Several decades of studying Britain’s relations with the European Union and its predecessor organizations have left me pessimistic about the U.K.’s ability to secure exit from the E.U. on the terms that appear clearly to be in everyone’s best interests. And a few days in Brussels have led me to conclude that the prospect of a negotiated exit is growing more remote.
Britain’s fundamental problem through the years — from Harold Macmillan, to Margaret Thatcher, to David Cameron, to Theresa May — has been its tendency to expect rationality, especially economic rationality, to carry the day in European decision-making. The British have persistently underrated the extent to which Europe is fundamentally a political enterprise, and overrated the extent to which Anglo–German economic ties will lead Germany to take Britain’s side against French political ambitions. The British remain convinced that Europe’s problems can be solved if only everyone will be reasonable. It is an admirable conviction, but it fundamentally misunderstands a European project that is based on ideological conviction rather than rationality.
In spite of all the deliberate mystification involved in Brexit, the core of the problem is quite simple. After Britain legally exits the E.U. at the end of March 2019, it will have precisely the same relationship to the E.U. as the U.S. does today. All British goods and services sold in the E.U. will have to meet E.U. standards, and all E.U. goods and services sold in Britain will have to meet British standards. The only question of substance is whether Britain and the E.U. should start discriminating against each other’s trade on the basis of national origin.
Under the WTO’s rules they could do so, at least to a minor extent. But in a world where free trade is under threat — not least from Washington, D.C. — it would seem better if both sides agreed not to discriminate at all. In essence, British goods and services could be treated “as if” they were from the E.U. provided they met E.U. rules, and vice versa. Both sides would be free to regulate in their own way domestically, both sides would apply only their own rules internally, and both sides would be free to negotiate free-trade deals with third parties. A system of origin rules would be required to ensure that British imports from outside the E.U. did not qualify for free entry into the E.U., but origin rules are the stuff of free-trade deals the world over, and there is obviously nothing impossible about agreeing upon them.
Curiously, this solution is more or less — with the important exceptions of agriculture and services, both now included — the one the British proposed for an industrial free-trade area with the European Economic Community (EEC) in 1956, at the very dawn of the E.U. Back then, everyone liked it except the French, and so, after three years of tedious negotiations and French time-wasting, it never happened. Today, little has changed.
Of course, there are other concerns — on a practical level, a customs agreement is at least as important as a trade agreement, though much less discussed — and other ways of dealing with services. Indeed, I was in Brussels to help launch a report on one of those ways — “enhanced equivalence” in the financial sector — written by Barnabas Reynolds for the British think tank Politeia and New Direction, a European think tank allied with the European Conservatives and Reformists.
“Enhanced equivalence” is complicated in detail, but simple in essence. It describes an agreement between two or more regulatory authorities on the ends they seek, one which accepts that they can reach these ends in different ways. It’s a species of mutual recognition, and much better than the alternative of regulatory harmonization, which tends to add regulatory burdens, reduce competition, lock in the dominance of today’s firms, and promote the emergence of a transnational administrative state. In the context of Brexit, it’s a way to apply a concept the E.U. already accepts so that the City of London — Europe’s financial hub — and the E.U.’s nations enter a “common market” of sorts in financial services, without the supranational overhead and regulatory overreach of the E.U.’s common market.
I wish I could say that this sophisticated approach was received with applause, or even optimistic interest, in Brussels, but I can’t. Though of course it’s early yet, the initial response to the report was cool, if not chilly. Partly this was no doubt a result of Brussels’s persistent tendency, which Reynolds emphasized with regret, to believe that trade is about gains and losses, and that Britain and London can prosper only at the expense of the E.U. So foolish a belief scarcely merits rebuttal, yet it persists.
The larger problem, though, is that “enhanced equivalence” would require the European Commission to make a decision based on an objective assessment of whether Britain is actually regulating in an equivalent way, when E.U. rules make it clear that such decisions are inherently political. The Commission is not obligated to respect such an objective assessment. If it were obliged to do so, it would no longer be in charge, and being in charge is its entire purpose. So we come back to the problem with Europe that has bedeviled Britain since Macmillan: It’s not about the economy, stupid.
In practice, the only possible response to this as it pertains to Brexit is to point out that Britain will neither pay its “divorce bill” of 39 billion euros nor allow the large E.U. surplus in visible trade with Britain to escape tariffs, if the E.U. reserves the right to discriminate against Britain’s financial sector whenever it is politically convenient to do so. The E.U.’s position is basically one that can work only when it is negotiating with smaller players, which helps explains why it took seven years to negotiate what turned out to be an intensely controversial free-trade deal with a country as nice as Canada, and why its negotiations with the U.S. toward such a deal never got very far off the ground.
Fundamentally — as leaked E.U. documents about the U.S. negotiations confirm — the E.U. has an inferiority complex when it comes to dealing with countries and institutions in its weight class.
Fundamentally — as leaked E.U. documents about the U.S. negotiations confirm — the E.U. has an inferiority complex when it comes to dealing with countries and institutions in its weight class. When you put the E.U.’s desire to justify, reaffirm, and strengthen its political existence together with Britain’s desire to separate while maintaining close economic ties and a friendly political relationship, you have a tenuous basis for an agreement. Frankly, if Britain and Brussels were capable of negotiating a reasonable Brexit deal, Britain would probably never have voted to leave the E.U. in the first place.
I certainly won’t rule out the possibility that a deal will be struck. Economics don’t matter as much as the British think they do, but they do matter. The “divorce bill” deal of December 2017 alludes to the possibility of a comprehensive free-trade agreement (into which, as a legal matter, any equivalence deal would have to be incorporated), so most of the possible answers are still in play.
And it’s true that fault doesn’t lie entirely on the E.U.’s side: In an effort to keep its narrow Commons majority together, and reflecting what I fear is a distinct lack of civil-service enthusiasm for Brexit, Britain has been far too slow to state plainly that it wants the maximum degree of free trade it can negotiate with all parties, as long as this does not restrict its ability to govern itself or negotiate with others. The next few days, as the E.U. presents its draft withdrawal treaty and the British government responds, will be significant — and the early omens are far from favorable.
But Britain would do well to remember that it does have another option. The E.U. and European political leaders — starting with Angela Merkel — have gone out of their way, time and again, to state that Britain will not be allowed to “cherry pick,” gaining access to the continent’s customs union without accepting all of its obligations. On one level, this is ridiculous: All trade deals involve national efforts on all sides to “cherry pick,” if by that one means either to negotiate a favorable deal or to have fewer barriers in some areas than in others. But it is also revealing.
What the E.U. is tacitly conceding with the accusation of “cherry picking” is that a lot of the obligations that come with being in the E.U. are not politically or economically appealing. What it really worries about is that Britain is going to get access to European markets while dumping the E.U.’s regulatory overhead, which will in turn make it a lot easier to sign free-trade deals around the world. In short, what the E.U. fears — true to its suspicion that British prosperity will come at the expense of European failure — is a more competitive Britain.
And increased competitiveness is precisely what Britain should be aiming for. It’s not just a negotiating tactic, though it is that. And it’s not just an insurance policy in case negotiations don’t work, though it is also that. Most fundamentally, it’s the right thing to do. No one regards European economic policy as a byword for flexibility, growth, job creation, or technological innovation. Brexit has preserved and enhanced Britain’s economic and political freedom to take a different road. Not taking it wouldn’t just be bad economics; it would be bad politics — and with the E.U., that always matters more.