Mitchell: Prosperity in a post-Brexit world
Daniel J. Mitchel
I supported the UK’s decision to leave the European Union. Simply stated, the European Union is a slowly sinking ship. Getting in a lifeboat doesn’t guarantee a good outcome, I noted, but at least there’s hope.
That being said, there is a lot of angst in the UK about what will happen during the divorce process, in part because of the less-than-stellar performance of the Tory leadership.
There are three things, however, that British politicians need to remember.
First, the EU bureaucrats are terrified at the prospect of losing $10 billion of annual payments from the U.K., which is why they are desperately trying to convince politicians in London to cough up a big pile of money as part of a “divorce” settlement.
Second, European politicians are terrified that the UK, which already has the world’s 10th-freest economy, will slash tax rates and become even more competitive in a post-Brexit world.
Third, failure to reach a deal (also known as a “hard Brexit”) isn’t the end of the world. It’s not even a bad outcome. A hard Brexit simply means that the UK trades with Europe under the default rules of the World Trade Organization. That’s not complete, unfettered free trade, but it means only modest trade barriers. And since Britain trades quite successfully with the rest of the world under those rules, there’s no reason to fear a collapse of trade with Europe.
Moreover, don’t forget that many industries in Europe will pressure their politicians to continue free trade because they benefit from sales to UK consumers.
The bottom line is that the UK has plenty of negotiating power to get a good outcome.
So what does this mean? How should British politicians handle negotiations, considering that they would like free trade with Europe?
Part of the answer is diplomatic skill. British officials should quietly inform their counterparts that they understand a hard Brexit isn’t a bad outcome. And they should gently remind EU officials that a hard Brexit almost certainly guarantees a more aggressive agenda of tax cuts and deregulation.
But remember that it’s in the interest of UK policymakers to adopt good policy regardless of what deal (if any) is made with the European bureaucrats.
The first thing that should happen is for British politicians to adopt a low-tax model based on Singapore. Some experts in the UK are explicitly advocating this approach. Marian Tupy of the Cato Institute explains why copying Singapore would be a very good idea:
“Why Singapore? Let’s look at a couple of statistics. In 1950, GDP per capita adjusted for inflation and purchasing power parity was $5,689.91 in Singapore. It was $11,920.58 in the UK Average income in Singapore, in other words, amounted to 48 percent of that in the UK In 2016, income in Singapore was $82,168.33 and $42,287.17 in the U.K. Put differently, Singaporeans earned 94 percent more than the British. During the intervening years, Singaporean incomes rose by 1,344 percent, while British incomes rose by 256 percent. …the “threat” of Singaporean tax rates and regulatory framework ought not to be a mere negotiating strategy for the British government vis-a-vis the EU. It ought to be a goal of the British decision makers—regardless of what the EU decides!”
Or the U.K. could copy Hong Kong, as Telegraph columnist Neil Monnery suggests: ”Hong Kong…is now one of the richest places in the world, with income per capita 40 per cent higher than Britain’s.”
And much of the credit belongs to John Cowperthwaite, who unleashed great prosperity in Hong Kong by limiting the role of government.
In other words, the United Kingdom should seek comprehensive reforms to reduce the burden of government.
That includes obvious choices like lower tax rates and less red tape. And it also means taking advantage of Brexit to implement other pro-market reforms.
One example is that the UK will now be able to assert control over territorial waters. That should be immediately followed by the enactment of a property rights-based system for fisheries. It appears that Scottish fishermen already are agitating for this outcome.
Daniel J. Mitchell, a senior fellow at the Cato Institute and chairman of the Center for Freedom and Prosperity, is on the Editorial Board of the Cayman Financial Review.