Britain's mess shows good policy cannot be taken for granted

By Phil O'Reilly, March 2019

With Britain's exit from the European Union now only four weeks away, the formal terms of Brexit are still very unclear. Government departments and businesses in the UK are already planning for an untidy, no deal "hard" Brexit.

Business investment has essentially stalled while the hopelessly split politicians try to work out what short-term political advantage they might gain.

If an untidy, hard Brexit occurs this will have a very significant impact on the UK and EU economies and their trading partners, including New Zealand.

For the UK, this would be similar to another global financial crisis, and UK business confidence and the fate of the City of London's financial institutions would be up for debate over coming years.

Some New Zealanders seem to welcome Brexit, largely on the basis of a romantic notion that Britain would return to its commonwealth roots and quickly negotiate a high-quality free trade agreement with New Zealand which would be advantageous for our exporters. Some of this may be true in the long run, but it ignores many of the realities.

For a start, if Britain exits the EU, the top priority for trade negotiators, ours and Britain's, will be the ongoing trading relationship with the EU. For us, the size of the EU prize is much bigger than a post-Brexit UK deal.

If Britain were to stay in the EU, New Zealand would have an automatic free trade deal once the forthcoming free trade agreement has been negotiated.

It is possible that under a hard Brexit the UK may want to negotiate a fast free trade agreement with us but this won't necessarily mean the UK will give us what we seek in agricultural access or investor state dispute mechanisms and much else besides. Britain will be cautious about offending the EU member states which will still be its core trading partners.

If we do achieve a trade agreement with the UK it won't mean a sudden rush of business taking place. Our market is small and British businesses favouring us over their existing EU trading partners is unlikely. Even if a really good agreement is reached, it will take a while for activity to ramp up.

The economic idea then that Brexit is good for New Zealand is wrong-headed in the short to medium term. It may be the case that a decade from now a resurgent global Britain will be good for us, but that is a long time between drinks.

The Brexit experience should also teach us a few valuable domestic lessons.

First, it should make us understand that local circumstances matter, even in large economies. The second lesson is that even very well-run public policy systems occasionally get things dreadfully wrong.

We take the competence of our public sector for granted far too often. This means we don't invest in the right thinking about what our options are as a nation, how we might take advantage of them, and what the trade-offs and the costs and benefits might be.

New Zealand's severe lack of think tanks and evidence-based intellectual debate are examples. University academics, trade unions, business groups and other actors in society need to stand-up much more to bring forward good, research-backed ideas.

The third and most important lesson is that we should not take consensus for granted. Those who argued for a British withdrawal from the EU really started finding their voice after the Maastricht Treaty in 1992, which laid the foundations for a move from a purely economic community to an EU that was a much more political and social force than previously.

Far too many in Britain, including in the business community, lazily thought that it would be easy to insult the European project and still enjoy its economic benefits.

This consensus was one that was defeated. One of the reasons was that there was not enough balanced and informed commentary and response to Europe. Praise as well as criticism. The EU came to be blamed for so many of the UK's ills when some of them were self-inflicted.

We can find similar parallels in the trade debate in our own country, where the established consensus has now been successfully questioned by those who do not share a belief in free and open trade and see only the negatives.

Brexit matters to New Zealand, not just economically but also because of the lessons it can teach us about how we need to improve our own public policy making, our own consensus building and making sure we really understand the detail of what goes on in other countries rather than simply applying slogans to them.