This op-ed is part of the FT’s Future of Britain Project. We are inviting readers, commentators and thought leaders to brainstorm ideas for the future of Britain after Brexit. This piece is in response to the second topic: What is the best model for the UK economy post-Brexit? For an alternative view, Tim Harford, economics leader writer for the FT, outlines his vision for the UK. Submit your own idea here.
Brexit is a constitutional decision that will repatriate a host of economic policy levers. Yet Remainers still take it as given that Britain’s exit from the EU will make it permanently poorer. Led by the Treasury, most assume that leaving must mean an economy averse to trade and migration, with little in the way of positive regulatory change. It is as if the UK within the EU is the pinnacle of economic dynamism.
Yes, the mood music from the post-referendum Conservative party — with former Remain backers in No 10 and the Home Office overcompensating with a caricatured view of what voters want — is not a good sign for the short-term. But scores of other non-EU countries show that political independence is nothing to fear where long-term economic success is concerned. In fact, Brexit provides both opportunities and pressures to become more open.
Let us examine the components of the EU. First, the customs union, where the mind-boggling common external tariff and quotas on non-EU goods contribute to raising prices for manufactured and agricultural products by about 20 per cent for EU consumers, according to the research of Patrick Minford. Under the much lamented “hard Brexit” with World Trade Organisation rules, we could abolish this administrative nightmare, adopting unilateral free trade.
It is true that this would entail more customs checks, but it would lead to a substantial fall in consumer prices (about 8 per cent overall, according to Professor Minford). But the real long-term gains would come from trading on our comparative advantages. In other words, producing what we are relatively good at under global competition — pushing us further up the value chain into a future of high-end manufacturing and services.
Vested producer interests will wail. Remain backers will whinge about manufacturing and agriculture facing more overseas competition. But if competition at an EU level is good, why not globally? Brexit is a chance to throw off not only the shackles of the EU’s tariffs, but also the second major economic pillar: subsidies and protections for agriculture. The Common Agricultural Policy deters innovation at a high cost to taxpayers and has been captured by interest groups using it to impose stringent, anti-scientific regulations relating to food standards, pesticide use and GM crops. It should be scrapped.
New Zealand in the 1980s showed what liberalisation can achieve. The country’s sheep stock halved and the number of beef and sheep farms fell by a third. But farms became larger and more productive, while production of fruits and wines grew sharply and a venison industry developed. There was substantial supply-chain innovation. Trading at world prices, the sector is now an international success story.
Sensible policy decisions on trade and agriculture could leave us unambiguously better off out of the union in these areas.
But what about the third major pillar, the hallowed single market, that we are informed it would be disastrous to leave? The European Commission itself believes this common regulatory zone has raised EU-wide gross domestic product by just 2.1 per cent. That figure was calculated for 2008 and is likely to be smaller for the UK, which is less dependent on EU trade than the average EU economy. Britain specialises in services where the single market is less complete; it is often more likely to be liberal on the regulatory side — harmonisation thus does not benefit it as much.
After Brexit, EU trade would become even less important for the UK. But if we remained in the single market, membership would mean the whole economy continuing to be bound by the “one size fits all” regulation emanating from Brussels. It would also mean no say on new regulation imposed by Brussels, not least that designed to curb “Anglo-Saxon finance”.
In contrast, leaving would allow us gradually to reassess employment, financial, insurance, environmental and clinical trials regulation once more, and absolve ourselves of the EU precautionary principle, which deters innovation.
I can already hear people describing this liberal vision as a pipe-dream. Surely leaving the single market will mean less foreign direct investment and more restrictive migration? Far from leaving the UK insular, I believe a clean Brexit will put pressure on the UK for the opposite. Quite simply, there will be no other choice. Given the trend for falling corporate profit tax rates and the need to maintain important FDI, Britain could lead the world in abolishing profits as a tax base entirely.
It would also become obvious that for a mature economy, trading services requires the movement of people. After initial attempted clampdowns on numbers, the country would adopt more expansive bilateral movement with many other mature nations, as well as the EU, to reflect our successful service sector.
In short, a clean Brexit provides both the opportunities and the international pressures for a Britain more open, and more liberal, on economics than ever. There will be bumps and scrapes along the way, but the long-term outlook is fresh and exciting.
The writer is head of public policy at the Institute of Economic Affairs