Second Thoughts on Brexit?

BRUSSELS - Donald Trump applauds Brexit but traditional American conservatives and liberals are perplexed by it. They cannot understand how a people renowned for common sense could have undertaken a project so harmful to national interests on the basis of such tendentious arguments. Surely there will be a second referendum, they opine, when people realize the cost of leaving the European Union.

Indeed, the British people might well have second thoughts. The pound sterling has fallen since the referendum, pushing up prices in supermarkets and the cost of imported parts for industry, to say nothing of holidays in Spain. The short-term cost to the U.K. of Britain’s EU divorce settlement has been estimated at between 20 billion and 60 billion euros, simply through sharing out assets and liabilities. It becomes astronomical when the potential loss of exports and inward investment, as well as the increase in Britain’s public administration to cope with Brexit, are included.

Britain does not have the administrative capacity to handle the five main sets of negotiations required by Brexit or to manage procedures previously handled by the EU. These negotiations concern the divorce itself, future U.K.–EU relations, transitional arrangements, the resumption of Britain’s WTO membership, and the negotiation of trade and investment agreements with countries around the world. Such negotiations will not be easy. India has already demanded that Britain ease immigration rules in exchange for any trade concessions. The British government, whose main platform is cutting immigration and reclaiming sovereignty, would reject such demands.

Britain will have to set up its own bureaucracy to administer activities that are now the responsibility of the EU, such as trade, agricultural support, and fisheries. The budgetary implications are enormous. The British authorities must recruit 500 trade experts merely to handle Brexit-related negotiations. Checking compliance with rules of origin, or collecting customs duties and administering quotas, will be a huge burden. Thousands of immigration officials will be needed to issue and check visas and work permits.

So, American friends ask, won’t the British think again before inflicting so much damage on themselves? And, indeed, last week a pro-EU Liberal Democrat was elected to a parliamentary seat near London previously held by a Euroskeptical Conservative. The victorious candidate’s party is demanding a second referendum on the terms of Britain’s exit. This month’s by-election occurred in a pro-remain constituency. Elsewhere, resentment against elites, experts, and foreigners still holds sway, stoked by nationalist politicians, the popular press, and post-truth social media news feeds.

Theresa May’s pro-Brexit government won’t run the risk of a new referendum because it faces no serious opposition, with the Labour Party in meltdown. A second, unpredictable referendum might shatter the government’s principal mission. It would intensify Scottish pressure for independence, especially if it endorsed a sharp break with Europe (known as a “hard” Brexit). In any event, which of the two referendums would express the real views of the electorate?

A gradual move by the government toward a “soft” Brexit is conceivable, if the Supreme Court next month gives Parliament a say on the terms of exit. This would mean staying within the EU customs union and/or single market. The price tag for single market membership includes continued free movement of labor, the jurisdiction of the European Court of Justice, and large payments into the EU budget — a hard sell to “Leave” supporters, whose mantras are “sovereignty” and “taking back control.”

Continued customs union membership is less costly. It would avoid tariffs, quotas, and cumbersome rules of origin for trade with the EU. It would eliminate the need for difficult WTO negotiations and reduce the administrative burden on the government. But it would also rule out bilateral trade agreements, which Ms. May has touted as creating a “truly global” Britain, and make the job of Trade Secretary Liam Fox redundant. Insiders suggest that Ms. May is more interested in immigration than trade and might not mind such a prospect. After all, many of her supporters thought they were voting against globalization in the June referendum.

However, as the year draws to a close, insiders are betting on a hard Brexit, with no divorce settlement, no transitional arrangement or long-term agreement. Brussels is talking tough and the British prime minister’s advisors reckon that the kind of “bespoke” tailor-made agreement she is seeking may not be attainable. If, after leaving the EU, Britain set itself up as a large low-tax off-shore center, specializing in sweetheart deals with investors, conflict with Brussels would be guaranteed.

Instead of dreaming of a second referendum, it would be better for Britain’s friends in business and government to urge both sides toward moderation while there is still time. Brexit is not a win-win strategy and the name of the game now is damage limitation.

Photo by Sam Greenhalgh.