Brexit, Competition, and Economic Welfare

Alden Abbott —  27 June 2016

A key issue raised by the United Kingdom’s (UK) withdrawal from the European Union (EU) – popularly referred to as Brexit – is its implications for competition and economic welfare.  The competition issue is rather complex.  Various potentially significant UK competition policy reforms flowing from Brexit that immediately suggest themselves are briefly summarized below.  (These are merely examples – further evaluation may point to additional significant competition policy changes that Brexit is likely to inspire.)

First, UK competition policy will no longer be subject to European Commission (EC) competition law strictures, but will be guided instead solely by UK institutions, led by the UK Competition and Markets Authority (CMA).  The CMA is a free market-oriented, well-run agency that incorporates careful economic analysis into its enforcement investigations and industry studies.  It is widely deemed to be one of the world’s best competition and consumer protection enforcers, and has first-rate leadership.  (Former U.S. Federal Trade Commission Chairman William Kovacic, a very sound antitrust scholar, professor, and head of George Washington University Law School’s Competition Law Center, serves as one of the CMA’s “Non-Executive Directors,” who set the CMA’s policies.)  Post-Brexit, the CMA will no longer have to conform its policies to the approaches adopted by the EC’s Directorate General for Competition (DG Comp) and determinations by European courts.   Despite its recent increased reliance on an “economic effects-based” analytical approach, DG-Comp still suffers from excessive formalism and an over-reliance on pure theories of harm, rather than hard empiricism.  Moreover, EU courts still tend to be overly formalistic and deferential to EC administrative determinations.  In short, CMA decision-making in the competition and consumer protection spheres, free from constraining EU influences, should (at least marginally) prove to be more welfare-enhancing within the UK post-Brexit.  (For a more detailed discussion of Brexit’s implication for EU and UK competition law, see here.)  There is a countervailing risk that Brexit might marginally worsen EU competition policy by eliminating UK pro-free market influence on EU policies, but the likelihood and scope of such a marginal effect is not readily measurable.

Second, Brexit will allow the UK to escape participation in the protectionist, wasteful, output-limiting European agricultural cartel knows as the “Common Agricultural Policy,” or CAP, which involves inefficient subsidies whose costs are borne by consumers.  This would be a clearly procompetitive and welfare-enhancing result, to the extent that it undermined the CAP.  In the near term, however, its net effects on CAP financing and on the welfare of UK farmers appear to be relatively small.

Third, the UK may be able to avoid the restrictive EU Common Fisheries Policy and exercise greater control over its coastal fisheries.  In so doing, the UK could choose to authorize the creation of a market-based tradable fisheries permit system that would enhance consumer and producer welfare and increase competition.

Fourth, Brexit will free the UK economy from one-size-fits-all supervisory regulatory frameworks in such areas as the environment, broadband policy (“digital Europe”), labor, food and consumer products, among others.  This regulatory freedom, properly handled, could prove a major force for economic flexibility, reductions in regulatory burdens, and enhanced efficiency.

Fifth, Brexit will enable the UK to enter into true free trade pacts with the United States and other nations that avoid the counterproductive bells and whistles of EU industrial policy.  For example, a “zero tariffs” agreement with the United States that featured reciprocal mutual recognition of health, safety, and other regulatory standards would avoid heavy-handed regulatory harmonization features of the Transatlantic Trade and Investment Policy agreement being negotiated between the EU and the United States.  (As I explained in a previous Truth on the Market post, “a TTIP focus on ‘harmonizing’ regulations could actually lower economic freedom (and welfare) by ‘regulating upward’ through acceptance of [a] more intrusive approach, and by precluding future competition among alternative regulatory models that could lead to welfare-enhancing regulatory improvements.”)

In sum, while Brexit’s implications for other economic factors, such as macroeconomic stability, remain to be seen, Brexit will likely prove to have an economic welfare-enhancing influence on key aspects of competition policy.

P.S.  Notably, a recent excellent study by Iain Murray and Rory Broomfield of Brexit’s implications for various UK industry sectors (commissioned by the London-based Institute of Economic Affairs) concluded “that in almost every area we have examined the benefit: cost trade-off [of Brexit] is positive. . . .  Overall, the UK will benefit substantially from a reduction in regulation, a better fisheries management system, a market-based immigration system, a free market in agriculture, a globally-focused free trade policy, control over extradition, and a shale gas-based energy policy.”

Alden Abbott

Posts

I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

3 responses to Brexit, Competition, and Economic Welfare

  1. 

    Thanks, Laura. Of course there are transaction costs, but that is a necessary part of any major regulatory change, such as the welfare-enhancing transportation deregulation of the 1980s, and telecoms reform. What Brexit does is it gives the UK an opportunity to truly liberalize its economic regime if it has the will (and good sense) to do so — as it did with the repeal of the corn laws nearly 180 years ago, which helped usher in a period of unprecedented UK economic growth. Sometimes one just has to take the plunge.

  2. 

    While I agree that Brexit may be output-enhancing over the long run, there will, of course, be enormous transactions costs — at both the macro and the micro level — over the short to medium run. The arrangements that will ultimately be negotiated between the UK (or what will remain of it) and the EU may well retain output-limiting features sub nomine “harmonization” that would only gradually (if at all) be phased out.

Trackbacks and Pingbacks:

  1. Financial mishmash | Marcus Ampe's Space - June 29, 2016

    […] Brexit, Competition, and Economic Welfare […]