Why Brexit Could Push the UK in a More Free Trade-Friendly Direction

When Britain at last leaves the large protectionist bloc of the EU customs union, the economic realities of having made this shift may push it, at least the first step, back toward its former place as one of the world’s leading exemplars of free trade.

With scarcely over a month left to go until Britain is scheduled to leave the European Union, it is looking increasingly unlikely that any sort of formal withdrawal agreement will be reached by the time Brexit arrives. In the aftermath of Parliament’s overwhelming rejection of Theresa May’s widely criticized Brexit Deal, UK policymakers have gradually been shifting gears away from the question of how to procure a transition deal from the EU and toward the question of how to help the British economy bounce back after the near-inevitability of a No-Deal Brexit.

The British government and civil service are currently investigating a wide range of different and sometimes conflicting policy proposals. Among the most widely reported of these investigations is the so-called “Project After” initiative, which is exploring the viability of cutting corporate taxes and the value-added tax (VAT) and increasing government spending and subsidies as potential methods of boosting the British economy to offset the uncertainty and potential turbulence of a No-Deal Brexit.

Of all the proposals currently on the table, however, the one that arguably has the most potential to bolster the UK economy, as well as the greatest prospects of actually being politically feasible under current circumstances, is the proposal to drastically—or even totally—cut Britain’s tariffs in the aftermath of a No-Deal Brexit, which reports have confirmed is indeed under consideration by “Project After.”

A Post-Brexit UK Should Be a Free-Trade Haven

The benefits of free trade over protectionism are so numerous and well-documented that even the notoriously disunited economics profession has typically found itself in a rare state of agreement on the matter. When a government imposes a tariff on imported goods, it creates an additional cost that has to be borne by the producers of those goods, eroding the profit margins they are able to make by selling those goods to consumers in the importing country.

The fact that Britain will no longer be part of the EU will create a more lasting constraint on policymakers to impose protectionist measures.

This increased cost means that the marginal producers, who had previously only just been able to make a profit by selling their goods to consumers in the importing country, now find that they are no longer able to do so without suffering losses, forcing them to exit the market. This reduces the supply of the goods being imported, which, other things being equal, will increase the prices consumers have to pay for those goods, tangibly reducing the standard of living of consumers in the country that imposed the tariff.

The fact that the UK government is considering significantly cutting tariffs in response to a No-Deal Brexit seems to reflect a desire to boost consumer spending, which would be stimulated thanks to the decreased consumer prices brought about by tariff cuts. Such a boost in consumption might be enough to offset the downward spiral of consumer and business activity that many mainstream economists and pundits fear might result from the uncertainty surrounding Brexit.

But this isn’t the only reason why free trade increasingly seems to be a real, politically-feasible possibility for Britain as Brexit approaches. Regardless of the momentary preferences of the UK government for more or less consumer spending, the fact that Britain will no longer be part of the EU-wide single market will create a much stronger and more lasting constraint on the ability of British policymakers to impose protectionist measures.

It has often been remarked by economists that the smaller the political unit that places a tariff barrier around itself, the more difficult it will be to disguise the economically harmful effects of having limited trade in such a manner. If a tariff is placed around a large region, such as the whole of the EU, that region’s large internal market will usually still be able to produce many of the goods that can now no longer be imported so easily. The result of the tariff would still be an increase in prices and a decrease in the quality and variety of goods available, but in such a large protectionist bloc, these negative effects might manifest so gradually and slightly that consumers may not fully realize that their standard of living has been harmed compared with what it otherwise would have been—let alone that it was the tariff specifically that caused the harm.

Britain Is Too Small to Absorb the Cost of Tariffs

At the other end of the spectrum, however, if a tariff wall were placed around a unit as small as a town, a neighborhood, or even an individual household, it is easy to imagine how the reduction in the quality of life suffered by those within the tariff wall would be significant and immediate. The harsh effects of any restrictions it imposes on its international trade will become considerably more difficult to disguise. Without such a large internal market to provide them with substitute goods at only a slightly higher price, it would be immediately apparent to the residents in the smaller protectionist bloc that the tariff had harmed them by cutting off their access to trade with the wider world.

When Britain exits the large protectionist bloc of the EU and becomes its own small, independent sovereign region, the harsh effects of any restrictions it imposes on its international trade will likewise become considerably more difficult to disguise. Even if British politicians do not come to appreciate the benefits of free trade on a principled level, Britain’s exit from the EU may impel them to support it nonetheless rather than impose the increasingly obvious costs of protectionism on the voting public.

None of this is to deny the primacy of education in sound economics as the surest way to inoculate the public against all kinds of government intervention into the economy, including trade restrictions. However, when Britain at last leaves the large protectionist bloc of the EU customs union, the economic realities of having made this shift may push it, at least the first step, back toward its former place as one of the world’s leading exemplars of free trade.