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Brexit — An Obituary and an Opportunity

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By William Reinsch:

Last week the British looked the future squarely in the eye — and voted to run away and hide. The victors in the “leave” campaign said June 23rd would go down in history as their Independence Day, completely missing the point that there is no real independence anymore. We are all dependent on each other in a globally connected world, and that is not going to change. We can’t “uninvent” the advances in transportation and communications that bind us together. It’s ironic that the Brits would miss that, given their thousand years of experience with the advantages and disadvantages of being an island nation and their long tradition of looking outward, but their reality is the same as everybody else’s — the pace of change is accelerating and more and more people are being left behind. So, it’s understandable that they voted against the future, but that does not mean they get to avoid the consequences. 

And what are those consequences?  After we get through the initial panic, and some kind of equilibrium is restored, albeit at a lower level of economic activity, I expect a long period of slow decline for the U.K., both politically and economically as it slides slowly into irrelevance. Don’t expect a mass exodus from London, but do expect a decline in new inward investment as companies realize they will no longer be able to access the EU from the U.K. and need to have a location inside the now-27 member union. This will be particularly true of American companies looking at growth potential in central and Eastern Europe, but also British companies will be reviewing their options and adopting hedging strategies that allow them to remain in the U.K. while at the same time moving resources to the EU to preserve their position there. 

Another change will be the gradual movement of innovation elsewhere if the U.K. adopts restrictive immigration policies as it leaves the EU. Most observers believe the most important issue in the Brexit campaign was immigration, so it would be no surprise if Britain moves away from the open policy of the EU. Doing so, however, denies Britain the talent, vigor and enthusiasm that immigrants bring. We have learned over the years that people protection stifles innovation just as trade protection does because the world’s best and brightest go somewhere else, in this case away from London. This is not something that happens immediately — or all at once, but ten years from now the difference will be visible.   

Some commentators are suggesting that globalization is optional, that countries can choose the extent to which they want to engage globally, and that the result of the Brexit vote will be a slowdown in trade and market integration. Of course countries can try to build a wall, although neither side in the U.K. debate has suggested that, but the larger reality is that the global economy is going to move on — either with the U.K. as an integral part of it or not. Trade and investment will flow towards the countries that have the most open markets and the greatest growth potential, and a mature economy like that of the U.K. is not likely to be a popular target if it is on its own.

Politically, the British can look forward to the same marginalization. First, they will need to defend the idea of the United Kingdom from the Scots, the Northern Irish, and possibly the Welsh, who may prefer to remain in the EU. The first two voted to remain in the EU — and may well begin or renew demands for independence from the U.K. Second, while their senior citizens may retain memories of empire, those days are long gone and are not, in any event, compatible with the retreat from the world that Brexit signals. Inside the EU they have been an influential voice in a large and powerful organization. Outside it, they are just another medium-sized power jostling with the big guys. Their special relationship with the U.S. will no doubt continue, but without the associated clout of the EU, the partnership will be less balanced than it traditionally has been. 

That special relationship, however, presents an opportunity for us that can be win-win, and that is a bilateral free trade agreement — sooner rather than later. We will inevitably strike an agreement at some point because it is so obviously in both our economic interests. Doing it sooner has two advantages: we will likely get a better deal out of the U.K. as it tries to demonstrate its continued relevance; and, because it will be a better deal than we are on track to get out of TTIP, we can use it as leverage in the latter negotiation as well. But those will only be true if we seize the initiative and move quickly, once the U.K. is in a legal position to do so.

In some circles this would be known as making lemonade out of lemons, but that’s a lot better than just leaving the lemons on the table.  It would also help the U.K. salvage something out of what will prove to be an historic mistake on their part.   
___
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.

Photo credit: leonyaakov via Flickr
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