F.A. Hayek Program at the Mercatus Center.
