This is how the US could benefit from Brexit
The British vote to leave the European Union has shaken world financial markets. The immediate and medium-term prospects for economic growth in the United Kingdom are severely diminished, and the impact on the rest of Europe will be negative.
Some of the obvious political winners from Brexit are people who do not like Western Europe and what it stands for. Ironically, the United States – Europe’s greatest ally and the EU’s largest trading partner – may also end up as a beneficiary, though not if Donald Trump, the presumptive Republican nominee, wins the presidential election in November.
Britain has a population of just over 65 million people and what was, at least until Thursday, the world’s fifth-largest national economy, with annual GDP totaling nearly $3 trillion. In the context of a $75 trillion global economy, Britain’s is a relatively small, open one that relies heavily on foreign trade – annual exports are typically in the range of 28%-30% of economic activity.
That is now likely to change. The EU accounts for about half of Britain’s exports , and the prospects for continued full market access are dim. Trade in goods may be affected, but the impact on exports of services – including financial services – will be more severe. In principle, Britain could now negotiate a great deal of market access, but this would almost certainly require accepting rules made in Brussels – which is just what the British voted against. Growth in the UK will consequently be lower and for a long period of time.
The direct impact on the world economy is likely to be limited by the fact that other countries will to some extent gain from Britain’s loss. For example, the UK was until recently one of the top destinations for foreign direct investment , precisely because companies saw it as a good base from which to sell into the rest of Western Europe. The UK’s attractiveness – and the creation of good jobs that resulted from it – will now decline.
The big political loser is obviously the EU itself, which, without one-sixth of its current GDP, will fall in the economic rankings from just below the US to around – or some would say below – the level of China (measured using current exchange rates). The precise policy reaction of EU leaders is unclear; but, given the inept way the eurozone crisis has been handled since 2010, a return to more dynamic growth seems unlikely.
A weaker Europe is bad for the world – and people like Vladimir Putin who hold democracy in contempt are undoubtedly smiling today. But many authoritarian regimes are funded by the export of natural resources. Slower global growth and consequently lower oil prices are not good for countries such as Putin’s Russia and Iran. And China remains an economy where growth is very much based on the export of manufactured goods to richer countries, so a slowdown in the UK and the EU does not favor the Chinese, either.
In geopolitical and economic terms, the US is potentially the biggest winner from the disintegration of the EU. The US rose to global predominance as Europeans fought one another and their empires declined. The post-1945 US role was challenged first by the Soviet Union, which, for a time, posed a real technological challenge. Today, Russia has a small – and shrinking – economy and a population in decline.
Next up was 1980s Japan, with its innovative management practices and well-run companies. Japan is much richer than Russia today, but it, too, remains mired in economic malaise and may be trapped in a perpetual downward demographic spiral.
Leaders of the EU have, in recent times, seen themselves as a rival to the US on the global stage. The question now is which parts of Europe will stick together and on what basis.
Prosperity is based on people and ideas. Who can attract the most talented people, educate them and their children, and give as many individuals as possible the opportunity to work productively? The US has some serious problems, but absorbing immigrants and encouraging creativity have been among its main strengths for more than 200 years.
The UK has also been a relatively open society in recent decades, and many of its younger people would like that to continue. But older people, living outside large urban areas, have voted instead to build barriers and – to a significant extent – attempt to close off the country from the rest of the world.
The politics of the US presidential election are obviously quite different from those of the UK’s Brexit debate. But Trump is offering a strikingly similar vision to that of Nigel Farage , head of the UK Independence Party – and on Friday both of them seemed equally delighted with the outcome of the referendum.
The choice that Americans will make in November now comes into clearer focus. Will voters heed the siren song of Trump – and do great damage to the US economy and to the world by embracing a self-destructive effort to wall themselves off from the world? Or will they choose prosperity and a leading global role?
SOURCE: World Economic Forum