The Trade Consequences of Brexit

On March 2, I discussed the upcoming referendum on Britain's exit from the European Union. The Brexit debate has moved on since then. It has become a lot nastier, the rhetoric sharper and angrier. Opinion polls suggest the vote could go either way.

Three issues that dominate the battleground are the economic consequences of Brexit, immigration, and the excesses of EU regulation. Inevitably, the focus is parochial and inward-looking for those yearning departure.

Third parties, including EU members, have argued against Brexit. Donald Trump is the only exception. Britain's departure will weaken Europe as well as Britain. The consequences of a lesser Europe will also weigh globally, not least on the EU-US relationship.

Much of the economic argument has been about trade relationships. Studies from the UK Treasury, the International Monetary Fund, and the Organization for Economic Cooperation and Development and a number of think tanks have concluded that Britain will be poorer and its economy smaller with Brexit.

The only way Britain could maintain the market access privileges owed to an EU member would be to accept the regulatory framework governing EU trade and also pay a contribution to the EU budget, as do Switzerland and Norway for this right. And this would be without a say in such matters.

Britain would also forego the benefits of preferential trade deals between the EU and more than 50 other countries, as well as its participation in current negotiations on some 20 other agreements. It would have to plough its own trade furrow and that would not be straightforward or quick. Erstwhile EU partners will be in no mood to be kind to a departing member.

The Brexit camp are weak on the economics of departure and would prefer to shift the debate to immigration. But the immigration argument is about EU citizens not extra-EU citizens and the distinction is conveniently blurred. More than half of net immigration in the UK is extra-EU. That flow is entirely a matter for the British Government.

Taking immigration as a whole, Britain has some three million immigrants, a number proportionately in line with many other EU economies. The skill level of Britain's immigrant population is higher than in many of its neighbours. More than 45 per cent of foreign born British residents have tertiary education. The figure is nearer 25 per cent for the native born population.

European Union immigrants are net contributors to the fiscal take, hardly leaches on social services. The strains faced by the National Health Service and the chronic housing shortage are conveniently blamed on foreigners. The reality has much more to do with post-Lehman crisis budget cuts and local land regulation in the case of housing.

An irony in the Brexit debate is that the leading figures in the remain camp are hard-pressed to challenge the game of blaming immigrants when spending cuts are a root cause of popular disaffection. Immigrants are taking the blame for recession and little play is given to the contribution that immigrants make in improving the nation's demographic profile.

On regulation, an OECD study shows that Britain is less regulated than France, Canada, Germany, Italy and the United States, notwithstanding EU membership. The biggest regulatory burden, relating to land use, is of entirely domestic provenance.

The Brexit camp is poorly equipped with arguments for abandoning a far from perfect arrangement that is the EU, but a superior one to the alternative. But they have soundbites on their side and popular anger over austerity and stagnant incomes, perhaps mixed with prejudice and nostalgia in some quarters.
Soundbites and populism do not work for the Stay camp. In the cut and thrust of political debate, if you have to explain, it is probably in vain.

The Financial Times' poll of polls reports a mere three percentage point difference between the Leave and Stay camps - 43 per cent to 46 per cent. That difference is within a statistical margin of error. It is a sad thought that this looks like anyone's game.

This article was first published in the South China Morning Post on May 11, 2016 as The Brexit question is down to the wire, and the things are getting nasty

The views expressed in the reports featured are the authors' own and do not necessarily reflect Asia Global Institute's editorial policy.