Brexit

The reality of Brexit unleashes a flood of questions, most of which cannot be answer for quite a while. The near term consequences of the UK’s exit from the European Union will depend on the details of the divorce, which will take several years to unfold. Divorces can take place smoothly and amicably or not. The result—the new reality—can be seen as fair (but invariably diminished on both sides, at least economically) or not.

My concern in this note is whether the underlying public sentiments that pushed Brexit over the finish line—the fear of job losses and cultural dilution as a result of excessive immigration—herald a retreat from the globalization that has dramatically raised standards of living and reduced poverty around the world in the last several decades.

As we know from Adam Smith, our ability to increase our output and thus income rests heavily on the productivity gains made possible by specialization. But we can only specialize in our work and output if we are able to trade what we produce for the other things we need and want to consume. The freer and more extensively we can trade, the more we can specialize and prosper. As I never tire of pointing out, the boundaries of trading within the family, the village, the province and the country and beyond are largely arbitrary. However, trade requires shared rules and standards. Within the family these can be more informally developed and understood. Even within villages customary understandings of weights and measures and value may suffice among people who know each other. But as the domain of trade expands and buyers and sellers no longer know each other, such standards and rules need to be formalized into laws and their enforcement supported by courts and impartial judges. Parties to agreements need to be confident that their contract will be enforced as agreed.

The U.S. Constitution gives our federal government the power and responsibility to establish standards of weights and measures and the monetary unit without which trade within the United States would be greatly encumbered. Agreeing on the voltage standard for electrical devises is one of thousands of examples. Businesses themselves recognize the benefits to themselves and their customers of harmonizing many elements of the products they produce and trade. Thus bottom up negotiations over many years have produced the Uniform Commercial Code, which removes many unnecessary costs of trading across different legal jurisdictions through standardization.

Trade across national borders could not exist without international laws and understandings about the nature of contracts and their enforcement, the description and measure of content and statements of value (unit of account), etc. Leaving the EU does not free the UK from the need to conform to such standards if they wish to continue trading with the rest of the world.

In their efforts to facilitate free trade within Europe by harmonizing product standards, the European Commission bureaucrats in Brussels got off to a bad start by failing to distinguish between those standards that facilitated trade from those that unnecessarily limited product diversity and competition. Their definition of the acceptable features of bananas has become the poster child of their misguided and laughable efforts. This does not mean, however, that the facilitation of international (or intra EU) trade does not need harmonized standards (weights and measures of food content, length, volume, etc.) in order to remove unproductive and unnecessary costs of trade.

The huge benefits of trade—global trade—also require that each of us can produce (work at) whatever we do best. The fullest measure of such freedom—free labor mobility—would require the free movement of labor to the best jobs they can find and this is what the EU required of its members within Europe. It is also what has raised fears and reactions within the UK of having, for example, too many Polish plumbers. As the vote for Brexit dramatically demonstrates, we dare not ignore these fears and they are not easily dealt with. See my earlier discussion of this challenge: https://wcoats.wordpress.com/2016/06/11/the-challenges-of-change-globalization-immigration-and-technology/

The growing anti-immigrant sentiments in continental Europe have little to do with free labor mobility within the EU and are more directed to the refugee problem created by the wars in the Middle East. The British vote to leave the EU seems to reflect some mix of a reaction to ill informed harmonization measures taken by the EU (largely some time ago) and a lack of appreciation of the benefits of properly directed harmonization of codes and standards as well as of fears of losing jobs to immigrants (and on the part of some, a natural fear of strangers). The key question for the future of free trade and globalization and the enormous benefits they bring is whether Brexit is the beginning of a closing of that door. We need to make every effort to address and mitigate these fears so that that does not happen.

The establishment of an efficient international trading order (the international establishment of rules and laws and their enforcement) can come about in a variety of ways. The international agreements and organizations established after World War II to perform this role (e.g., UN, WTO, IMF, World Bank) have generally served this international order well though they are not perfect. The statement by Boris Johnson, former mayor of London and possible successor to British Prime Minister David Cameron, that: “I believe we now have a glorious opportunity: We can pass our laws and set our taxes entirely according to the needs of the U.K. economy,” either reflects stunning ignorance of the role of international law in underpinning globalization or blatant dishonesty. The international institutions that oversee our liberal international order need to be preserved and where appropriate strengthened, not destroyed.

The European Union itself was always much more than an economic (free trade) project. Following WWII after centuries of devastating wars, the European project was always more about establishing the mechanisms of political cooperation that would avoid another European war. It has been stunningly successful in this endeavor, but still struggles to find the right balance in the devolution of authority and the best formulation of European wide governments for preserving peace and promoting economic well-being. An excellent discussion of these issues can be found in Dalibor Rohac’s Toward an Imperfect Union: A Conservatives Case for the EU.

The consequences of Brexit for Britain (what ever might be left of it) and for the EU (what ever might be left of it) will not be known for many years. But the risks of an inward looking nationalism and a retreat from a liberal international order that it seems to reflect should be taken seriously and resisted vigorously.

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About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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3 Responses to Brexit

  1. Robert Schadler says:

    Hi Warren,
    Dare I see Brexit rather differently — or at least, since we agree the consequences are largely still to be determined — see the possibility/probability spectrum differently.
    The flexibility/fluidity of resources, labor, and money flowing across borders is alwarys thru a political filter. Britain wants its political filter to be democratically responsible to the British.
    It is unknown if the total number of people allowed to work in the UK will go up or down; only that the criteria for such a visa will now be shaped by British political processes, not EU ones.
    Likewise a free trade area for goods, will enhance the trade and specialization within that area — but it is not necessarily the case that GLOBAL trade will be enhanced. The expansion of the U.S. from 13 states to 50 resulted in more trade occurring within the U.S. It doesn’t speak to whether the U.S. as such would trade extensively with the rest of the world or be highly protectionist.

    While I agree the EU project stemmed from WW II, this seems akin to general preparing to fight the last war. One can be sure, but it is easy to doubt that Europe would be fighting a new chapter of WW II if the EU had not occurred, much less if the UK had not joined it. The experience of WW II, with its death and destruction, the threat of the Soviet Union, and NATO seem more then enough to account for the lack of European warfare.

    But the political project of the EU was well more than war prevention. It included regulating the size of the holes in Swiss cheese, and the curvature of bananas to be deemed “imported” and other such. It was seen as a project to remake the identities of the peoples of Europe by entities that were beyond any democratic control. That is not the project that Hayek, Churchill, Ortega, etc. were talking about.

    My impression was that a UNITED EUROPE had become something more than an ideology and close to a secular religion for many in Europe. The underlying cultural foundations were not present as so they wanted to created a standardization that people did not want. And the EU institutionally was arrogantly unresponsive.

    Might the EU unravel entirely? Might it reform itself in such a fashion that the UK would return? Might it restrict itself to those actions that the European public were to judge as genuinely benign? Might the discussions to implement Brexit result, years from now, for the UK to remain?
    These are still open questions, to my mind. I’m not sure we can predict whether the UK will engage in more or less trade globally? Will the EU still trade a great deal with the UK?
    I’ll defer to your expertise to shape what I think about whether London will remain the financial capital of Europe. NY, Singapore and HK are able to be such without something like the EU to facilitate them. Perhaps London still has enough competitive advantages to continue, but I can see where it might not == especially if the EU wants to spite them.
    Finally, I think the mobility of labor (those moving around simply to work) needs to be distinguished from massive immigration (planning to live permanently in another country). As a child of immigrants (but even if I weren’t), a political entity should be able to shape what kind of immigrants, as well as the overall number, in the hope that those admitted will be woven into the overall population. A hundred million from, say, India moving to England might be a good thing — if they were well selected and it occurred over a century. It would be a bad thing if they were simply self selected and came all in one year.

    All the best,
    Bob

  2. James Roumasset says:

    Warren,
    The enlightened Brexit voter is presumably not against immigration, just immigration outside of Britain’s control. Trump unfortunately conflates the control of illegal immigration w/ scary anti-trade threats, but even he allows for a “great big beautiful door w/ a golden doorknob” in his wall with Mexico. So control of immigration need not be anti-immigration or anti-globalization.

    Once comforting thought is that we won’t have to distinguish between Britain, Great Britain, and the United Kingdom of Great Britain and Northern Ireland anymore. Only Britain (England and Wales) will be left.
    Cheers,
    Jim

  3. wcoats says:

    Ambassador J William Middendorf sent me the following email and asked if I would post it to my Brexit blog for him:

    “Warren excellent article on EU and I would like to suggest a small modification. From afar the EU may enjoy the eulogistic acclaim of Hollywood actresses but regrettably in my 92 yrs. I have seen both close up. A few years ago I served as your ambassador to the EU in Brussels and was somewhat shocked to find a giant socialist regulation factory practicing finger on the scale trade negotiations. I spent my entire time there (successfully) correcting unfair EU attacks on US exports, especially in area of agriculture. Billions were involved. Trump may have it right. I Saw this first hand. Bill Middendorf”

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