Challenges for a Global Britain outside the European Union – Migration, Trade and Finance
Alexander Mengden // 29 March 2017
Today, March 29th 2017, Prime Minister Theresa May officially triggered Article 50 of the Lisbon Treaty, thereby beginning the formal process of withdrawing the United Kingdom from the European Union.
While the Prime Minister has made it clear that she prefers a so-called ’hard’ (or ‘clean’) Brexit that takes Britain out of the Single Market and ends automatic freedom of movement with the rest of EU, there are still many uncertainties about how this withdrawal will look.
This poses urgent questions over the best terms under which the UK can leave the EU and how it can make the most of the opportunities presented by its newly gained independence to achieve the promised vision of a better and more prosperous Global Britain.
One of the main challenges will be to establish a new immigration regime that maintains and expands the economic benefits of inward migration to the UK and, at the same time, addresses the concerns of the British public. In fact, Brexit gives the British government the opportunity to achieve both objectives.
Openness to migration brings big economic benefits. Labour migration is, in effect, a form of international trade that raises productivity and living standards for both migrants and natives (Legrain, 2016). By raising the diversity of skills at the economy’s disposal and filling labour shortages, it supports the specialisation of labour and facilitates economic growth. These are benefits that a future immigration system needs to keep and enhance by welcoming aspiring workers from Europe and the rest of the world.
Despite these economic benefits, many British voters are worried about uncontrolled immigration. Public opinion polls such as Ashcroft (2013) show that migrant entitlements to welfare benefits and their use of public services are by far the deepest of these concerns.
Thus, the best way to tackle these problems would be to address them directly, by implementing keyhole solutions that restrict migrants’ access to welfare benefits and public services. Past proposals, such as former Prime Minister David Cameron’s ‘benefits ban’, failed to satisfy the non-discrimination provisions required by the EU. But after Brexit, it should be possible to restrict migrants’ access to at least some of these benefits and thus make immigration more politically palatable. This solution is superior to the restriction of migration via quotas or skill requirements because it does not sacrifice the positive effects of migration to the British economy and society. On the contrary, it would explicitly treat migration as a positive-sum game, rather than a burden on natives.
The second major challenge the United Kingdom will face as it leaves the European Union and the Single Market is to develop a strategy that preserves current trade ties with both the EU and third countries and harnesses the opportunities outside the customs union to embrace a bolder free trade agenda with the wider world.
One solution would be a comprehensive EU-UK trade deal that preserves customs-free trade with countries of the European Union and secures ongoing customs and administrative cooperation – to the benefit of all parties. It is to be hoped that – as the President of the European Commission Jean-Claude Juncker has assured – the negotiations will not be used to punish the United Kingdom for its withdrawal. This would be a lose-lose outcome.
There is also the question of what happens to the trade agreements that the UK has with the rest of the world as a result of its membership of the European Union. The EU currently has 44 bilateral and regional trade agreements in place with over 60 partners and is the top trading partner for 80 countries. It would take many years and substantial transaction costs for Britain to bilaterally re-negotiate all of these treaties. Trade negotiations are usually very slow processes. For example, the US usually take 3.5 years on average to negotiate bilateral trade agreements, whilst the EU-Canada comprehensive trade agreement even took seven years to negotiate.
However, the UK will surely be able to negotiate deals more quickly on its own without having to carry the rest of the EU. It may also be possible to grandfather the existing trade agreements of the European Union with third countries, i.e. to replicate and apply them to the new institutional arrangements. This may spark some complications under WTO rules, but could be acceptable to all parties as a temporary measure during the transition.
The UK should also consider much more radical trade policies. One such alternative is to revive Great Britain’s classical liberal tradition of unilateral free trade – with this strategy, Britain would eliminate its own import tariffs on goods and services from third countries and cut back on non-tariff barriers. The United Kingdom will benefit from this strategy even if other countries do not reciprocate, because British consumers and businesses will enjoy cheaper imports and access to a larger variety of goods and services. If these arrangements can be consolidated into multilateral free trade agreements then all the better, but this is not essential.
Of course, there will be vocal resistance to the lowering of import barriers from those domestic sectors that currently benefit from restrictions on trade. But protectionism is a costly and inefficient way to protect jobs and means that consumers – including the poorest in society – end up paying higher prices. On the contrary, the British government should use Brexit as on opportunity to drop out of arrangements such as the EU’s Common Agricultural Policy, which Minford (2015) estimates to cost around four percent of British GDP, and embrace free trade in agricultural products instead of establishing a similar system at the national level.
The third main test comes from financial regulation, an area in which the UK is challenged to preserve direct access of UK-based financial institutions to the EU and to use the opportunity to reform financial regulations and restore it as part of the common-law legal system.
The current passporting arrangements within the EU enable businesses to deal directly and easily with their counterparties and customers located in other member countries. This system has reduced costs for cross-border financial operations. However, maintaining access via these financial passporting arrangements would probably require Single-Market membership and free movement of people under EU rules.
The alternative of equivalence-based access to the EU financial markets would give UK financial institutions similar rights while only requiring regulation accepted as equivalent rather than identical. It would therefore give the UK the opportunity to reform its financial system by removing unnecessarily onerous requirements if their absence does not endanger equivalence requirements. The UK could also re-draft its laws in accordance with a common-law legal system that relies on textual instead of purposive reading and thereby guarantees greater certainty to the parties involved.
Admittedly, a large number of current financial regulations – such as the setting of capital requirements, rules for clearing derivative trades, transparency of back accounts to prevent money-laundering – come from higher-level bodies, like the FSB and Basel. But the UK will surely gain more flexibility over policy than it has now as a member of the EU.
In summary, the United Kingdom’s withdrawal from the European Union and the Single Market brings substantial challenges for policy towards migration, trade and financial regulation. These challenges can be mastered by harnessing the opportunities coming with the newly-gained independence to embrace a bold free market agenda. The UK has the chance to liberalise its immigration regime and open its doors to work migration from all over the world, making these reforms politically acceptable by restricting migrants’ benefits and charging them for public services at the same time.
It has the opportunity to preserve its current trade ties and to leave behind agricultural and other protectionisms by reviving the UK’s great tradition of unilateral free trade, gradually complemented by ex-post trade deal. And the UK has also the opportunity to maintain equivalence-based access to EU financial markets whilst reforming its financial system to remove unnecessary and detrimental requirements, re-drafting its regulation in common law and increasing legal certainty.
All these are challenges that the UK government can fail – but they also represent a great opportunity for a more prosperous and Global Britain.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).