A landmark speech by Theresa May, the prime minister of the UK, setting the direction of the country for its foreseeable future appears to place Britain firmly outside of the EU. May has finally made it clear that Brexit means leaving the European single market – and the customs union – ensuring that Britain has complete control of its trade and borders.
However, what seems clear at first sight is perhaps more complex. The prime minister has left a number of core issues very open. She seems to want to a form of customs union with the EU, even if only on a sector-by-sector basis, and she seems to be prepared to pay something to the EU for that relationship. In addition, there is an acknowledgement of the need for EU citizens living in the UK to have their situation protected, but there’s a lack of clarity on future migration to the UK from the EU.
Throwback Britain
Underpinning all of this is a different model of Britain’s economic development. When May says she wants “Britain to be what we have the potential and ambition to be: a great, global trading nation that is respected around the world and strong, confident and united at home”, she is fundamentally changing the political and economic model that has governed the country for the past 40 years.
In the 1970s, faced with a long-term economic and political decline, Britain turned to Europe as a market for its goods and for a political relationship that ensured its continued influence through a regional alliance. May seems to be aiming for Britain to become a free trading nation that has global rather than European ambitions. This is reminscent of 19th-century Britain, which built predominance through imperial trading relations and enforcing free trade.
What May seems to be overlooking is that Britain’s position in the world is not what it was. As the 19th-century German economist, Fredrich List, recognised, only the strongest economies have an interest in free trade as they have the competitive advantage. In the 19th century, when Britain was promulgating free trade, it was the most powerful nation in the world. It was the home of technological innovation.
Now, Britain has the lowest level of productivity in the G7. In a free and open market, it is likely to be flooded by imports or see a real crash in the value of the pound, with the inflationary consequences that will produce.
This is not withstanding the political power needed to enforce free trade – political power Britain currently lacks. One of the key questions as Brexit approaches is why should countries make free trade agreements with the UK? The US backs the Transatlantic Trade and Investment Partnership because it would have given access to the massive EU market but why should President Trump give priority to the UK when in fact his economic policy seems to be making a protectionist turn? He is turning his back on free trade with Mexico, so it’s not clear why he would allow free trade with the UK. If Britain was to have a free trade agreement with the US this would inevitably result in the UK accepting the regulatory standards of the United States – which could be less than optimal for Britain.
In her desire to be a global, free-trade power, May is trying to achieve something that is not possible. The rules of global trade are likely to be set by the US and China. Britain’s ability to influence these rules outside of the EU are likely to be limited and the economic consequences difficult to determine.
One significant feature of May’s position is that, unusually for a British Conservative Prime Minister, politics is driving economics. Whereas the Conservatives have always been seen as the party of big business and in particular the City of London, May and her government are apparently prepared to sacrifice a single market with Europe in order to control the borders. May is making a strategic political calculation rather than an economic one: that she can capture the votes of the disaffected and the “just about managing” by targeting immigration.
Her second strategic political decision is that by taking a hard line on Brexit she can keep her party together as she cleverly positions herself as the sceptic who was in favour of EU membership before the referendum, who now takes a hard line on negotiations with the EU. The problem is that while political decisions may be driving economic ones for now, what happens when the economic consequences start to be felt?