Jan 3, 2019

What a “Hard Brexit” Could Mean for the US and the UK

Daniel Griswold Senior Research Fellow

As the United Kingdom enters the final countdown to Brexit on March 29, 2019, it’s looking more likely that the country will “crash out” of the European Union with no formal exit plan in place. A hard Brexit will cause short-term disruption, but it may prove unavoidable given the hard political realities. 

Prime Minister Theresa May has come under heavy criticism from all sides for her handling of Brexit, but she may be trying to achieve something impossible. Supporters of Brexit want a clean and meaningful break from the EU, while the remaining EU countries are demanding a frictionless border with Northern Ireland, a $50 billion divorce settlement, and the free movement of people that most Brexit supporters oppose.

Mix in domestic British politics and the result is a lack of support in Parliament for the “soft Brexit” deal May has negotiated with the other EU members. May postponed a vote earlier this month to approve the deal when it was clear that it was set to lose by a large margin. She’s postponed another vote until mid-January, but it still appears well short of majority approval.

In the short to medium term, exiting the EU will be painful for the UK economy. Because of its proximity, continental Europe is the biggest commercial partner for the UK. According to a recent House of Commons Briefing paper, the EU is by far the UK’s largest trading partner, buying 44 percent of UK exports and supplying 53 percent of UK imports. Goods, services, investment, and people flow freely between the UK and the other 27 members of the EU.

Dropping out of the EU will not end the UK’s economic ties to the rest of Europe, but it will introduce frictions and outright barriers that will impose a real and measurable cost on the UK. A recent study by the UK’s Treasury Department predicts the soft Brexit negotiated by May’s Conservative government would result in a UK economy that will be 3.9 percent smaller in the long run than it would be if the UK were to stay. A hard Brexit, the crashing out that will happen on March 29 absent an agreement, will mean the economy will be almost 10 percent smaller than it would be otherwise.

Americans have a real stake in the Brexit outcome. The United Kingdom is America’s seventh largest trading partner in goods, its third largest source of tourism, and its top partner in services trade and direct foreign investment. Majority-owned UK affiliates in the United States employ more than one million Americans, while US affiliates in the UK sell more than $600 billion in goods and services and employ 1.4 million British workers. The two nation’s financial sectors, centered in New York and London, are especially intertwined. Any economic downturn caused by Brexit will have a noticeable impact on a sizeable number of American workers whose jobs are tied to the UK.

One silver lining would be the opportunity for the United States and United Kingdom to sign a bilateral trade agreement. Such an agreement would ensure that people in both nations can continue to enjoy mutually beneficial commerce that has only deepened over the decades. As I outlined in a new study for the Mercatus Center, a US-UK trade agreement could also tackle issues that the EU has been reluctant to engage, including addressing non-tariff barriers such as sanitary and phytosanitary regulations on food products and the elimination of agricultural duties. The Trump administration has already notified Congress that it plans to pursue such an agreement once the UK actually exits the EU’s customs union.

In strictly economic terms, Prime Minister May’s deal would be the best option for the UK (other than staying in the EU). It would keep the UK inside the customs union for several years and continue to allow the free movement of people. But Brexit was about more than economics. It reflects an understandable desire of many British citizens to “take back control” of their domestic economic affairs from what has been seen as over-reaching regulation from Brussels. It also reflects a less understandable hostility to immigration, even though the three million EU residents who have migrated to the UK have been a boon to its economy.

Given the lack of support for the soft Brexit option, leaving without an agreement on March 29 appears to be a growing possibility. Crashing out will cause pain and disruption in the short run, but it may be the only way to fulfill the expectations of those who supported Brexit. Let us hope there’s enough enlightened self-interest in London and Brussels to mitigate any short-term chaos by striking temporary agreements before March 29 to keep planes flying, people moving, and goods, information, and money flowing across the English Channel even after a hard Brexit.

Photo credit: Dan Kitwood/Getty Images

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