The Bear’s Lair: Brexit divorce will need good lawyer, hot new girlfriend

David Cameron’s unexpected and admirable victory last week has produced a Conservative government with an overall majority in the House of Commons and an obligation to arrange a referendum on British exit from the EU by 2017. Cameron undoubtedly intends to get as good a renegotiation deal from the EU as possible, and then put that deal to the British electorate with a recommendation to stay in the European Union. If he succeeds, there will then be a double disappointment. First, there will be disappointment for those favoring British exit (Brexit), who will find themselves trapped in Europe for another 42 years (the last referendum was in 1975). Second, there will be unexpected disappointment after the referendum for Cameron and the British public as a whole, when the EU bureaucracy reneges on or slithers out of any useful concessions it may have made.

Those favoring Brexit (which, tentatively and on balance, I do) therefore need to have two plans in place as quickly as possible. The first plan is on how to win the referendum. The second, without which the first plan is useless, is how to negotiate Brexit in detail and rearrange Britain’s economic partnerships following exit to ensure the best possible future. In other words, how should Britain’s lawyer (presumably Cameron) negotiate the divorce from the EU, and where will Britain find the new hot girlfriend (or by all means, Britannia being a lady, boyfriend, or indeed Significant Other), without which it will be condemned to a post-divorce existence of loneliness and penury. (Thank God, since Britain abandoned the Commonwealth on its entry to the EU in 1973, there are no significant children to consider!)

As in most divorces, the primary emotion is deep regret at having got married in the first place. With 63 million people on a small island, the British economy is service-oriented, with limited manufacturing, and lacks self-sufficiency in foodstuffs, energy or raw materials. Accordingly, its natural trading partners are countries with abundant raw materials, energy and cheap food.

As of 1960, Britain had such trading partners, in the countries of the Commonwealth, both the white-dominated Dominions and the ethically varied but impoverished remainder. What’s more, until Maynard Keynes, with incredible foolishness, negotiated it away at the Bretton Woods Conference of 1944, Britain had a structure in place to take advantage of those relationships: Imperial Preference, which erected a modest tariff war around the Empire and Dominions, while promoting free trade within its borders.

Had British negotiators in 1944 had the sense they were born with, they would have dismissed with scorn the U.S. request to do away with Imperial Preference (which was at last creating a viable alternative trading bloc to the heavily protectionist United States itself) while devaluing the pound from $4.03 to its proper level of around $2.50 and relying on the City of London to raise the necessary finance to keep Britain afloat temporarily.

Even by 1960, while the structure was mostly (not entirely) gone the trading relationships with the newly independent ex-colonies remained, and an enlightened Britain could have focused on them. Europe, heavily protectionist and dominated by manufacturing and hopelessly inefficient and expensive agriculture, was an unattractive partner for Britain to choose. Looked at from the vantage of 2015, the EU marriage in 1961-73 was a hopeless mésalliance. What the hell could the foolish young country have been thinking of?

Needless to say, the attractive ex-girlfriends of fifty years ago have mostly made alternative arrangements elsewhere. Canada has joined the United States and Mexico in NAFTA while Australia and New Zealand have become almost wholly Pacific-oriented. As for the African ex-colonies, they are torn between a somewhat indifferent United States and the apparently ardent but possibly abusive China. Britain, the old flame, is rarely considered at all, other than as a part of the hopelessly frumpy and protectionist EU. Thus any new friends Britain may find to help her exit the EU must be dealt with on an entirely new basis; the old economic ties are simply not there and even the sentimental ones have worn very thin.

The IEA’s prize-winning essay, Iain Mansfield’s “A Blueprint for Britain” considered in detail the exit negotiation with the EU after a referendum exit vote and concluded that Britain’s medium-term gains or losses from exit would depend crucially on the terms achieved. If Britain could maintain access for financial services and free trade in services, while negotiating new free trade agreements with third countries and maintaining EU ones, exit would be economically beneficial. Conversely if the EU imposed its full external duties and regulations on Britain, there would be a net cost to Britain in the short and medium term.

Thus Cameron’s skill as negotiator and his emollience will be heavily called on if Britain votes for Brexit. We should strongly oppose any temptation he may have to resign if his advice against Brexit is rejected – the abrasive George Osborne or the bullying Boris Johnson, let alone the iconoclastic Nigel Farage, would be far less suitable for this purpose.

“A Blueprint for Britain” also took the view that Britain can flourish outside the EU by being “open to the world.” In principle, this is right; Britain has always flourished as a global entrepot, doing business with countries from all different cultures (albeit from time to time making life easier by colonizing them!) In a truly free-trading world, this would undoubtedly be the most attractive alternative. However, we do not currently live in such a world. The failure of the Doha Round of trade talks launched in 2001, innumerable “anti-dumping” actions and the increasing plethora of bilateral and regional “free trade agreements” – in reality, protectionist agreements to keep out non-members of the club concerned – shows that protectionism, while not rampant as in the 1930s, is certainly on the advance.

Complete openness to a protectionist world doesn’t work. Britain tried it before, from 1846 to 1932. The era of global free trade, on which Britain’s 1846 Repeal of the Corn Laws had been predicated, came to a halt with the Cobden Treaty of 1860 and then began to reverse, with the protectionist Morrill tariff imposed by the United States in 1862, a swingeing German tariff in 1879 and the French Méline tariff of 1892. The consequence of Britain’s economic unilateral disarmament was industrial decline and the loss of its economic supremacy. Economic disarmament, like military disarmament, is an attractive idea, but it needs to be multilateral; unilateral disarmament, military or economic, is a road to disaster.

If Britain is to leave the EU, even if it retains a free trade agreement with it like those of Norway or Switzerland, it needs to find a new “girlfriend” with which the outlines of a new trading arrangement can be made. Without showing the electorate the prospect of such an attractive new partner, the electorate will reject Brexit, rightly seeing it as a recipe for international isolation, competing as in 1862-1932 as a free trade nation in a protectionist world. Needless to say, while Britain is easily large and robust enough to survive as an independent economic entity, it does not have its relative strength of 1862, nor its colonial possessions of that date, and so cannot hope to prosper against universal tariff and non-tariff barriers.

The obvious new girlfriend for Britain is the beauty queen across the Atlantic and its northern neighbor. The difficulty is that any preliminary approach to the U.S. would be unlikely to succeed during the protectionist, somewhat anti-British Obama administration, so seduction would have to wait a change of administration (and also would be unlikely to work on Hillary Clinton.) There’s also the problem that any such match, with Britain perhaps entering an enlarged NAFTA, might involve almost an equal loss of independence to the EU itself, with Britain having equally little ability to affect the terms of the arrangement. However much we may regret the Error of !776, therefore, the chance of undoing it appears to be limited.

There are however other alternatives. Britain’s non-European best buddy other than the U.S., historically, has been Japan, with the hiatus of 1941-45 arguably due to Britain’s betrayal of its Japanese alliance by the 1922 Washington Naval Treaty. However Japan has in many respects the same strengths and weaknesses as Britain, and so is not a particularly attractive potential bride in this case.

The old Commonwealth offers much better pickings, in some respects better than in 1960. Canada and Australia have perhaps realized the dangers of being excessively tied to their powerful neighbors in the U.S. and China respectively, so might be open to a new arrangement. As for Africa, while some countries (notably South Africa) have not yet emerged from their inevitable post-colonial angst, there are an increasing number that have, and many African countries have capabilities that are nicely balanced against Britain’s. While Britain may appear to offer less to them in return than China or the United States, we are notoriously nicer to our girlfriends than China, and so at least some African countries may be receptive to our approaches.

India under Narendra Modi also appears to be getting over the half-century of socialist post-colonial angst represented by the Congress party, and may well be interested in entering into at least a limited arrangement with Britain. From its recent experience with global cricket administration, which it has both dominated and revolutionized, India would today be far more confident of its position in such an arrangement than it would have been a generation ago. The danger here comes on Britain’s side, and matters such as mutual migration would be very difficult to agree, but with the U.S. committed to the Trans Pacific Partnership, which does not involve India, a limited arrangement with Britain could be attractive.

Finally, there are the four countries of western Latin America that have formed the Pacific Alliance – Mexico, Colombia, Peru and Chile. Here there are no significant long-term cultural ties, but an excellent economic fit, with the Pacific Alliance having both resources and cheap labor. Their alternative partners, China and the United States, both have a track record of domination that they will find unattractive, so a loose arrangement with Britain could well be desirable to them.

As for how Brexit-supporters should go about winning the referendum; that is a question of political tactics on which I have no expertise. But without a good divorce strategy and some signs of response from the potential hot new girlfriends suggested above, the British public will be frightened into a pro-EU vote. And given the failings of the EU’s economic policy and governance, and the vengefulness of its bureaucrats, they will almost certainly regret such a vote for generations to come.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)