What this Economist Has Learnt From Brexit

The consequences of Britain leaving the EU have exposed the complexity of one country’s economic relations with its partners.

I have found Brexit rivetting. As a piece of Econ 101, it is straight forward. (OK, I simplify; it is rare for first year students to study in any depth the implications of intra-industry trade, supply chains, the economies of scale and of agglomeration in international trade.)  But first year economics courses teach little about institutional underpinnings.

The exposing of the intricacies of the British leaving the EU has broadened my understanding of the network of relations which evolve around a trading relationship. For instance, Britain is involved in the European Space Agency; under Brexit the country may have to withdraw and institute its own program. There has been a myriad of such revelations, some of which may seem particular to Britain – such as the Irish border – but collectively they tell us that trade deals are likely to lead to other arrangements of mutual benefit.

The insights led to the thought experiment of what would happen were New Zealand to withdraw from Closer Economic Relations with Australia. I am not advocating such a course; to do so would be as stupid in economic terms as Brexit. But a scientist has to think the unthinkable to understand the thinkable.

What I have realised is that I have little idea of all that would unravel if we were to give up CER. I know a little. For instance, if you are overseas and need consular help where New Zealand has no diplomatic mission, as likely as not you would go to the Australian one and they would act on your behalf until a New Zealand diplomat got there. I have no idea what the protocols are, but the trust I have partly reflects the trust between Canberra and Wellington, which has arisen out of long-standing inter-relations between the two countries. (All right, all right, we sometimes get tetchy with one another, but no more than do civilised siblings.)

While CER is not as tight a deal as the European Treaty, the possibility of Brexit has revealed just how deep and complex these relations can be. It is probable that not a single person who voted in the referendum realised the full extent (I include the dips in the Foreign Office).

Brexit has been fought over much wider issues (although these small intricate complexities add up to a huge one). I am not sure that the advocates understood even these. David Davis appears to have exited (Brexited?) as secretary for Brexit over negotiating strategy. Boris Johnson’s leaving the Foreign Office involved far wider issues – the extent to which one can make independent decisions when there are trading relations (which include those that are not covered by explicit trade agreements).

He has a point. I was moved by his example that as Mayor of London he could do nothing about the juggernaut trucks which he said caused ‘horrific spate of deaths, mainly of female cyclists’. Better visibility was not in the EU rules. The heavier and slower Brussels juggernaut bureaucracy will eventually get around to it.

But he cannot follow his own logic when he objects that the deal the May Government proposes would exclude Britain from making the rules ‘with large parts of the economy locked into the EU system, but with no UK control over the system’. The harder Brexit he advocates will only give the UK greater control with enormous costs of trade reduction (think intra-industry trade, supply chains, the economies of scale and agglomeration). I’d have thought the logic was in the direction of staying in the EU and taking part in the decisions while  trying to improve them.

In all the pre-Brexit negotiations no attention was paid to the decision processes. I favour empowering the select committees of the EU parliament to review regulations, just as does our Regulations Review Select Committee. Such an innovation does not seem to be on the EU agenda because the EU power structure is about states; the European parliament is largely a fig leaf.

Until the discussions on Brexit exercise, we did not really appreciate the gain from the removal of frictions at the border as a result of trade deals. An open border means straight through without hanging around for customs clearance. This is key for supply chains built around just-in-time production. (JIT is when one holds low inventories expecting the supplier, which may be in another country, to be able to deliver quickly – even overnight.) It is argued that that such costs are more important today than tariffs (excluding those on agricultural goods). How long freight waiting times will increase under Brexit is yet to be found out, but the Brits may have to recruit and pay 5000 more customs officers.

The heart of the problem is that nobody knows what Brexiters like Johnson really want. They fantasise what might be possible; reality is much tougher.

One is sorry for Theresa May trapped in a conflict between the irreconcilable Leavers and Remainers (plus the demands of the rump EU itself). She will be remembered for her primary goal to keep the Conservative Party together (and in power).

What happens next? This politics is more complex than can be handled by economists’ analytics. I went to history. Robert Peel who led the Tory Party, the Conservative’s predecessor, pushed through the repeal of the Corn Laws in 1846 with a parliamentary coalition of Whigs and a minority of his own party (who would later coalesce in the Liberal Party). Shortly after, his government fell on the rejection of the Irish Coercion Bill and the Tory Party split. (The Corn Laws are of great interest to economists and critical to the development of the New Zealand economy.) Another later parallel might be the fraught sovereignty issue of Irish Home Rule which again split a political party (Liberals this time).

What I learned from all this history is how contingent and unpredictable political events are. It may be that we shall see a realignment of British politics – it may depend upon whether its Labour Party also fractures. (It is so much easier being in Opposition where differences may be obscured when you dont have to make actual decisions – as some of our current ministers are learning and Simon Bridge, or his successor, will learn.)

There does not appear to be any such deep economic fracture in New Zealand politics, even if there is disagreement about our precise trade policy. True, we have some who are as unrealistically pious as Boris Johnson. But we were never the international hegemon nor have we the illusions that we are large enough to matter. Even so, the intricacies of international relations that Brexit has revealed remind us that even in as simple a deal as CER much goes on which is unnoticed.