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British voters who voted for Britain to leave the European Union were motivated by many things. One notion which certainly played a role in the result was the idea that a country should be sovereign, and too much of British law and custom had been subsumed into European law, and was set by European policymakers in Brussels and not in Westminster. However, there are many things one can do with one’s sovereignty. One can embrace, as many nations have, more protectionism, more mercantilism, more populism.
Brexit represents a historic opportunity for Britain to reclaim its leadership role in promoting open trade, competition and the protection of property rights. There is no need to read this vote as a vote for a closing of the market. Rather it could be seen as a reaction to the closing of the European market, and the embracing of dirigisme, and statism in Europe.
The European project which has contributed so much to the world in terms of peace, and an opening of markets in its previously closed member states, has morphed in the last twenty years into a regulatory set of arrangements that have been characterized by statism (EU standards and technical barriers to trade), and protectionism (the embrace of geographical indications for example, where certain foods can only be produced in certain European regions and carry the name, like champagne or pecorino cheese). European competition law, once a vehicle to promote consumer welfare has now become a stick with which to beat big (and predominantly US) companies, to level the playing field in ways that have nothing to do with competition and more to do with governments penalizing success. Ultimately the vision seems more about equality of outcome, and less about equality of opportunity.
So how does Britain reclaim its role? Since the decline of the multilateral negotiating agenda, which really set in with the 1999 Seattle WTO ministerial riots, and the collapse of the Free Trade Area of the Americas negotiations, conventional wisdom pursued a bilateral and regional agenda where one of the global powers negotiated agreements with smaller partners, such as the US-Colombia, US-Peru, and to some extent the Trans Pacific Partnership (which only recently included economic powers like Japan). Major powers such as the US and EU followed a lock-in policy where smaller countries could be forced to lock in reforms as NAFTA had very successfully delivered for Mexico.
However, Mexico apart, these policies did not very successfully lock in the much needed structural reforms associated with delivering internal legal and regulatory systems based on competition on the merits. The result was that the elites in societies who very often controlled the distribution of foreign products became very well off, while consumers saw comparatively fewer benefits.
Brexit represents a historic opportunity for Britain to reverse this trend, and instead lead a group of countries who are sufficiently like-minded on the importance of open trade and competitive markets that they more easily incorporate provisions into free trade agreements that lower the levels of internal market distortions to each other. The countries that share these values can be characterised by those countries that promote property rights protection and open competition in their own legal systems.
There are no prizes for guessing who these countries are, as the embrace of these norms has made them economically successful as well. Countries such as the US, Australia, Singapore, New Zealand, Canada, Hong Kong, and perhaps Switzerland come to mind. Others in the broad area might include Chile, which embraced electricity privatisation a year before Britain’s ground breaking reforms. If we are able to create an Anti-Distortions Agreement (ADA) consisting of these countries, where internal distortions are progressively eliminated (while these countries are relatively undistorted compared with other countries, there are sectors where distortions do still exist such as agriculture in the US or Canada and some local content regulation), then a growth engine for the world could be created.
At the same time, recognizing that not all countries share this view, including some very large economies such as India and China, Britain should commence bilateral negotiations with its eyes wide open to the reality of distortions in these markets. These bilaterals should be open to trade, but should also put in place mechanisms to defend Britain’s interests form major distorting trading partners.
By opening up its agricultural sector and moving away from highly distortive production subsidies, Britain can lead the Commonwealth countries and developing country agricultural producers into a new relationship based on open trade. The impact on the rural poor of this policy shift would be dramatic,
Improving its own internal regulatory policies to promote more competitive outcomes becomes a possibility if Britain is freed of regulations imposed on it by Brussels.
Naturally all of this is contingent on a strong negotiation with the EU in the form of a Free Trade Agreement Plus. This agreement would deal with all the regulatory barriers faced by UK exporters of goods and services into the so-called EU single market (which only exists in a few sectors), as well as reducing tariffs. In reality, EU commercial interests are just as focused on a very high level FTA with the UK, as European supply chains are both deeply integrated and also heavily reliant on the depth of the capital market in London, something that will not be replaced by Frankfurt or Paris in any post Brexit scenario.
All these suggestions are based on an understanding of Britain’s heavy competitive advantage in services. Even in financial services, where great fears have been stoked about the loss of the so-called passport right, a better arrangement for the UK’s financial services industry is possible if our negotiators target the lack of a single market in financial services in Europe, and negotiate, as they must, bearing in mind the very specific interests of UK financial services’ players.
All of this is why we at the Legatum Institute have established a Special Trade Commission to take advantage of our own knowledge in this area, forged over two decades of trade negotiations, as well as the fact that there are many trade negotiators who recognize the potential of this moment and are willing to step up to the plate and help in what is beginning to be seen as an inflection point in global history.
Historic opportunities, or inflection points like this do not come along every day. Britain is in a unique moment. Embracing the agenda we have set forth requires bold, resolute leadership, but there are many, including the members of our Special Trade Commission who can act as guides for this journey. But there is also a dark side to inflection points. Mismanaged, Brexit could plunge the UK, and the global economy with it into recession and perhaps worse. If any nation is up for this challenge, it is surely Britain with its rich and storied history, its disproportionate contribution to the world, and its capacity for exploration and adventure.
Shanker Singham is Director of Economic Policy and Prosperity Studies, Legatum Institute and Chairman of the Legatum Institute Special Trade Commission