In Praise of Lesser Evils
Can Realism Repair Foreign Policy?
Before Britons voted to leave the European Union, Swati Dhingra, an assistant professor of economics at the London School of Economics, wrote a series of papers with her colleagues trying to convince them otherwise by pointing to the economic consequences. Two weeks after the voters chose Brexit, Dhingra spoke with Foreign Affairs deputy managing editor Stuart Reid in London.
Were you surprised at the immediate financial turmoil after the vote?
Not at all, because we had already seen that the turmoil actually started a bit before, in terms of the real business activity. Recruitment companies weren’t hiring very much. Seventeen percent of the 340 companies that were surveyed recently said that they were on a hiring freeze. Another 25 percent said that they were only doing short-term contracts. Mergers and acquisitions were down 70 percent compared to last year. So in that sense, we were already seeing real business activity come to a standstill. And the uncertainty index developed by Nick Bloom at Stanford University was at its 19-year high, higher than what we saw during the Scottish referendum, during the global financial crisis, and [after] the September 11 attacks.
Break down the economic consequences of Brexit.
At the moment, Britain is a member of the single market as a member of the European Union, which means we have free trade in goods, services, free movement of people and capital. And all of those are coming into question, because the default is WTO membership, which would come into play if we don’t negotiate anything else in the meantime with the European Union regarding the single market.
So what does that mean? That’s going to mean that we’re no longer going to have tariff-free access to the European Union market. We’re not going to be able to do business with the European Union with the same ease that we do now. And the reason that’s important is that 50 percent of U.K. trade and investment comes from the European Union. This is our biggest trade and investment partner, and once that trade and investment becomes more expensive to do, we’re going to see a contraction. That’s going to show up in lower employment, fewer jobs, and reduced economic growth in the U.K.
Ninety-six percent of economists agree that a Brexit would have substantial economic cost to the U.K. economy.
Ninety-six percent of economists agree that a Brexit would have substantial economic cost to the U.K. economy. The magnitude they’re thinking of is about a one percent to three percent decrease in British GDP over the next five years after Brexit, and a bigger two percent to eight percent drop over about 15 years.
Can the trade problem be solved while keeping the spirit of the Brexit vote in place?
We can renegotiate a lot of the trade agreements. There are three different ways of doing it. One approach is a Norway-style agreement, which means we pretty much maintain the same access to the single market. There will still be some amount we’ll be giving up in terms of access, because tariffs are already very low between industrial countries. Where the trade agreements become important is where they reduce non-tariff barriers, things like different sets of regulations. That’s really what the European Union has achieved. It’s tried to harmonize a lot of these regulations.
And it’s not just about regulations. It’s also about things like rules of origin. When Norwegian salmon comes into a European Union country, it has to comply with certain rules-of-origin requirements, which the U.K. doesn’t, because it’s a member of the European Union. These are fairly substantial costs that most businesses, especially small businesses, find difficult to fulfill. Those are going to become much more expensive. And we would still have to accept free movement of people, which is going against the spirit of the Brexit vote. We would also have to accept pretty much all EU regulations. Norway accepts 75 percent of the EU regulations and has absolutely no voice in the decision-making process.
The other approach is what Switzerland has with the European Union. Most people think that the European Union is not going to give that, and it took a very long time to actually get each of those agreements negotiated. It gives you access to the single market, but not fully in services, which from the U.K.’s perspective is very important, because a lot of its trade surplus comes from services trade, and a lot of its foreign investment is in the services sector. So the U.K. probably is not going to be so happy even with the Switzerland-style deal, and again, we still have to accept free movement of people and the EU regulations.
Finally, on the other end of the spectrum is a WTO membership deal. What we will still probably have to do is think of other ways of negotiating with the European Union, because being part of the WTO, we’ll get the same kind of access that currently Brazil, China, or the United States has to the European Union market. There’s going to be no preferential access. The big problem is that most trade agreements (especially trade agreements that we do today, which are not about tariffs but are really about non-tariff barriers) take anywhere from five to ten years—even 15 years, some would say.
Unfortunately, the European Union is the one that got scapegoated.
Do you think the 52 percent of voters who voted for Leave were voting against their economic self-interest?
Yes. We’re looking at a country which, just like the United States, has seen almost three decades of stagnating wages, has seen austerity happen to it, and has seen a lot of economic polarization. If you look at the U.K.’s inequality statistics, they look very similar to what happened in the United States. We’re talking about a very divided society. This was an anti-establishment vote. It was a protest vote against many policies that have hurt poor people a lot more than they’ve hurt any other high-income individuals.
Unfortunately, the European Union is the one that got scapegoated. That’s really worrisome because the same areas that voted overwhelmingly to leave are the ones that are going to be most negatively affected. One example is Sunderland [a city in the north of England]. I went and talked to the city council in Sunderland about Brexit, and what they told me was, “One worry we have is that the Nissan plant might decide to relocate to outside of Paris because they have some kind of tie-up with Renault.”
Once the Nissan plant moves out of Sunderland, what is going to happen to those middle-income jobs that it’s creating there? And what’s going to happen to all the other suppliers that have located there mainly because they’re suppliers to the Nissan economy or they get demand because Nissan employees are spending money? But somehow the message never came across to the people there: “You might become like Detroit.”
What about Europe? Is it going to take an economic hit without Britain in it?
Trade with the U.K. will become more expensive. Countries like Ireland are going to be quite badly hit, because they’re so well integrated with the U.K.’s supply chains. For some other countries, there are not going be big economic costs coming just from the U.K. leaving, but we might see the start of a chain reaction. If the U.K. exits, tomorrow there’ll be a vote in France, Italy, the Netherlands, Sweden. Then I think we’re talking about a protracted period of uncertainty and therefore reduced business activity.
What does Brexit mean for the future of London as a financial capital?
It all depends on what sort of new deal comes about. What motivates a lot of banks to locate in this country is the single passport privilege [which gives financial institutions the automatic right to operate in other EU countries]. They can almost costlessly do business with the European Union. Once that goes away, you’ve taken away that ease of doing business, and it’s fairly easy for these businesses to move around. That’s not to say London doesn’t have other inherent strengths—yes, it has English law—but certain transactions can easily be re-routed. That’s what we should expect.
You mentioned that people voted against their economic self-interest. Is part of the problem that the gains of globalization haven’t been spread equally among society?
Absolutely. We’ve seen inequality go up. If you look at the 90th percentile versus the 10th percentile person in the wage distribution, there are huge differences. They live completely different lives. But the real issue now is, How do you put that behind you and go further? And how are you going to create these middle-income jobs to ensure that people aren’t left behind in the future? That’s the struggle, because tax revenues are going to be falling and welfare spending is only going to decline further; austerity is going to continue for another year at least. So the people who are now going to be at the receiving end of [the consequences of Brexit] are going to be already-marginalized people and young people entering the job market.
Where the media failed was that it never clearly communicated to the people, “Here’s the good economics."
But where the media failed was that it never clearly communicated to the people, “Here’s the good economics, which is telling you that [leaving the EU] is going to have all of these economic consequences for you.” What they instead said was, “Here’s one view, and here’s the second view”—even though one view was shared by 96 percent of economists, and the other view was a very debunked economics, which was driving the notion that there might benefits from Brexit. People were left with the impression that there was some kind of academic debate about this.
Is it frustrating as an economist that you very carefully laid out all of the economic downsides to leaving, only to have people not listen?
Absolutely. I think all of us did this purely out of public service. I get no money, and no reduction in any other responsibility that I have in my job to do any of this. I gave talks everywhere, from Sunderland to Wales to London. It’s really frustrating. We went through a lot of effort to put the good information out. It was not written for an academic audience; it was written for anybody.
But it’s not my job to then communicate it in a mass public forum; that’s the job of the media. We can only say, “Here is the good economics from the bad economics. Here’s why the bad economics is bad.” We can sift out that information for the journalists to pick up, and then their job is to communicate it on a broader level. It’s really frustrating that that didn’t happen. We keep getting called, once again, to do interviews and answer the same questions. Then we’re asked, “Why didn’t you communicate this before?” We tried. You never listened.
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