The case for Brexit – long term hopes v short term fears

by John Reiners

Here in the UK, the last week has seen an explosion of debate on the case for or against Britain staying in the European Union, with prominent politicians, business leaders and celebrities aligning themselves on different sides. We have months of debate ahead of us before the vote on June 23rd and it will take time for the battle lines of the debate to become clear. Early signs are that the strongest themes will play on voters short term fears– on one side fear of uncontrolled immigration and on the other the leap into the unknown if we sever ties with our most significant trading partners.

The Brexit vote is a major decision that will shape the UK’s path for a generation. So the debate should not be about short term concerns but consider more the world that we will be operating in over the next 20-30 years. Oxford Economics is preparing its own analysis of the economic implications, and hosting a Brexit forum in London on March 22nd. But here are a few personal reflections, following a debate I attended yesterday with the EU’s Trade Commissioner, Cecilia Malmstrom, hosted by University College London’s European institute and the Policy Network think tank.

Though aimed at covering the EU’s broader trade agenda, the discussion naturally moved on to the Brexit question. The commissioner was reluctant to comment directly or offer advice, yet her talk included some highly relevant points. In particular she talked about the changing nature of global trade, with the growth of integrated value chains. Increasingly the final product comprises multiple components, often including software, sourced from many different nations. A car, like BMW’s Mini for example, is manufactured and assembled in several countries, with components, both hardware and software, sourced from around the world. This is very different to the model of trade and comparative advantage described in my economic text books, where a developed economy would specialise in finished goods and import raw materials from emerging markets, for mutual benefit. So untangling the impact of Brexit on UK’s trade is complex and will become even more so as value chains and trade in software and services become more prominent.

It would be great if the Brexit debate focused on these long term trends in global trade, described in our Trade Winds research for HSBC. The UK needs a trading regime that positions it to benefit from open trade in services and digital products in a world of integrated value chains. Growth of trade over the next 30 years will grow fastest in Asia. The UK and Europe need to work hard to get their share. Much remains to be done to tackle barriers to trade by updating regulations for the digital world and forming new trade agreements. The EU has set out its strategy, “Trade for All”, at the end of last year, though some may challenge its agility at execution. But those arguing for Brexit would have to convince that they could do better - creating a favourable trading environment, while disentangling and renegotiating with the EU - a process that by some estimates could take decades.

John Reiners is Oxford Economics Managing Editor, EMEA. He manages research programs on a wide range of topics, including digital economy and international trade. He also follows emerging trends, like the emerging platform economy. He can be contacted at jreiners@oxfordeconomics.com