The panicked response of world financial markets in the days following the recent Brexit vote has left the impression that the British decision to leave the European Union will harm the British, U.S., and world economies. Overwrought commentators lamenting Britain’s “senseless, self-inflicted blow” (The Economist) and “isolationist catastrophe” (the Los Angeles Times) have only added to that impression. This quickly formed conventional wisdom is badly mistaken for several reasons.
First, the U.K.’s dependence on exports to the European Union is far less than many commentators assume. Only one tenth of the U.K.’s gross domestic product derives from the sale of such exports. The other nine tenths come from the sale of products domestically or to non-EU trading partners, particularly the United States, Britain’s largest consumer of its export goods.
Second, by leaving the European Union, Britain will extricate itself from layers of costly EU-imposed, growth-inhibiting regulation. Though only one tenth of the U.K. economy involves exports to EU countries, all of the U.K.’s economic activity has been subject to EU regulation, including its labor and work place practices, environmental policy, fishing and agricultural industries, transportation system, banking and financial services, and consumer products. A non-partisan referendum-neutral think tank, Open Europe, estimates that the cost of complying with just the one hundred most expensive EU regulatory directives is about £33 billion per year — or more than 2 percent of the U.K. GDP. The distinguished British economist Tim Congdon, a confirmed Eurosceptic, estimates that the total cost of EU regulation is closer to 6.5 percent of the nation’s GDP. The reduction of this regulatory burden will provide an immediate growth dividend for the U.K. economy.
Third, far from losing access to markets for its exports, the decision to leave the European Union will open up new opportunities for British free trade. From the beginning, the architects of the European project have pursued two distinct goals: the economic and the political unification of Europe. The conflation of these two aspects has often left voters, politicians, and commentators thinking that Britain could not have free trade with Europe (and access to what was originally called the European Common Market) without accepting a loss of political sovereignty and of democratic control over vast areas of national policy. Indeed, full membership in the European Union has required national parliaments to relinquish just such sovereignty.
Nevertheless, Britain can continue to trade freely with European Union nations without having full European Union membership. Neither Switzerland nor Norway, for example, belongs to the European Union, but both have free-trade agreements with it, as part of what is now called the European Economic Area. During the coming transition in its relationship with the EU, Britain will likely want to negotiate a similar free-trade arrangement with the EU. Moreover, because EU exports to Britain significantly exceed British exports to the EU, the EU will have a clear interest in allowing Britain to secure precisely such an arrangement — as Mark Kerber, the head of the German industry group BDI, acknowledged last week before the vote.
In any case, by leaving the European Union, Britain has opened up other opportunities for free trade. Until now, the exclusive nature of the European Union has prevented Britain from establishing a free-trade pact with its largest and most lucrative trading partner, the United States, to the detriment of tariff-paying businesses on both sides of the Atlantic. Repeated calls for including Britain in the North American Free Trade Agreement (NAFTA) have been ignored, since under the terms of Britain’s treaty commitments to the European Union, the U.K. has not been free to negotiate its own trading arrangements or to decide on its own trade policy. With Brexit, that will change. Brexit now makes possible the negotiation of free trade deals with other countries (including the United States, Canada, and China) with which Britain and the EU presently lack such agreements. Given that the U.K. has the world’s fifth-largest economy, few countries, let alone the United States and Canada, will want to consign Britain to the “back of the queue,” as President Obama threatened to do during the referendum campaign.
Finally, by extricating itself from the EU, Britain will benefit its other non-EU trading partners whose companies have been subjected to suffocating EU regulation as a consequence of doing business in an EU-regulated Britain. The growing regulatory apparatus of the European bureaucracy and courts has particularly encumbered American business interests with excessive regulation, arbitrary antitrust restrictions, and punitive fines.
Antitrust judgments against American companies have alone been extremely damaging to innovation and growth. The European courts have repeatedly blocked mergers and acquisitions between American companies operating in Europe, even if the companies in question do only a small percentage of their business on the European continent. Until recently, most countries in North American and Europe routinely accepted the antitrust decisions of the governments in which major multinational corporations reside.
Over the past 15 years or so, however, that has changed dramatically. In 2001, the European Commission and the Luxembourg Court of Justice blocked the $42 billion merger of General Electric and Honeywell, after antitrust regulators in both the Clinton and the Bush administrations approved the acquisition of Honeywell by GE and after GE spent millions of dollars on their acquisition plan.
In a high-profile case against Microsoft, the European Commission decided in 2003 to reopen antitrust prosecution against the software firm after its case with the United States government had been settled, even though U.S. regulators had previously consulted closely with their European counterparts. The European Commission further decided to impose a remedy for the alleged antitrust violation that went far beyond that imposed by the U.S. government. Microsoft was required not only to pay an additional $794 million fine (then the largest ever levied by the EU) but also to license its products to competitors and produce a stripped-down and renamed version of its main Windows software product, a version that few companies would want to buy.
In 2008 the EU imposed a second, $1.44 billion fine against Microsoft for alleged noncompliance of its previous directive, setting another record for the largest fine ever imposed on a private company by the EU. In 2009, the EU exceeded even that punitive levy by fining Intel $1.45 billion for alleged anticompetitive behavior. Last year, EU regulators trained their sites on Google, in a move that many financial analysts believe was motivated more by a misunderstanding of the dynamics of technology innovation (and by reflexive anti-Americanism) than by any substantive antitrust violations by Google.
During the past two and half decades, the European Union has grown from a simple free-trading area into a vast, pan-national bureaucracy and regulatory entity with a distinct legal personality superseding that of member governments. Its courts can overrule the parliaments of member nation-states. Its complex, unaccountable bureaucracy can impose laws and regulations on those states. And the maintenance of such a federal system itself imposes a huge tax burden on member countries, disproportionately so in the case of Great Britain — which contributes at least £7 billion per year more to the EU budget than it receives back in transfer payments or benefits.
Nevertheless, markets have responded to Brexit negatively for two main reasons: fear of political uncertainty and the assumption that a British exit from the EU will deprive it of access to a larger European market, resulting in reduced economic growth. The political uncertainty surrounding Brexit will clearly pass. But an increasingly democratic Britain acting once again in accord with its own national interests will likely result in more, not less, free trade and greater economic freedom — not only for Britain but also for its key trading partners, including the United States. Economic growth will be the inevitable result.
Consequently, markets have nothing to fear from Brexit.