From Great Britain to Little England
Mike O'Sullivan & David Skilling
British Prime Minister Theresa May blinked more than once as she prepared to invoke Article 50 of the Treaty of Lisbon and initiate Britain’s exit from the European Union. According to May, Brexit will transform the United Kingdom into what she calls “Global Britain.” But what lies ahead is really anyone’s guess. The UK has long been shorn of its empire; now it will be shorn of Europe, too.
Singapore, Switzerland, and Norway are often mentioned as models for the UK to follow as it pursues its own trade policies outside of the EU. This is ironic (or perhaps fitting), given that all three are small countries that do not share Great Britain’s sense of self-importance in world affairs.
The experience of small states is instructive for the UK. Viewed from New Zealand or Singaporeit is fanciful to think that concluding new free-trade agreements with large emerging markets such as China and India will come easily for the UK. The gestation period for FTAs is long even under favorable conditions; and today a protectionist cloud hangs over the United States and potentially other countries. Signing a new FTA with the “America First” Trump administration will not be the cakewalk that UK Foreign Secretary Boris Johnson and others have promised.
It is telling that the same small economies that know the most about global engagement are consistently pessimistic about Brexit. Economic policymakers from the Nordics and the Netherlands to New Zealand and Singapore understand that regional integration matters, and that Brexit will have large negative effects.
In the coming months, the world’s small, open economies will function as canaries in the coal mine for the global trade system. Small countries on the periphery of the EU, such as Norway and Switzerland, have learned that benefiting from EU integration requires limiting the scope for independent domestic policymaking. Given these countries’ experience, the Brexiters should rein in their expectations for how much control they can realistically “take back.”
May’s government has made various announcements indicating the types of post-Brexit policy changes it will pursue. Chancellor of the Exchequer Philip Hammond, for example, has talked about a low-tax, light-regulation model. But this model’s success in city-state settings such as Singapore, Hong Kong, or Dubai is no guarantee that it will work for a G20 economy. Meanwhile, May has suggested that the UK will, once again, embrace industrial policy, though it remains unclear what she means by this.
The UK has always had a high degree of autonomy to shape its own economic strategy, but Brexit will probably force policymakers to craft a comprehensive agenda that makes the country’s priorities explicit. As they do, they should learn from successful small economies.
For starters, small countries invest heavily in knowledge and human capital at all levels, from compulsory, vocational, and university education to lifelong-learning programs. These investments enable more people to take advantage of the opportunities that globalization provides, while also increasing productivity and wages.
Second, small countries have growth policies specifically geared toward boosting their competitive strength in the global economy. These measures can take a variety of forms, from investment in high-quality infrastructure and human capital, to sectoral policies that assist certain industries. But all are meant to ensure the country’s position near the productivity frontier, and within key international economic clusters.
Third, because small countries are highly exposed to external shocks, they have a range of measures in place to manage economic risks and ensure resilience. These include well-developed social insurance, flexible labor markets, active labor-market policies, and the fiscal space to pursue countercyclical stimulus policies (small economies tend to be fiscally conservative, partly for this reason).
The upcoming Brexit negotiations will pose a generational challenge for the UK. But, beyond handling those talks well, the UK also needs to develop policies that will enable it to navigate an ever more challenging international environment. This will require it to do things very differently than it has in past decades.
In fact, the UK’s survival could depend on it. Brexit, and UK policymakers failure to develop a coherent, robust economic strategy, has breathed new life into the Scottish independence movement. Many are confident that the small-economy model would work well for an independent Scotland. To be sure, Scotland has significant economic exposures that it needs to address, and it might need the security of a larger economic unit. But it is not obvious that the UK provides such security, especially now that it is on a path to leave the EU’s single market and customs union.
Independence would allow Scotland to develop policies that are more in line with other successful small economies – not least by retaining EU membership. As Scotland confronts the strategic challenges of Brexit, it will also have an opportunity to develop policies that are better suited to it.
Britain chose to leave the EU because it had an outsized opinion of itself. But it will soon have to follow a small-country model, like that of Switzerland or Norway. Forty years after leaving New Zealand in the lurch to join the European Economic Community, the UK might soon have less access to the European market than New Zealand does. Its journey from Great Britain to Little England may well be complete.
Mike O’Sullivan is Chief Investment Officer in the International Wealth Management Division at Credit Suisse. David Skilling is Director of Landfall Strategy, a Singapore-based economic advisory firm.