Brexit or Bust?

Brexit illustrates the challenges of economic independence and interdependence.

Over the next week the British Parliament debates the terms for Brexit or not. There is no point in my trying to guess what might happen. There are many opinions and they all contradict one another; probably all will be wrong.

But it might be useful to look at the fundamental issues which underpin not only Brexit but any trade deal. I shant look at border issues, such those in Ireland or Gibraltar-Spain which have bedeviled Brexit; they are not particularly relevant to us. But I will say that I was in Britain when the Irish ‘troubles’ began, and took the view that membership of the EEC (as it was then) would soften them; time has happily proved this hope right.

Aside from borders, there are two salient issues: freedom of movement and sovereignty. The first – the fourth freedom – which I discussed in an earlier column, seems to me to be basic to Continental Europe and therefore to the EU.

Restricting migration has ruled out the so-called Norwegian-plus option where Britain would be outside the bloc and the customs union but inside the single market. Under that plan the UK would join Norway, Liechtenstein and Iceland in the European Free Trade Association, which allows them to participate in the European Economic Area.

The problems with the strategy were, perhaps, soluble had Britain negotiated down this path from the beginning. The stumbling block was Theresa May’s nonnegotiable condition that there must be restricted freedom of movement. Her Cabinet judged that a major factor in the Leave vote was a dislike of the inflow of immigrants. There is freedom of movement between the EEA and the EU. No ifs, no buts.

Does the issue touch us? Under the Trans-Tasman Travel Arrangement with Australia we are close to a full freedom of movement but the Australians have been chipping away at it. Generally, provisions for migration in FTAs are limited; only business visas and provisions for young workers. These are special cases and not major examples of the fourth freedom.

May’s Deal resolves the concerns of those fearful of more unlimited freedom of movement. Borders aside, the dominant remaining contentious issue is that of sovereignty, the right and ability to make laws and to adjudicate them.

In many areas an individual member of the EU can pass legislation. However once trade is concerned, the activity is subject to EU law, enforced through the European Court of Justice. This also applies to the EEA (i.e., Norway-plus) and to May’s Deal.

Many Norwegians do not like this arrangement because it makes them subject to regulations determined by the EU in Brussels over which they have no say. The standard illustration – I don’t know if it is true – is that Brussels has decreed how straight bananas should be. That also says how straight they should be in the EEA. Under May’s Deal it would also determine the straightness of bananas in Britain.

There is a widely held view that many Brussels regulations are the result of pettifogging bureaucrats. I would address the problem by giving the European Parliament a statutes revision select committee. But that does not resolve the Norwegian concern because they are not in the European Parliament, while Brexit involves the Brits leaving it.

This is a level higher than the loss of sovereignty in a free trade deal. Suppose one of our trading partners made rules about bananas, FTAs include provisions for our dealing with such problems, and even if unresolved we could still grow or import bent bananas.

An advantage of ‘No Deal’ over May’s Deal is that any relationship would be of the nature of an FTA and Britain would not be automatically subject to direction from Brussels. The No Dealers probably have in mind an FTA like the Canadian one (which took years to negotiate). We too want a Canadian-style FTA with the EU (and Britain if it Brexits).

There are a couple of other complications. The EU requires a rich country with which it has a close trading relationship – such as Norway or Switzerland – to make a payment to the EU budget to support the poorer EU countries. That rarely happens in an FTA. The No Deal will not totally avoid all such payments since there are legacy payments (such as to pensions for EU bureaucrats).

Second, because it would be in a customs union, Britain is unable under the May Deal to have separate trading arrangements (so for instance they cannot do a FTA with us). May’s Deal is a transition arrangement.

Let’s leave these complications aside. What I have done, simplifying the complexity, is to set out a hierarchy of possible deals as follows:

No Deal (with the possibility of a Canada-type FTA in the long run). It has the merit of restricted freedom of movement and no subservience to Brussels regulations.

May’s Deal (again with the possibility of a Canada-type FTA in the long run as Britain transitions out of it). There will still be restricted freedom of movement but Britain would be subservient to Brussels regulations.

Norway-plus. There would now be unrestricted freedom of movement with the EU (as at present) but Britain would now be subservient to Brussels regulations and have no role in formulating them. (Negotiations over FTAs with other economies could get underway.)

Remain. There would continue to be unrestricted freedom of movement from the EU and Britain would continue participating in formulating Brussels regulations.

Before you make a choice, there is an additional complication. The hierarchy also grades the options from the one with the worst economic impact (No Deal) to the least (Remain). (No Dealers claim there will be no economic loss – a case of ideology overruling commonsense.)

There are various estimates of how large the impact would be in terms of loss of GDP. I do not trust the exact magnitudes but I am confident that the ranking is broadly right. Anything other than Remain will depress Britain’s economic performance. These are long-run estimates. My expectation is that the transition turbulence during the first years of Brexit will far outweigh them.

Observe that the British Parliament faces at least three options (excluding Norway-plus and interpreting Remain as a further referendum). The Arrow choice paradox tells us that there is no certainty of a rational decision among multiple parties with multiples choices; a good reason to be cautious about predicting what Parliament will decide.

I have not given my opinion. From the first referendum I have taken the view that once there is a practical Brexit option (rather than the ethereal one of the first referendum), there should be a second referendum. It is a position which this constitutionalist would take were he a No Dealer, a May Dealer or a Remainer.

How would I vote? I cant. Instead, I say to my British friends that the world will be a better place with a well-functioning EU with Britain in it. Whether such gains which may (or may not) arise from Brexiting outweigh this judgement is something for British voters to decide.