Why the World Should Root for the EU in Brexit Talks
If Brussels folds, it will mark the end of the last, best hope for stopping a race to the bottom.
In words now coming back to haunt him, British Prime Minister Boris Johnson once said that negotiations with the European Union on the terms of Britain’s departure from the bloc would let Britain have its cake and eat it too. The United Kingdom, he insisted, would walk away with a trade deal that preserved unfettered access to the continent’s market of 450 million consumers, while freeing the U.K. from pesky European rules, regulations, and standards. The only problem is that EU negotiators don’t seem to want to give away their half of the cake. As talks remain deadlocked and a hard deadline of Jan. 1, 2021, is fast approaching for Britain to crash out of the EU, the rest of the world should be rooting for Europe to hold on to its share.
It is easy to dismiss the too long-running Brexit show as an internal European affair—of deep interest to companies doing business there, of slightly less interest to European citizens, and of little consequence to anyone else. That would be a mistake. For one, there will be short-term economic costs—and if Britain has a hard exit with no new trade rules in place, it could send shock waves around the globe. The British economy is expected to shrink by 4 percent over the next decade, and there will likely be massive short-term disruptions in trucking and air freight, possibly leading to widespread shortages.
But there is also a larger stake for the world. If Brussels folds in the negotiations, it will mark of the end of the last, best hope for restraining the race to the bottom in global trade.
At the heart of the unresolved Brexit issues is a hoary metaphor known as “the level playing field.” For decades, the phrase was uttered as justification every time a trade minister slapped tariffs or other protectionist restraints on imports. Who could possibly compete on tilted playing field, after all? But the metaphor captured the belief shared in many of the West’s market-based democracies that capitalist competition is expected to be more or less fair. There is no shame in a company losing market share to a nimbler, more innovative competitor. But what if that competitor is enjoying huge, tax-free loans or other subsidies from the government? Or given preferential treatment by regulators? Or allowed to cut costs by dumping waste into a nearby river? Most of us would consider these practices unfair and wish to constrain them. Many of the issues dividing the United States and China over trade, for example, are level playing field issues.
In the Brexit negotiations, these issues have proved by far the hardest to resolve. The EU, though not without its own sins, has been the global champion of high-standards capitalism. It has gone much further than the United States, for example, in restraining government subsidies for companies, resisting tax competition that drains government coffers, and insisting on high levels of social protections for its citizens. In the Brexit talks, the European fear is that an unshackled Britain will siphon off investment by promising companies that invest in Britain full access to the EU market without any of these costly protections.
The European Council in 2018 went so far as to enshrine the metaphor in its guidelines for the Brexit negotiations, insisting that “the future relationship will only deliver in a mutually satisfactory way if it includes robust guarantees which ensure a level playing field.” The aim, the guidelines say, is to “prevent unfair competitive advantage” by ensuring that a post-Brexit U.K. does not undercut European rules that restrict state subsidies to companies, limit tax competition, and set certain benchmarks for labor standards and environmental protection. The European Parliament took this a step further, insisting that Britain must adhere to EU standards for consumer protection, climate change, public health, and animal welfare if it wants to keep the same access to the EU market that a member state enjoys.
To the British, such demands undermine the entire reason for the exercise, which is to reassert national control over economic regulation. Whatever the British people may have wanted when they voted in 2016 to leave the EU—control over immigration appears to have been a top issue—for those parts of the U.K. elite that supported Brexit, the real prize was greater economic autonomy. Freed from the shackles of supposedly stifling EU regulations, or so the argument went, Britain would become a “Singapore-on-the-Thames”—a deregulated, free-trading, business-friendly magnet for investment.
The EU’s insistence that the U.K. adhere to EU standards if it wants to remain in the common market is therefore nonnegotiable. “To think that we might accept EU supervision on so-called level playing field issues simply fails to see the point of what we are doing,” Britain’s chief negotiator David Frost said in a lecture in Brussels earlier this year. “It isn’t a simple negotiating position which might move under pressure—it is the point of the whole project.” The U.K. argues that Brussels should be prepared to accept a trade deal similar to the ones it has negotiated with Canada, Japan, and others, in which the EU is eliminating tariffs without requiring full alignment on standards. But France, in particular, argues that those countries trade far less with Europe and therefore have far less capacity to disrupt EU markets. Britain, on the other hand, is far more economically integrated with the EU, and laxer standards post-Brexit could pressure the EU to lower its own if it wants to remain competitive.
The Brexiteers certainly have a legitimate point: A more lightly regulated Britain may well enjoy greater competitive success. It is likely no coincidence that few of the world’s top tech companies are located in Europe. For a young entrepreneur with a good idea who wants to become fabulously wealthy with minimal interference from the government, the United States is a much better place to set up shop than Europe. It may also be a touch paranoid for the EU to fear that Britain will suddenly launch a frenzied dismantling of regulations on the environment, labor, and worker safety in the style of U.S. President Donald Trump and his Republican allies. Johnson has already made commitments to uphold existing standards, though he has not agreed to align with future EU rules.
Nor has the EU always practiced what it preaches. Ireland and the Netherlands are critical hubs for many of the infamous tax avoidance schemes by giant tech companies such as Apple and Google, even as Brussels has tried now and then to crack down on these practices. The EU state aid regime does far more than most to prevent governments from throwing taxpayer money at companies. But massive French and German subsidies to aircraft maker Airbus helped ensure the company’s commercial success, triggering a decadeslong trade confrontation with the United States. But nonetheless, the EU remains the most serious effort in the world today to smoothen global capitalism’s rough edges. For example, income inequality in EU member states is, on average, far lower than in Britain or the United States.
It is hard, of course, to predict the outcome in deadlocked negotiations. Both sides have reasons to back away from the cliff before the end of the year. But the U.K. position is by far the weaker of the two. One of Johnson’s big bargaining chips was the prospect for a new trade agreement with the United States, which the anti-EU Trump administration enthusiastically supported. The United States is by far the largest export market for Britain outside the EU, and progress on a U.S.-U.K. deal would have strengthened Johnson’s hand. But the incoming administration of President-elect Joe Biden has shown much less enthusiasm for the deal.
The Biden team should go further and say publicly that it would prefer a final deal that respects high European standards. The U.S. trade consensus is already moving more strongly in the direction that freer trade must come with stronger social obligations. At the insistence of the Democratic majority in the U.S. House of Representatives, for example, the renegotiated North American Free Trade Agreement—now called United States-Mexico-Canada Agreement—requires Mexico to do far more to uphold labor standards and allow union organizing in its factories; failure to do so could trigger quick U.S. retaliation.
The European Commission has also handed an olive branch to the incoming Biden administration, calling on Washington to seize what it described as a “once-in-a-generation” opportunity to embrace a new trans-Atlantic agenda built on shared values, interests, and global influence. The proposal calls for the two economic giants to deepen cooperation on controlling the pandemic, fighting climate change, regulating the digital economy, screening risky investments, and revitalizing global trade rules through the World Trade Organization. The agenda fits well with the Biden platform: His agenda to “build back better” calls for the United States to take a far more European-style approach to investing in workers, communities, and the tattered social safety net.
A clear Brexit outcome that maintains the commitment to high European standards would be a strong signal that a new direction is possible for global trade and capitalism—where governments work cooperatively to make their economies better serve their people. As the Brexit negotiations head to a final deal or a final breakdown, the EU should continue to insist that it will only share the cake on equitable terms. The world is watching.