London Mayor Boris Johnson Announces Support For Brexit
Boris Johnson tells reporters about his 'agonizing' decision to campaign for Brexit. Photograph by Chris Ratcliffe — Getty Images

Forget Brexit, What Americans Should Really Worry About Is ‘Trexit’

May 25, 2016

America is just a few months away from one of the most unconventional and consequential elections in its history, but it's not alone.

In less than a month, British citizens will vote in a referendum on whether to remain a member of the European Union, and tempers on both sides of the issue are flaring. The most recent point of contention was a study issued by the UK's Treasury, which argued that a British exit from the Union—known popularly as Brexit—could cost the U.K. economy 820,000 jobs while causing home prices to fall 18% and GDP to be 6% lower after two years.

The study found much more severe consequences of a Brexit than other, private estimates. For instance, Oxford Economics estimates in its best-case scenario that a Brexit would cause the U.K.'s GDP to fall just 0.1% per year, while a London School of Economics study sees a GDP drop between 1.1% and 3.1% per year.

So why such large disparities between these estimates? It's because the actual effect of a Brexit is almost completely dependent on policy decisions following the move to leave the EU. Economists argue that leaving the EU would hurt British growth by reducing trade, immigration, and foreign direct investment. But free trade between Britain and Europe is not dependent on British membership in the union. The EU has free trade agreements with dozens of countries around the world, Canada for instance, and could have one with Britain too. Nor do the economic benefits of increased immigration or foreign direct investment depend on outsourcing decisions on those topics to Brussels.

And it's not as if it's the part of the British political spectrum that is opposed to things like free trade that is promoting Brexit. It's members of Britain's Conservative Party that want out, so that the British people can decide for themselves what level of trade and immigration is appropriate.

There is a parallel between the situation in Britain and what's going on in the U.S. Let's call it "Trexit."

Presumptive Republican nominee Donald Trump has promised to renegotiate America's own trade deals, like NAFTA, while cracking down on illegal immigration. Economists have also tried to gauge the effect of Donald Trump's admittedly vague plans for renegotiating American trade deals by threatening to or actually imposing steep tariffs on goods imported from rivals like China. Economist Mark Zandi argued that such a strategy would cost the U.S. economy 7 million jobs and throw the country back into recession.

Other economists, like J.W. Mason of John Jay College, think that a trade war like Trump is proposing would have very little affect on the U.S. economy (though it could have a much larger impact on Mexico and China). That's because even if China and Mexico retaliate by raising tariffs on its own goods, trade between the U.S. and China and Mexico represents less than a quarter of overall exports and imports. Furthermore, higher U.S. tariffs may very well encourage U.S. businesses to bring some operations back to American shores.

The effects of a Trump tariff plan is almost entirely based on how other countries and businesses react to a domestic policy change. Because we have no examples of the U.S. government raising tariffs as Trump has proposed, there's no real way to know how businesses or our foreign governments will respond, making economic forecasting of the policy even more futile than economic forecasting normally is.

The same goes for the Brexit situation. Pro-brexiters say that following its decision to leave the EU, it could make like Canada, and just sign it's own free trade agreements with the EU. Those against leaving the EU say that those countries won't be so keen to work with a Britain that abandoned its treaties. What will really happen? Who knows? Economists surely aren't equipped to answer these sorts of questions, which are political and diplomatic in nature.

Where Trump and the Brexiters part ways is on the question of what to do with illegal immigrants. Donald Trump wants to, as quickly as possible, deport the more than 11 million immigrants who are in the U.S. illegally, which would cost quite a lot of money in legal and labor costs. It would also shrink the labor force dramatically, which would cause total economic output to fall. Few economists would dispute this, but pro-deportation advocates point to the costs to government programs of having a large illegal immigrant population, since these folks tend to be a poor and therefore receive more in government benefits than they pay in taxes.

The polls on this issue show that it's actually low income folks—those who are not bearing the burden of higher government spending on immigrant populations—that actually favor cracking down on illegal immigrants, compared to wealthier Americans that are subsidizing government programs.

In other words, these issues are being framed by politicians and the press as economic ones. And this makes sense. It's much easier to try to solve political problems by deferring to experts who can tell us what the best solution to a problem should be or what the consequences of an otherwise politically appealing choice might be. But most questions in life do not have obvious answers, and even the so-called experts must make assumptions when conducting their analysis that are inevitably drawn from their own political biases.

If the fight over NAFTA has shown us anything it's that the American people are pretty immune to the arguments of economic experts. Even NAFTA's fiercest critics argue that it has cost us just 35,000 jobs per year, or about 1/7 of the new jobs that the American economy is adding per month today. But the 2016 primary results show that a good portion of American are convinced that free trade agreements are the prime cause of the country's economic problems. Not only are these projections and estimates not much better than propaganda, they're not very effective at convincing voters either.

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