How’ll Brexit work out? Assume a parachute…

As Adam Silverman points out, Brexit may have won, but they don’t seem to have done so with any idea about what is supposed to happen next. The strategy seems to have been:

  1. Campaign to get out of Europe
  2. Win vote!
  3. Freedom and democracy! All the bad parts will now go away!
  4. Ok, maybe the EU has a few good parts, but we’ll just negotiate to keep those.

This is a bit like telling your boss that you quit your job, but you’d still like to negotiate about keeping the salary and company car, and maybe a few of your more enjoyable work tasks.

I’ve not seen one person articulate a list of what those good and bad parts are, but here’s what the campaign rhetoric would seem to imply:

GOOD

  1. Access to the common market.

BAD

  1. Control of the UK’s borders.
  2. No more paying money in
  3. No more Euro red tape

 

It is taken for granted by Brexiters that the EU would sign on to this deal. They don’t seem to have done any behind-the-scenes negotiating or persuading or sounding out to confirm this. Heck, they haven’t even figured out whether they will invoke article 50 (i.e., the separation mechanism) immediately, or not for a little while, or not for a very long while, or maybe not use all all, except for waving it as some kind of bluff that would let them issue demands (“We’re giving Pilate two days to dismantle the entire apparatus of the Roman Imperialist State…”).

I have watched conservative MP’s parading across my TV set, saying with a completely straight face that of course we’d still have access to the free market because “Germany will still want to sell us cars, obviously.”

Except that isn’t obvious. At all.

Germany can sell us cars with or without the European market, our leaving will just make them a bit more expensive, because we could wind up with import duties, and more complex logistics in selling across market boundaries. WTO rules would probably set duties at a maximum of about 10%, so that would add a bit on to the cost of everything made in Europe. But then there would be extra hidden costs, because, taking the example of cars, Britain would now have its own set of regulations covering everything from how bright headlights must be, to what emissions are allowable, to how mileage is measured (i.e., my company isn’t free to claim a hundred miles per gallon for its cars by rolling them down a hill in neutral gear – rules have to be in place to force an apples-to-apples comparison for consumers).

Imagine that the UK, free from the tyranny of the EU, passed slightly different rules about fire safety standards for fabrics. Fabrics sold in the UK might now have to be manufactured as a whole separate batches than ones from the EU. That would add costs to design and manufacturing, and remove economies of scale. It would mean you couldn’t sell off any leftover Calais couches in Dover, or vice versa. It would require whole new rounds of paperwork and testing, and experts paid to track all the small differences in rules. And those extra cost will be passed along to consumers in higher sales prices.

Bottom line: Germany doesn’t have to let us into the common market to sell us cars (or anything else). Their goods will just get a bit more expensive over here, and ours will get a bit more expensive over there.

But wouldn’t they like to be able to sell stuff cheaper here? Surely that is in their interests?

Indeed they would! In fact, the EU has already agreed to let both Norway and Switzerland into the common market, without their being full members of the EU. So why not the UK too?

Because the EU didn’t let Norway and Switzerland in for free. They both have to pay a price for being given free access to the large European market. Specifically, they have to allow free movement of workers across their borders, pay into the EU pot, and follow EU regulations. In other words, they have to give up every single thing that Brexiteers imagined this vote was supposed to liberate the UK from.

Britain would almost certainly be required to pay that kind of price too – we no longer have the leverage to demand otherwise.

Statistics are a little hard to find, but it seems that of everything the newly reconfigured EU (i.e., minus the UK) exports out of its borders, about 16% of it is sold to the UK. That’s about a sixth of it – roughly the same amount as they export to the USA (who you might note, has not been granted full access to the European market). Now that’s a lot of trade, and the EU really doesn’t want to lose a chunk of it to higher cross-border prices. All else equal, they’d prefer to keep us in the market.

At the same time, though, 45% of the UK’s exports are sold to the EU. Losing some percent out of nearly half of everything we export to the entire world would make that a far more painful loss to us than it would to the EU. When you are negotiating with someone and they want what you have, but you NEED what they have, that’s a recipe for being taken to the cleaners. Especially in cases like this where all sides know exactly what the stakes are, so there’s no real room to get away with bluffing.

And it’s not like the UK is mostly exporting commodities like crude oil that can just as easily be sold to China or the USA. A disagreement over trade doesn’t mean that we can simply reroute our tankers to a different port, and unload our wares for sale there instead. The top 5 types of commodity the UK exports are mechanical appliances,  motor vehicles, pharmaceutical products, electronic equipment, and mineral fuels. Those things generally have to be built and designed for specific needs and markets and regulatory environments in specific places. You can’t take a suspension systems designed for a Skoda, and simply plug it into a Hyundai instead, just because you’re having a tiff with the EU.

So the UK is walking into a high stakes negotiation in which everyone can see that the other side holds most of the aces. But it actually gets worse from there.

Let’s game this out. The EU starts out by offering Norway’s deal: We keep access to the common market, but we are required to pay in money, allow free movement of people across the border, and follow EU regulations.

The UK’s new Brexit Prime Minister says no. Those are the exact things we demand to escape from. We’ll take anything BUT that. It’s our bright red line, put one toe over it, and we walk away.

Now the EU has to look at the various nationalist movements bubbling up in France and the Netherlands and some of its other countries, and realize that there are a whole lot of angry people looking to try to win over their countrymen that leaving is painless, and let’s you keep all the good stuff. If the UK is seen to get a sweetheart deal, then that enables these people to start a rush for the exits. Countries, big and small, would start flooding out of the EU. Why buy the cow if you can get the milk for free, as the old saying goes. If the EU wants to survive (and it does), then it needs to make an example out of the UK, giving us the ugliest possible deal, in order to send a message to its other malcontents who have been conspicuously eyeing the doors.

Bottom line, the EU could not offer the deal that pro-Brexit MP’s seem to imagine is there for the taking. Not even if they wanted to. The UK doesn’t have the leverage to demand any better, and the EU has a gun to their head that prevents them from offering any better.

If you look at what they are saying, the EU politicians clearly know all of this. Analysts on the sidelines can see all of this. The only people who don’t seem to have taken the time to work it out are the ones who have just won a referendum. They’ve fought for, and won, a mandate for a plan that they haven’t bothered to think through, and are now noisily demanding control of the driving seat in the UK Conservative party so they can be the ones to implement it… at some point in the future, maybe, somehow, and please stop hassling them for details. The details aren’t important. Winning is. And Britain, ra ra, and FREEDOM!

There’s an old joke about economists who “assume a can opener”. This appears to be a darker version, in which politicians win a referendums with the line “assume a parachute”.

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5 thoughts on “How’ll Brexit work out? Assume a parachute…

  1. Over here its “Two economists fall into a hole. One looks at the other and asks: what do we do? The second economist responds: assume a ladder.”

    And thanks for the link back.

  2. Pingback: Why Brexit won: It’s not (just) what you think |

  3. Pingback: Boris to foreign minister a clever but risky move (no really) |

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