Britain’s Post-Brexit Identity Crisis

Hair typically tousled, Johnson began by pointing up at James Thornhill’s vast ceiling painting titled “The Triumph of Peace and Liberty Over Tyranny.” Britain’s departure, he suggested, could be a moment of liberation and transformation. An island long shackled by continental constraints would fly like Superman, Johnson opined, “ready to take off its Clark Kent spectacles and leap into the phone booth and emerge with its cloak flowing as the supercharged champion” for the benefits of free trade and charting your own national path.

Brexit backers hope to take back control of a country whose 2016 referendum realized a vote to reject not just the European Union but also a model of globalization favoring prosperous urbanites over poorer, rural communities. Even before the new divisions and shutdowns brought about by the ongoing coronavirus pandemic, Johnson was leading the world’s most radical experiment in deglobalization: a bloody-minded push to overturn decades of conventional wisdom that midsize nations must band together, both to reap the rewards of trade and solve problems that each would find too large to fix on its own.

If it works, Brexit will act as a rebuke to those globalists who argue that economic prosperity and democratic sovereignty are hard to reconcile. Other nations may follow suit, rejecting the strictures of multilateralism for bold new eras of national autonomy. But that is a big if, given Brexit also leaves Britain facing awkward questions not just about the kind of trade deal Johnson may strike with the EU but also about the kind of country Britain aspires to become.

Johnson wants to believe that Britain’s future can be simultaneously more open to the world and more in control of its political destiny.

Many arguments for Brexit were based on misunderstandings—perhaps willful, perhaps not—of globalization itself and thus the way Britain’s ties with Europe are now likely to be recast. Johnson wants to believe that Britain’s future can be simultaneously more open to the world and more in control of its political destiny. But his policies already look incoherent. Britain’s tight timetable to strike a deal this year has been severely complicated because of its pandemic response. Even putting that aside, Johnson is balancing conflicting future visions of a free trading, low-regulation “Singapore-on-Thames” with more statist pledges to reduce yawning inequalities. More to the point, he faces one ultimate Brexit conundrum—namely that the act of departure itself could worsen the very underlying divisions that pushed his country to leave in the first place.

Gove had a point. Decades of ever closer ties helped boost Britain’s economy. In 1992, the U.K. signed the Maastricht Treaty, which accelerated European economic integration by handing more powers to Brussels, including expanded cooperation on criminal justice and foreign policy, and laying the groundwork for the creation of the euro. At that time, British GDP per capita was nearly a fifth below that of France. Twenty-five years later, Britain had pulled ahead.

Britain’s growth was uneven, however. London boomed, as did other major cities. Decaying industrial regions and hardscrabble coastal towns did not. Taken as a whole, British household incomes remain well below their level prior to the 2008 financial crisis. Homeowners in desirable areas have enjoyed a prolonged boom but only at the cost of ever higher inequality among regions. During the 2010s, house prices in London, for instance, increased twice as fast as they did in the rest of Britain.

It was voters from those left-behind areas, including small post-industrial towns in northern England like Consett and Wigan, that propelled Johnson back to power in Britain’s recent election.

It was voters from those left-behind areas, including small post-industrial towns in northern England like Consett and Wigan, that propelled Johnson back to power in Britain’s recent election. The Conservative leader now heads an ungainly coalition, bringing together genteel and traditionally Tory suburbs in southern England with once solidly socialist northern cities. In what amounts to a realignment of British politics around a Remain-Leave axis, Johnson united two groups that voted strongly to leave: older, affluent social conservatives on the one hand and the lower-skilled working classes that used to back the opposition Labour Party on the other.

Keeping this grouping together is now one of Johnson’s trickier political challenges. Much more difficult, though, will be finding answers to the questions Brexit posed about the failures of Britain’s economic model.

Globalization tends to be portrayed as a uniform process, where all nations must follow similar rules. But in truth each country globalizes in its own peculiar way, as industries with competitive advantages duke it out on the world stage. That process helped Britain become the world’s second largest exporter of services, behind only the United States. London’s status as a European and global financial center was a big part of this. But British firms also thrive in trading services such as advertising and management consulting, telecommunications, information technology, and business. U.K. services exports are worth almost twice as much as its goods exports, according to McKinsey, a consultancy.

Globalization’s advances also helped some British manufacturers recover from the traumas of Thatcherism—the free market, small-government policies of former Prime Minister Margaret Thatcher. Policies promoting deregulation and competition during the 1980s pushed U.K. manufacturing down from about a quarter of GDP to less than a 10th today. Yet advanced manufacturing revived during the 1990s and 2000s, notably in areas like car-making, where companies such as Honda and Nissan built huge factories to export cars to Europe. Aircraft parts and pharmaceuticals did well too as Britain became a base from which international investors could access the EU’s so-called frictionless single market.

Yet these British successes came at a cost, not least a pronounced hourglass-shaped labor market with a squeezed middle class. The era of hyperglobalization created plenty of good jobs at the top in both services and advanced manufacturing. Britain’s flexible labor market also churned out poorly paying low-skilled jobs at the bottom, leaving millions of workers barely out of poverty. But middle-skilled jobs, such as factory machinists, were caught in the middle, falling by around a 10th in the decade before the 2008 financial crisis.

Much of the recent Brexit debate has focused on how “soft” or “hard” a future EU trading relationship would be. A Canada-style deal is undeniably hard, involving the reintroduction of customs checks and possibly tariffs. Negotiating such a deal will not be easy: Canada’s took seven years, a feat Britain now hopes to achieve in less than one, according to Johnson’s self-imposed deadline. Set against the backdrop of the coronavirus crisis, with both British and European political elites overwhelmingly preoccupied with outbreak management, the odds of meeting this timetable look worse than ever.

Of the plausible deals Britain could have struck, Johnson’s also threatens the greatest disruption to trading patterns, short of crashing out of the EU entirely. A Canada-style deal will leave Britain’s economy 3.5 percent smaller in a decade, according to the London-based National Institute of Economic and Social Research—a decline that amounts to $90 billion, or about $1,100 per person per year forever.

Yet Johnson’s true Brexit conundrum is that these new frictions will hit some sectors harder than others. As the author and economist Martin Sandbu argued: “A hard Brexit … stands to exacerbate the polarising characteristics of the UK’s existing economic model and harshen the social tensions to which it has given rise.”

How might this happen? A hard Brexit will hurt British-based manufacturers that use the U.K. as a base from which to plug into European supply chains, like Nissan or Jaguar Land Rover, owned by India’s Tata Motors. These companies rely on sending parts and widgets back and forth across Europe’s borders. Intermediate goods traded with Europe alone now make up roughly a quarter of Britain’s imports and exports, according to McKinsey.

When we speak of globalization, this is what we mean: components flying between countries via the webs of production that trade economists call “global value chains,” often based on models of “just in time” delivery. In this sense, much of Britain’s recent globalization is actually best understood as a process of Europeanization. A hard Brexit will undo much of this, adding costs to companies via trade barriers and delays through new custom checks.

Few British industrial manufacturing firms are likely to replace contracts lost in France or Germany with others in South Korea or Thailand.Johnson’s predecessor, Theresa May, tried to avoid this problem with her “Chequers” deal—named after the country residence of sitting British prime ministers—which preserved frictionless trade in goods. Johnson rejected this because it meant keeping common EU rules, in effect choosing to sacrifice car- and drugmakers on the altar of sovereignty. Nor are U.K.-based manufacturers likely to be able to replace lost EU business. The cost of moving goods over long distances remains a powerful force shaping trade patterns. Apple can ship lightweight electronics from factories in China, but in heavier industries like auto and aviation, production tends to be regional, for instance in North America or East Asia, rather than truly global. Few British industrial manufacturing firms are likely to replace contracts lost in France or Germany with others in South Korea or Thailand.

Brexit will hit trade in services too. More than half of exported U.K. services end up in Europe, where they will lose access to the single market, for instance when the city of London loses the so-called “passporting” rights that let banks sell services into the single market without needing extra licenses. Global financial centers grow by servicing regional markets, as New York does for the United States or Hong Kong for China, so London will suffer as it distances itself from its European base as banks and brokerages shift divisions to Frankfurt or Dublin.

Services are still likely to be more resilient than manufacturing, however. Trade in services is still growing strongly around the world, in contrast to the exchange of goods, which is stagnant or declining. If Britain manages to sign post-Brexit trade deals with countries like the United States and Japan, it is likely to seek favorable conditions for its services industries. Services trade is also less troubled by problems of distance, meaning British banks or consultants are more likely than manufacturers to be able to replace lost European business elsewhere in the world, for instance in Asia.

Not all British factories will move: Nissan, which operates Britain’s largest car factory in the northern city of Sunderland, recently pledged prior to the coronavirus crisis to stay even under a hard Brexit scenario, although whether this hope remains in place for Nissan and other major international manufacturers now depends on the severity of the coming economic downturn and potentially government support to offset huge falls in demand. Falls in the value of sterling prior to the crisis helped workers and factories regain lost competitiveness, although again these effects have now been swamped by the economic turbulence brought on by the pandemic. Still, when the coronavirus crisis subsides, thousands of manufacturing jobs, built up slowly over decades, are likely to shift gradually (or potentially at an accelerated rate due to the crisis) to countries like Poland and the Czech Republic, where access to Europe is easier. Foreigners who might once have brought new factories to Britain will head to Europe too, just as Elon Musk recently began a new Tesla Gigafactory in Germany. Britain, he said, was too risky.

Just a fraction of Britain’s manufacturing employment comes via high-quality exporters. Even so, those jobs are often to be found in left-behind regions, while services jobs in banks or advertising agencies are overwhelming concentrated in cities. Manufacturing jobs have knock-on effects too, supporting other employment, suggested Richard Baldwin, a trade economist known for his work on global value chains. “If you lose a few hundred jobs in London, no one notices,” he said. “But if you lose a few hundred of these good jobs in left-behind areas, the secondary effects can be devastating.”

The first is “Singapore-on-Thames,” or, to its more boisterous backers, “Singapore-on-steroids”—a vision of an ultra-competitive island of rock-bottom taxes and lax rules, which would tempt European companies to shift business to the U.K. in search of easier regulation or indeed to relocate entirely.

There were elements of this vision in Johnson’s Greenwich speech, in which he painted himself as that most unusual of animals: an ardently free-trading populist, rather than the protectionist variety represented by U.S. President Donald Trump. Yet Britain’s Singaporean future remains unlikely for three reasons, the first being its misunderstanding of the country on which it is based. Singapore is undeniably a low-tax, competitive economy. But rather than Singapore being a haven for deregulation, its economic management is interventionist, with a state that owns stakes in almost everything, including telecom providers and airlines. Rather than undercutting regional rivals, Singapore prospered by offering relatively high regulatory and legal standards, winning investment from poorer neighbors like India, Indonesia, and Malaysia.

Then there is the second matter: Europe. Anxious about Britain’s Singaporean instincts, the EU plans to make a “level playing field”—meaning comparable social and environmental standards —central to its Brexit negotiations. Britain can push for regulatory divergence if it wants. But Europe can then respond by raising trade barriers or with retaliatory tariffs, in effect negating any benefit the U.K. might gain from undercutting European rules.

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The final barrier to Singapore-on-Thames comes via the British public. The U.K. already has one of Europe’s most deregulated labor markets. Polls show scant support for lowering standards further, for instance by cutting the
minimum wage or lowering environmental and food safety rules. The long-term public response to the coronavirus is certain to play into this too, by radically expanding the scope of state intervention in the economy and increasing public demand for higher spending in core public services, especially health care.

Indeed, it is mostly for these reasons that Johnson had begun prior to the pandemic to push a second post-Brexit strategy, which was far more statist and populist and designed to appeal to Brexit-backing voters in poorer regions. Some of this effort was symbolic, including mooted plans to relocate Britain’s upper house of Parliament, the House of Lords, to the north of England. But there were also serious proposals to rejuvenate declining northern areas via a new $100 billion infrastructure spending pledge and to build a long-promised high-speed rail line between London and Manchester, all funded by higher public borrowing.

More radical still were the ideas of Dominic Cummings, a Brexit architect and Johnson’s quixotic political advisor, to shake up the British state. Cummings attracted derision with a job advert inviting “weirdos and misfits with odd skills” to apply to join his Downing Street team. He planned to lead a group of self-styled insurgents at the heart of government, launching bold forays to scrap some state bodies and build others in their place, for instance a U.K. version of the U.S. Defense Advanced Research Projects Agency, which is responsible for developing cutting-edge military technology.

Cummings’s plans are eye-catching, but they require deft state direction that would be highly unusual in recent British history.

The idea here, attractive on its face, is that Britain can innovate its way into a new period of prosperity. Government economic measures unveiled in response to the pandemic may create further space for radical ideas too. Cummings imagines a radically different education system as part of this, with a focus on science, creativity, and problem solving. Britain’s recent decision to defy Trump and permit the Chinese firm Huawei to play a part in its future 5G rollout was part of this picture too, as Johnson and Cummings prioritized next-generation telecom infrastructure over favorable ties with the United States.

Yet this second approach also comes with problems. Cummings’s plans are eye-catching, but they require deft state direction that would be highly unusual in recent British history. Johnson will have less money to spend either way, given the damage the coronavirus response is likely to do to national finances.

Politically, Johnson has the rest of his coalition to think about, which includes plenty of traditional Tories keen on low taxes and worried about expensive white elephant infrastructure schemes. Even if they can be convinced, in part by rebranding these plans as pandemic stimulus measures, Britain’s underlying economic structure has proved surprisingly durable, from its flexible labor market to its deep regional inequalities and low investment levels. As the economist Diane Coyle has argued, even the sums Johnson presently plans to spend are nowhere close to what would be needed to shift this pattern fundamentally.

Over time Britain will adjust to its new circumstances too. The Harvard University economist Dani Rodrik talks about the “political trilemma” of globalization, in which deep global integration is incompatible with both national sovereignty and democratic accountability. Nations, he suggests, must pick two of these three things. Britain has decided to make its own rules and run its own institutions but at the cost of forgoing the economic benefits that hyperglobalization often brings.

Johnson rejects this trilemma, claiming Britain can now become more economically open and more in control of its own destiny. More circumspect Brexit backers think leaving the EU might create a new Britain that grows more slowly but is more democratic and equal. Such a bargain, they think, is probably worth having, so long as it begins to heal some of the wounds that caused Brexit in the first place.

The coronavirus outbreak will change this trajectory in complex but significant ways. In the face of the worst global public health crisis in a generation, Britain’s public might rediscover some affection for multilateralism, especially after a crisis that has seen precious little international coordination. But it is of course sadly possible that, as the pandemic deepens, Britain’s ties with Europe will be strained further, making Brexit negotiations far more difficult.

In the long run, there are many ways in which Brexit could turn out to be a good deal. The EU as an institution may prosper over the coming decade. But if it does not, Britain’s decision to leave will seem fortuitous. More to the point, while there is no single template for national economic development, countries that control what Rodrik dubs their own “policy space” are often better able to figure out new routes to prosperity, as South Korea and Singapore have done. This is a tough process with few guarantees of success. But Britain at least has the potential to become a leader in the kinds of industries that will underpin future global growth, from renewable energy and artificial intelligence to online education.

Yet even this cautiously optimistic vision comes with risks, namely that a process promised as a cure to globalization’s ills may still end up worsening the disease. Brexit is described as a divorce for good reason. If globalization was the heady, romantic rush of economic integration, then deglobalization is the slow, awkward, and painful unpicking of decades of trading relationships. Almost every respectable estimate suggests this will leave Britain poorer outside the EU. Indeed, its economy is already about 3 percent smaller than it would have been had it voted to stay.

Brexit itself was a radical democratic act, but its effects are likely to be felt in a gradual and painful process of relative economic decline for a decade at least. As Britain’s economy adjusts, the erosion of manufacturing in particular threatens to harm many of those who put their faith in Johnson’s promises. At its worst, Britain could face a Mediterranean future similar to countries like Italy, which have long struggled economically and whose politics have grown more unstable as a result. Rather than an act of national liberation and transformation, Brexit risks leaving Britain alone to navigate a more complex and uncertain global era, feeling more out of control than ever.

This article appears in the Spring 2020 print issue.