The Theory of Brexit

Later this week, the United Kingdom will vote on what the FT’s Martin Wolf has called a “piece of grossly irresponsible nonsense”: a referendum to leave the European Union. Despite the attempted interventions of eminent economists, social scientists, and research institutes, the debate has been largely conducted on terms that rarely interact with facts (see, especially, the various pronouncements of the Rt. Hon. blond wig for Uxbridge and South Ruislip and the MEP who is keeping at least five Kent pubs open single-handedly).

To distill the arguments of Brexit about economics, foreign policy, and immigration into one never-stated, but frequently implied phrase, the theory behind Brexit is this: Britain is a very important country.

If you believe that Britain is very important, then much of the Brexit rhetoric makes sense: of course countries will be lining up to make free trade agreements with Britain (leaving aside the very significant point that an FTA is not a single market); Britain’s global role will be unshackled from EU foreign policy; Britain will be able to attract foreign direct investment through deregulation and/or the awesome respect that capital markets have for its capacity and institutions; talented foreigners will be just as attracted to working in Britain as they would have been in the EU—or even more so, because the UK will be able to deregulate its labor and product markets (even though they are some of the most liberal in the world already) and prioritize non-EU skilled migration.

This was true in 1910. It may have been true in 1948. It is not true in 2016.

Britain is not an unimportant country, but it is nowhere near as important as it used to be or the Brexiters think it is. The City of London is not the financial center of the world because it sits at the heart of the world’s greatest empire. London is no longer the center of world trade. It sits alongside New York and Shanghai, ahead of Paris, in financial services because it is a large, open city in a country that has strong legal institutions and is a member of the world’s (or second largest, depending on your source) largest market.

British foreign policy preferences are but one of many important factors in the conduct of world affairs. Britain has an disproportionately large role because of its independent deterrent and Security Council seat, but neither of these factors are affected in any meaningful way by membership or non-membership of the EU. Other than that it is a large European country (you can’t fight geography—Britain has been in Europe for tens of millions of years), how would Britain have any greater significance in international negotiations outside of the EU? It is not at all clear that this would be the case.

Once you realize that Britain is no longer Top Nation, then Brexit begins to make a lot less sense. Indeed, it looks positively bonkers. For all of the failures and problems of the European Union, how would leaving make Britain more prosperous or important? The economic evidence is very clear—it could hardly be more so. The idea that the European Union has somehow shackled an international titan is absurd.

The spectacular deals that the Brexiters imagine will be on offer are chimerical. They will not exist. Yes, Britain would eventually be able to arrange bilateral trade deals, but those are much less popular than they were in the early 2000s and they take a long time to negotiate, and they do not provide the far greater advantages of a single market. Britain doesn’t make very much stuff any more (as a percentage of GDP), and free trade in services is very difficult without—you guessed it—free movement of people and harmonizing a lot of other regulations that the Brexiters hate.

Outside the EU, Britain will find it far more difficult to influence EU foreign policy. Large international problems—war in Syria, the related refugee crisis, Putin behaving badly—require collective solutions, and collective solutions can be organized best through broader international arrangements like the EU. They entail greater solidarity across not just foreign affairs but a wide range of policy areas. This requires a lot of patience and negotiation, but results in more coherent, unified action in the long run.

Broadly, international cooperation has become much more important over the last century. This is both because of the scale of the problems at hand, and the fact that other countries are using collective action as well. Britain will see its global role reduced outside of the European Union, it may suffer a short-run downturn, and it will almost certainly see smaller increases in living standards than if it had stayed. Again, despite the failures of the EU (and they are many), it is far superior to the alternative.

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