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July 16, 2018

How to think about the three Brexit options

We are now at a stage where the universe of Brexit options is narrowing down to three exactly. The Brexit White Paper gave us the contours of the first - a withdrawal agreement with a customs union for goods only. The second is a no-deal Brexit. And the third is a Brexit reversal. 

Reversal advocates are now sensing a window of opportunity as Theresa May’s Brexit plan may not command a majority in the Commons. We agree with them on this point. This danger exists as both the Labour Party and the hardline Brexiteers promised not to support May's plan.

Where we disagree is on the likelihood of the sequence of events needed for a reversal to happen: rejection of the withdrawal agreement in the House of Commons provokes a government crisis followed by new elections; Labour enters the elections either with a formal pledge for a second referendum, or at least willing to accept it if forced into a coalition with the LibDems or the SNP; the referendum will ask whether the electorate accepts the withdrawal agreement, or whether it wants to rejoin the EU (critically, it does not ask whether the electorate prefers a no-deal Brexit); Remain wins; the new government would rescind the Article 50 notice; the EU accepts the outcome. 

Each segment of the sequent is loaded, even the last one. In his latest FT column, Wolfgang Munchau takes a look at the EU’s position. He argues the last thing they want is to have a contested Brexit reversal followed by a political backlash - that would see not only Nigel Farage and his lot taking a majority of UK seats in the European Parliament - but also populists elsewhere feeding on a narrative that democracy is suppressed by the establishment. 

But before it comes to this, spare a thought for the strategic choices faced by the supporters of each of the three Brexit outcomes. Each of the extreme groups could end up with the very opposite of what they want if they reject the withdrawal agreement. We note a comment by Daniel Hannan, a hard Brexiteer who opposes May’s new approach, but who said he will support it precisely because he sees these risks. We don’t expect him to be the last one.

It is possible that the true Brexit hardliners may prioritise bringing down the government over Brexit itself. On the contrary, a Brexit reversal could help the likes of Boris Johnson to gain power as he may be seen as the only leader to ward off an inevitable attack from UKIP. But we are not sure that this position informs the view of the majority of hardline Brexiteers.

The Remainers in the Labour Party also face a risk if they were to reject May’s withdrawal treaty. Once signed it will also be the EU’s withdrawal treaty, the best and only treaty the EU will offer the UK. If they reject it, they risk a hard Brexit. This is, after all, the default option under Article 50. And it is possible that a referendum would even support it. Public opinion has not turned a lot since the Brexit referendum. Remain has a slight lead, but it did so too before the previous referendum. 

The biggest argument against a referendum is the impossibility to handle the three way split of the situation. This time the choice is not between Leave and Remain, but one of three options: accept the deal, reject the deal and leave, or ask for a Brexit reversal. 

We think there is a greater logic to asking the two way question: Do you accept the deal, or not? The reason is that the previous referendum already settled the issue of withdrawal itself, and that this was based on Article 50 which explicitly sets out those precise choices. More importantly, it is the only logical two-way question that can be asked. 

We would not even rule it out that May, when confronted with a defeat in the Commons, decides to take the initiative herself and offer such a choice. The soft Brexiteers would support it. Many of the hard Brexiteers would support it if only because it takes Brexit reversal formally off the table. The DUP and the hard Labour Brexiteers would support it. 

Those asking for a second referendum should therefore be careful what they wish for. 

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July 16, 2018

How to respond to Trump

What Donald Trump thinks about Brexit, or who he describes as his foes, matters little. We already know what he thinks about the EU. What matters is how to respond to this threat. In the important debate about trade policy we note two strands of emerging thoughts. The first is based on economic arguments - that it is better for us not to respond to his tariffs. The second is political. If we don’t respond, he walks all over us.

It is worth getting into the details of those two arguments. Dani Rodrik argues that we should not retaliate. The key of his argument is the weak economic logic of counter-tariffs. The terms-of-trade effects of tariffs would, in theory, allow the EU to influence world prices to its advantage. But that would not be in Europe’s or China’s best interest. Employment is not a primary consideration either. By retaliating, the EU and China would simply reduce their own gains from international trade. And they have more to gain upholding the multilateral trading system, which they cannot do if they engage in a trade war with Trump. By exercising self-restraint, Europe and China could reduce the overall costs of Trump’s trade policy.

"Trump’s protectionism may yet result in a global trade war, with eventual economic consequences that are far more serious than the self-harm it entails at present. But if that happens, it will be as much the result of miscalculation and overreaction on the part of Europe and China as of Trump’s folly."

The arguments against Rodrik are political. Martin Wolf argues that the world should retaliate - but with the specific goal to force the US into a global tariff-free zone.

Hendrik Kafsack writes in FAZ that the dominant opinion in the EU is in favour of retaliation. One of the interesting reasons he gives is that the EU's trade policies are almost identical in substance to those of Trump. The EU’s main pre-occupation is to protect itself against China, which has pledged to increase its global competitiveness by 2025, and which is making strategic asset purchases world-wide. Unlike Trump, the EU formally complies with the rules of the global trading system, but it bends those rules. Kafsack notes that Macron’s slogan of a Europe that protects was merely the little sister of Trump’s America First. It is where French mercantilism meets American mercantilism. And Kafsack also notes that the EU uses the same zero-sum language as Trump on international trade. Kafsack leaves no doubt that his preference is a naïve free trade policy as he calls it, in agreement in Rodrik, but sees no chance of that happening. 

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