* The UK has to set up a situation where the incentives of those doing the negotiating for Europe are changed.
* Allowing tariff-free imports tends to make a country’s exports more competitive, as many exports involve imported parts or ingredients.
My family did Christmas in East Asia this year, and sitting in Hong Kong my thoughts drift to Brexit. There has been a SWAT team of UK produce industry luminaries visiting all key UK retailers to make sure they are aware of the implications for these retailers of Brexit on the produce supply chain. This is appropriate and wise. After all, these large retailers deal with many different products and may not understand the implications of a withdrawal from the common market on the fruit and vegetable trade.
Being an American, and thus outside of the debate on Brexit, I have sometimes felt like a priest receiving confession, for more than a few produce industry owners and executives have repeatedly told me they felt that Brexit was likely to challenge their businesses … and whispered to me that they voted for it anyway. For better or worse, we always thought the Remain campaign was misguided as it harped almost exclusively on the dire economic effects of Brexit – though we never heard a single person say they were going to vote for Brexit due to the economic benefits they thought it would bring.
After the vote, the pollsters said the one characteristic that best predicted how one voted was how people referred to themselves. If they thought of themselves as Europeans or even as British, they voted Remain, but if they identified as English, they voted to Leave. The whole dispute was built around what demographers call a psychographic.
Looking at the post-Brexit behaviour of politicians in the United Kingdom, they seem trapped. The problem is that they are focused heavily on trying to get other people, specifically the European Community, to do things. They would be wiser to focus on acting independently.
A famous Austrian political economist, who worked most of his life at Harvard, Joseph Schumpeter, coined a term, schöpferische Zerstörung, or “creative destruction,” which summarised the great dilemma at the intersection of economics and politics. In order for economies to advance, existing stores of wealth must be destroyed so that resources can be redeployed into new ventures. But, politically, there are always powerful forces that seek not maximisation of wealth, but stasis. Think of the global battle to fight Uber. In each city, some variation of the story is the same. In New York, for example, the numbers of taxis is limited by a medallion system. Originally the medallions were sold by the city, but there was a vibrant after-market, and with demand growing and supply mostly fixed, prices zoomed to over $1.3 million for a taxi medallion in 2014. Post-Uber and Lfyt, the medallions are regularly offered for a half-million dollars and, sometimes, as low as a quarter-million.
What the public policy response to this should be is interesting to think about. The people who bought these medallions were hard working people who played by the rules that society had set up. Now, due to no fault of their own, but due to technological change and regulatory decisions, what they had purchased – the exclusive right to respond to a person on the street waving their hand to get a taxi – was no longer as valuable.
The exact same thing happened with taxi drivers in London, where the barrier to entry is a test called “The Knowledge,” which typically takes people two to four years to study for and is extremely hard to pass and has been compared to having an Atlas of London implanted in one’s brain. Turns out that satellite navigation systems are perfectly adequate most of the time and so this barrier is not valued sufficiently by consumers in London to cause them to prefer to hail a London taxi rather than use an app to call Uber or Lfyt.
In cities across the world, this battle is playing out, in which traditional interests try to hold back the future. They try to preserve the value of the status quo — their medallion in New York or their job in London.
The only reason they haven’t won everywhere is because the taxi industry didn’t act fast enough to get these services banned. By the time the taxi companies realised how great the threat was, the companies – Uber, Lfyt and others — plus thousands of drivers and millions of customers valued these services and fought back.
In the Brexit matter, the focus on the European Union is driven by lots of vested interests. These people are not bad and are doing nothing wrong. They set up their supply chains and their businesses to take advantage of the laws as they have existed. At least in the short term, they will lose out if laws and policy change to encourage a different location for trade and investment.
But it is important to remember that any trading block exists based on what it excludes. The whole benefit of, say, Spain, being in the Common Market is that competitors from outside the market will experience tariff and non-tariff barriers that give Spain an edge on accessing, say, the UK market. If Europe eliminated tariffs on non-European countries and harmonised regulations, there would be no benefit to being in the Common Market.
So being in the Common Market has altered the patterns of trade to be in line with political barriers, whereas prosperity can best come through trade based on Comparative Advantage, in which case countries trade based not on artificial political distinctions but based on the ability to produce and provide goods and services most efficiently.
Hong Kong is a great place to think about this. In 1960, World Bank numbers indicate that per capita income in the UK was more than three times what it was in Hong Kong. Yet, today, Hong Kong’s per capita income is right at par with that of the United Kingdom. To put it another way, over the last half century-plus, Hong Kong has grown its per capita income at more than three times the rate of the UK.
One gets no sense that the UK government is thinking outside the box as to how the country can be set up post-Brexit to produce this kind of growth and prosperity for the British people.
The UK and Hong Kong both have the enormous advantage of a stable legal and property-rights system based on the Common Law. Indeed the UK has a big advantage here because nobody can really know how China will treat Hong Kong in the future, and this makes Hong Kong’s growth even more remarkable.
Hong Kong is also a free port, meaning there are, generally speaking, no tariffs or duties on imports. And here would be a path for the UK. Rather than some achingly difficult multi-generational negotiations with every country on the globe, the UK could declare itself a free port. This would instantly help trade flow in a way dictated by economics rather than politics. The reduction in tariffs would allow British consumers to buy the products they want at the lowest price available. It would be as if everyone in the UK got a pay raise as the cost of goods would drop.
Now, in an earlier column, we had suggested a variant of this proposal when we suggested that the UK declare itself tariff-free for all nations EXCEPT those of the European Union, which would be determined through negotiation. This depends on how much the UK government wishes to play hardball. The basic thought here is that the European Union is inclined to “punish” the UK, not because it makes economic sense but because the bureaucrats and functionaries who run the EU are petrified others may leave and want to set an example.
So the UK has to set up a situation where the incentives of those doing the negotiating for Europe are changed. In this case, if the whole world has tariff-free entry into the UK, but Europe does not, that means American and Japanese automakers, for example, would have tariff-free access to the large UK market – but German automakers would not. This would turn the German automakers – and many other European industries –into powerful advocates for allowing the UK free market access into Europe.
One wonders if Theresa May has read Donald Trump’s The Art of the Deal. His Fifth Step is “Use Your Leverage,” and one just doesn’t get the sense that the UK leadership team has the stomach for it at all. Politicians usually don’t – because, typically, the political pressure is almost all coming from businesses with known interests related to the European Union. The businesses, jobs, etc., that will be generated by future trade with India, America, Australia, Israel, Brazil and more are unknown and thus have only the vaguest of advocates.
Some will ask whether the UK doesn’t need to maintain the option of tariffs to use as leverage in negotiations with other countries. Well, the UK will always have the option of imposing tariffs if the political leadership of the UK feels the country is being treated unfairly. In general, though, allowing tariff-free imports tends to make a country’s exports more competitive, as many exports involve imported parts or ingredients.
In any case, movements such as this are steps the UK government can take – without anyone’s permission.
In 2016, both the UK and USA made political decisions that will have substantial economic impacts. Both decisions represent a break with the past. Both decisions have many intelligent and knowledgeable people wishing they could be undone.
The real question for the UK, though, is whether Brexit means shrinking back to the British Isles, maintaining the status quo with Europe as much as possible or an opening to the non-European world. The European Union accounts for about 10 percent of the world’s population; surely there must be opportunities to reach out to the other 90 percent! And what Trump wrote about when he was talking about leverage reminds us of the secret to trade negotiations with Europe – the more the UK opens to the rest of the world, the more pressure Europe will feel to cut a deal.
In 2017, in this time of great change, let us hope that leaders on both sides of the pond show themselves worthy of the new situations their nations confront. May they conduct themselves wisely and usher in an era of new prosperity for both nations.