If you take a crude and unscientific survey of some of Washington’s major think tanks, you discover (no surprise) that they’re generally agreed that the economic outlook for Britain is grim. Here’s a commentary by economist Desmond Lachman of the right-of-center American Enterprise Institute:
“Since the Brexit referendum, the U.K.’s economic performance has deteriorated. It has done so as the U.K.’s future access to the European single market, which buys around 50 percent of the U.K.’s exports, has come into serious question. . . . At a time that the European economy is already stuttering, with Italy in recession and the German economy on the cusp of recession, the last thing that Europe now needs is a sclerotic U.K. economy.”
A new study from the Peterson Institute for International Economics reviewed the forecasts of 12 economic models and found that only two of them predicted gains from Brexit. Other studies forecast losses of up to 8 percent of gross domestic product (GDP). The study also warns that “a no-deal ‘crash out,’ ” a reversion to higher tariffs rather than a “soft Brexit” of continuing the present no-tariff situation, “would have serious negative short-run impacts on the U.K., which are essentially impossible to model.”
Although E.U. countries would also lose some exports to the U.K., these are much smaller than the U.K.’s export losses to the E.U. Thus, they’re more easily made up by boosting exports to other countries, the report contends.
The U.K.’s losses are not just theoretical. Already, some companies are announcing closures of U.K. manufacturing operations, a good example being Honda. Similarly, some banks are moving financial assets (stocks, bonds, other securities) from their London offices to locations on the continent. There is much fear that London will lose its traditional position as Europe’s preeminent financial center.
Meanwhile, the chaos, confusion and contradictions of Parliament’s efforts to find a tenable Brexit policy must seriously undermine confidence in Britain’s political system and its ability to attract future investors, domestic and foreign.
The prevailing political anarchy was on public display last week. On Tuesday, Parliament rejected Prime Minister Theresa May’s proposed agreement with the E.U. for the second time. Then, on Wednesday, it voted down a proposal for the U.K. to leave the E.U. without an agreement, failing to acknowledge “that this is precisely what will happen unless they reconcile themselves to the very deal they rejected the day before,” as Douglas A. Rediker of the Brookings Institution noted in a blog post. The deadline for deciding is March 29, though that could be extended.
The larger and more significant issue floating over this controversy involves the future of the world trading system. There has been a loss of authority among the corporate executives, governmental officials and economists whose support is crucial if the system is to survive and flourish.
It’s not that they have changed their minds about the value of open trade so much as the public has turned more skeptical and hostile to trade expansion. A less supportive public in turn alters the political climate, making governments more nationalistic and leading to more, not fewer, trade barriers. Multinational firms become more cautious in making new investments, because they can’t know how much open trade will be tolerated.
Brexit is one example of this break from the past. Others are well-known: the Trump administration’s renegotiation of the North American Free Trade Agreement with Canada and Mexico, its bargaining with China over trade practices, and the imposition of U.S. tariffs on steel and aluminum imports.
The fate of Brexit is just a small part of this much larger story. Is the post-World War II global trading system, constructed gradually over the past half-century or so, breaking down? Or is it just in a state of temporary hiatus? History awaits an answer.
Read more from Robert Samuelson’s archive.