Letter from London: Brexit

By Steven R. Mann

Nearly 5 years ago, Britain voted to leave the European Union and now in 2021, the effects of that bombshell vote are becoming clear. On the positive side, Britain has been able to reform its immigration system, delink its justice system from Europe, and start talks on new free trade agreements. The costs, however, include disruption in exports, threats to London’s financial industry, a renewed wave of internal separatism, and an enduring cut in GDP.

The Brexit Vote

For some years, a segment of the public, fueled by the tabloid press, had been restive about a menu of EU issues, ranging from the power of Brussels regulations over daily life, the European Court of Justice’s (ECJ) influence on British trials and legislation, and unrestricted immigration from the EU. Eight Central and Eastern European countries joined the EU in 2004, while then-PM Tony Blair predicted that only 5,000-13,000 additional immigrants per year would enter the UK. Instead, one million EU nationals arrived in the decade that followed. The resentment was greatest in poorer towns and in rural areas compared to cosmopolitan London. Successive governments brushed off voters’ concerns, and this enabled populist rabble-rouser Nigel Farage, as leader of the small UK Independence Party (UKIP), to ride a tide of dissatisfaction to a stunning win for UKIP in the 2014 European Parliament elections.

Looking to defuse this populist challenge, Tory Prime Minister David Cameron offered the voters a 2016 “Remain or Leave” referendum on EU membership, thinking a Remain win would shove the issue offstage for years to come. Cameron and his government campaigned for Remain, while Tory politician Boris Johnson led the Leave forces. The brilliant and entertaining Johnson had famously wavered on which side to support, but then calculated his personal prospects were best with Leave. Cameron stressed the economic risks of Brexit, but Johnson promised to “Take Back Control” — to tackle immigration and break Brussels’ regulatory grip. Leave also promised higher wages, lower taxes, and more money for the National Health Service and farmers, while also pledging new, lucrative trade deals across the globe. Although the bookies gave 7-1 odds against a Brexit, the Leave forces won the vote by a 52-48 margin: dazzling promises beat grim warnings any day. (The Brexit vote was part of the wave of populism sweeping both sides of the Atlantic in that year, and in November, the bookies paid out 8-1 on Trump’s victory.)

Negotiating the Deal

Cameron immediately resigned and was replaced by Theresa May. Johnson’s bid for the top job at that time failed amid back-stabbing from his erstwhile political allies. May then spent 31 months negotiating a formal Withdrawal Agreement with the EU and quickly found that the Northern Ireland issue — all but unmentioned in the campaign — dominated the discussions.

The problem is this: Northern Ireland and the Republic of Ireland had an open frontier. There was free traffic through 208 border crossings with no immigration or customs checks. This freedom was a fundamental part of the 1998 Good Friday accords, which brought peace to Northern Ireland. With UK membership ending, how to maintain that open border if the sides are no longer in the same single market?

Theresa May’s solution was to agree that the entire United Kingdom would remain in the EU customs zone — and subject to EU trade regulations — until a better solution could be negotiated or perhaps a technological solution could be found. This was deeply unpopular politically, and she was replaced by Johnson, who chose to have England, Scotland and Wales leave the EU trade zone, with Northern Ireland remaining within the zone: in other words, a new customs border was drawn between Northern Ireland and the rest of the UK.

The UK formally left the European Union on January 31, 2020. The rest of 2020 was a transition period, in which all arrangements remained the same while the details, including the actual terms of trade between the EU and UK, were negotiated. A deal was agreed just before Christmas 2020, and Brexit started in full force on January 1.

Adding It Up

On the positive side, free EU migration has ended and the United Kingdom is reforming its immigration system, hoping to attract high-skilled science and tech talent. Divorce from the EU bureaucracy meant that the UK was able to act nimbly to launch a vaccine program: by the beginning of March, the UK had administered 31.6 vaccines per 100 population compared to 7.6 for the EU.

In financial services, the government is exploring ways to liberalize listing on the stock exchanges and allow innovative products, to compete with exchanges worldwide. London has also started free trade talks with the US, though the details will be devilish. Finally, there is the fisheries industry. Although fishing is a miniscule part of the economy (.02% of GDP)[1], it punches far above its weight in symbolic importance, and British mariners have long chafed at EU boats taking a hefty share of fisheries quotas. Under the new arrangements, British fishermen will raise their permitted catch by 25%.

But the downsides to Brexit are considerable. Yes, Britain is free from “nannying” EU regulations, but under Johnson, Whitehall continues to prove that it is no slouch in micromanaging its citizens’ lives. The free trade deal with the EU is proving tough in practice. Trade is almost completely tariff-free, but British exporters now have to produce detailed paperwork to satisfy EU scrutiny. Truckers have been especially impacted by the customs regime, as well as by new restrictions on their movement within the EU. Last month, the British Chambers of Commerce reported that half of its exporters report problems, and a number of smaller exporters have just decided that it’s just not worth it.

Fishermen have actually been another loser in the deal. Although fisheries quotas are increasing, Britain is dependent on the EU to sell its fish, and the red tape plus sanitary checks have caused export turmoil. Scottish fishermen have seen their quotas cut, due to tradeoffs on species, and the shellfish industry has been devastated because EU customs and sanitary checks prevent the fast export of their catch: in January, seafood exporters protested in Parliament Square about the “carnage” to their industry. Similar stories echo from agriculture, where meat and some vegetable exports face export hurdles.

The jury is still out on Brexit’s impact on the UK’s massive financial services industry, which directly produces 6.9% of GDP and accounts for 1.1 million jobs, as well as having a sizeable impact on real estate, hospitality and legal services. The sides failed to reach agreement by the end of the transition period. Negotiations continue, but UK firms have lost their frictionless ability to work throughout the EU, and in January, Amsterdam replaced London as Europe’s biggest trading center for shares, corporate listings, and Euro-denominated interest rate swaps.Financial services and trade woes underlie the estimates that Britain will suffer a lasting GDP cut.

The toughest immediate impact of Brexit, though, has been on Northern Ireland. The new customs border has been sharply unpopular there: supermarket shelves went bare in early January and death threats were made against local customs inspectors. To lower the temperature, the UK and EU agreed on a short-term customs moratorium, which expires at the end of March, but London has now said that it will unilaterally extend the regime for another six months. Brussels has reacted angrily and is readying its legal guns. Separating Northern Ireland in this fashion has been a bad precedent for British unity, especially since resentment of Brexit has also been high in Scotland, which voted 62-38 to stay in the EU. Chances are rising that David Cameron’s legacy will include the breakup of the 314-year-old United Kingdom.

Brexiteers counter the list of problems by waving the wand to conjure rosy future predictions of success. That tactic, though, has long since worn thin, and the tough realities of Brexit are clear. Accordingly, if the 2016 referendum were rerun, 49% of Brits would vote to remain, 37% to leave, with the rest undecided.

Cameron’s breezy confidence in a referendum, coupled with his careless referendum campaign, has secured his place in history as Britain’s worst prime minister, below those perennial cellar-dwellers Lord North — who lost America — and Neville Chamberlain.

Still, Britain is resilient and innovative, and importantly for us, it will continue to be America’s closest and most valuable ally. The best thing we can do for our old friend at this stage is for Congress to reaffirm Trade Promotion Authority before it expires in July and for the Biden Administration to prioritize a free-trade agreement with our British cousins. In an era of rising international challenges, the democratic, free-market nations need all the more to embrace strategies of mutual support.

Steven R. Mann is a foreign affairs professional, who served in the United States diplomatic service, where he specialized in the former Soviet Union and South Asia. Ambassador Mann is a Pennsylvanian who began his diplomatic career with postings to Jamaica and Moscow, and opened the first United States Embassies in Mongolia, Micronesia, and Armenia. From 1998 to 2001, he served as the United States Ambassador to Turkmenistan. In 2009, he retired from the Foreign Service and joined Exxon Mobil Corporation as a senior advisor. He retired from Exxon Mobil in July 2020.

He holds an A.B. degree from Oberlin College and M.A. degrees from Cornell and from Columbia University. He is a 1991 Distinguished Graduate of the National War College.

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