Since the time of Ronald Reagan and Margaret Thatcher, countries around the world have followed America and Britain’s economic example – privatizing, de-regulating and opening up their economies to foreign trade and investment, sometimes known as the ‘Anglo-Saxon model’.
Now, Britain's vote to leave the EU and the election of Donald Trump as the next president of the United States signal the end of Anglo-American leadership of the global economy. Neither country will lead the economic liberalization of their regions or the wider world for the foreseeable future.
At their heart, the American and British votes revealed a powerful popular demand to regain control of their national economies.
For many Trump voters this meant rolling back the laissez faire approach to international trade and investment that they believe has contributed to the stagnation of median wages and rising job insecurity.
The result is a Trump platform that vows to punish those American firms that move jobs offshore in order to prioritise global supply chains. America will also cap, if not roll back, economic integration with Mexico and is poised to abandon or re-negotiate the Trans-Pacific Partnership, the Obama administration’s ambitious effort to deepen liberal market values across the Pacific.
The Brexit vote sends a more complex message. Polls since the referendum imply that a majority of Britons still favour open trade and investment. Membership of the EU Single Market, however, carried obligations that cut to the heart of national sovereignty - in particular, the free movement of labour from other EU members. Many Britons believed the large influx in recent years suppressed wages and overwhelmed public services and housing.
And free-market-championing Brexiteers argued that EU membership imprisoned British trade policy in a tortuous EU collective bargaining system. This prevents Britain from striking trade deals with emerging markets that are tailored to specific British strengths, such as services.
But, once Britain has left the EU, it will no longer play any part in the future liberalization of the EU single market, even though this is currently the destination for some 45 per cent of British exports. Plans for a Capital Markets Union (which had been led by the British Commissioner Lord Hill until his post-referendum resignation), for removing the many barriers to trade in services, and for more open digital markets will proceed without a market-friendly British voice at the table.
British and American voters have rejected the logical evolution of the Anglo-Saxon model, which had progressed from breaking down barriers to trade at national borders, to tackling the thicket of non-tariff regulations that often limit trade and investment behind the border. National governments generally use these to pursue domestic political priorities, such as improving energy efficiency or ensuring the health and safety of consumers. But they can also use them to protect sectors of the economy from external competition.
It was the British European Commissioner Lord Cockfield, appointed by Margaret Thatcher, who helped design the Single Market that broke down the EU’s non-tariff barriers. To do so, however, involved introducing the concept of qualified majority voting. Thirty years later, many Britons have soured on the idea that regulations can be imposed on them by a majority of other member states, irrespective of whether these regulations enhance the country's trade or not.
Similarly, President-elect Trump appears set to remove the United States from designing common rules to enhance trade and investment across the Asia-Pacific. Instead, Trump will focus on removing domestic environmental restrictions on US businesses, alongside post-crisis financial regulations that he believes are also limiting US growth.
The prospects for completing the US-EU Transatlantic Trade and Investment Partnership (TTIP) in this climate are bleak. There is now little incentive for American and EU legislators to compromise on their regulatory standards in politically sensitive sectors such as food safety, the environment and pharmaceuticals.
In fact, we may witness a period of more intense transatlantic regulatory competition. In addition to ongoing disputes on the use of genetically-modified organisms in agriculture, the EU has already challenged US companies on their standards for data protection and approaches to tax avoidance. The Trump administration is likely to take a combative stance in response.
This would pose a dilemma for Britain. As it explores a post-Brexit trade deal with the US, it may find that it has to decide between regulatory convergence across the Atlantic or with its main market in the EU.
It is ironic that the two champions of the liberal economic order are about to step back from deepening liberal economics in their own regions, choosing instead to return to an era of more selective and transactional trade deals.
Perhaps doing so will give politicians and citizens in both countries the time to adjust to the disruptions caused by past liberalization. But America and Britain are stepping back at a time when the WTO is paralysed and when competing powers can use the vacuum to promote their own economic models in their regions – whether the economic state-centrism favoured in Beijing or the political state-centrism promoted from the Kremlin.
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