Brexit Could Spell the End of Globalisation and Global Prosperity

UK exiting the EU by a 2016 referendum signifies a rejection of globalisation.

Many fear the UK will be worse off economically outside the EU.

(Photo Courtesy: AP Images/ Matt Dunham)

The UK House of Commons has finally voted for Brexit. If the plan passes the House of Lords without much delay, the UK will leave the European Union several years after a 2016 referendum set it down this path.

More than merely tossing aside the EU, this vote represents a rejection of globalisation and the implicit trade-off of some democratic control over economic policy for prosperity. It’s an exchange that more citizens across the world, including the United States, are unwilling to make – often believing they can earn the same gains without a loss of economic control.

As an economist, I believe this trend of turning away from the institutions that facilitated economic globalisation is troubling and may lead to the unraveling of more than a half century of growing global integration – and the economic growth that came with it.

To avert that outcome, we need to answer the seemingly simple question: How can societies reap the economic benefits of globalisation while maintaining democratic participation within it?

Traditional Trade Barriers

Some of my research has focused on the ways in which democratic societies set their own trade policies – that is, tariffs, quotas and other types of barriers to foreign goods and services entering their markets.

But since the creation of the General Agreement on Tariffs and Trade after World War II, countries’ ability to do this has been increasingly constrained by international accords.

At first, this primarily involved trade barriers like tariffs – US President Donald Trump’s favourite weapon in his trade wars. While protests against the negative consequences of globalisation are hardly new, the loss of economic control over tariffs rarely led to a country’s outright rejection of this system, primarily because the economic gains were so significant.

For example, one estimate of the effect of the EU’s single market, which eliminated virtually all trade barriers within the union, is that it has raised member’s GDP by 8% to 9% – which translates to an average of about US$3,000 for every man, woman and child.

Beyond Europe, globalisation has brought significant gains to billions of people, including by helping cut the number of people living in extreme poverty from 1.9 billion in 1990 to around 730 million in 2015. That’s a drop from 36% of the world’s population to less than 10%.

‘Deep Integration’

But tariffs and quotas aren’t the only barriers to trade.

Countries across the world all have their own regulatory standards, quality certifications and other rules they require companies to follow. Known as technical barriers to trade, they can be just as bad for trade as traditional tariffs. And for global businesses, adhering to all these different rules can be costly.

So economists and trade negotiators began pushing countries to harmonise regulations governing issues like the environment, labour and intellectual property. This so-called deep integration is where international trade agreements moved into more controversial territory.

The EU, for example, has created a large set of harmonised standards and regulations that countries must follow in order to participate in the single market, one of the issues motivating UK voters who chose to leave. A famous case in which the EU eventually backed down after a UK backlash involved Brussels trying to enforce metric measurements, which would have endangered Britons’ beloved pints and miles.

In the US, the Trans-Pacific Partnership, negotiated by the Obama administration but shelved by Trump in 2017, delved deeply into these issues. A big part of the opposition to the agreement arose from the delegation of these sensitive issues to often secretive international negotiations.

Globalisation’s Paradox

This trade-off – between the economic gains of global trade and the desire for local control over a country’s economy and markets – is what Harvard economist Dani Rodrik called “The Globalisation Paradox”.

It leaves countries with essentially three choices:

1. They can reject globalisation’s deeper integration and risk losing out on economic prosperity

2. They can simply cede control of large parts of their economic policy to prevailing international standards, risking the ire of their citizens

3. They can help shape globalization by joining and helping create the international organisations and agreements that set trade standards, giving up some control but having a seat at the table.

I would argue that the third option offers the best answer to the question, ‘How can we keep globalisation’s gains without ceding all control?’.

The EU is one of the most ambitious attempts to follow the third path – and gave countries big and small equal say in much of its implementation. Its governing bodies consist of directly elected members and representatives of the member states’ democratically elected governments.

However, even this shared authority can cause problems, as evidenced by Brexit. Even if the EU is organised democratically, it does not necessarily follow that the citizens of the member states will feel much attachment to its decisions. This sentiment is doubly true in a country like the UK, which has traditionally regarded itself as separate from continental Europe.

But policymakers and trade negotiators would be wise to take account of voters’ concerns about a loss of control and be cautious about moving beyond preventing traditional trade barriers like tariffs and quotas from being erected.

The biggest risk we all face today is that Trump’s trade wars, Brexit and other newly erected trade barriers become permanent and undo many of the gains the world has made since World War II. We’ll all be the poorer for it.

(Article written by William Hauk and published in arrangement with The Conversation)