Brexit is Britain's own personally-inflicted trade war - but different.

Some have wondered why estimates of the cost of Brexit to Britain are comparable to (if not worse than) estimates of the cost of an all-out global trade war, even though the predicted reductions in trade from Brexit are far smaller.

Well it’s quite fascinating (for a nerd like me, anyway). An all-out global trade war costs the world in terms of higher tariffs, less trade, more expensive imports and less efficient production. Brexit costs Britain though, in terms of red tape.

You see, the EU is a customs union. This means that goods don’t have to pass a customs inspection once they are inside the EU. Once they reach Rotterdam, they’re in! This makes trade soooooo much easier. The UK auto industry for example, can engage in what is known as ‘just-in-time’ production, where their inventories are kept at relatively low levels to save on storage costs. This is because they are virtually guaranteed quick imports of parts from Europe when they need them. There are no customs inspections along the way to slow them down. Compare this to NAFTA. While it is a free trade agreement that generally imposes no tariffs, goods from Mexico still have to pass a customs inspection before going into the US. This is to make sure that they are, in fact, Mexican, and not say, Chinese goods trying to avoid US tariffs.

This is why Britain’s relationship with the EU is one that could simply not be replaced by a free trade agreement. And certainly not by a free trade agreement with the US[1] (despite Trump, the Saboteur in Chief’s, suggestions to Theresa May). And a customs union with the US, given the fact that it would render Brexit completely obsolete anyway[2], wouldn’t be as good as one with the EU either. So it is a huge advantage for Britain to be part of the EU.

But upon Brexit, Britain will leave the EU customs union. And while they won’t face massive increases in tariffs (as would occur in a trade war), these sudden customs impediments are even more problematic and costly. At least with a trade war, the government earns some tariff revenue.

This is why Theresa May is now trying to do a ‘soft Brexit’ or BINO (Brexit In Name Only), where Britain still remains within the customs union. Though ironically, as Paul Krugman notes:

“...that, of course, ain’t much of an exit: Brussels will still set UK trade policy, except Britain will no longer have a vote. So what was the point of Brexit in the first place? Good question. Too bad more people didn’t ask it before the referendum.”

And this is why Brexit could actually be worse for Britain than an all-out global trade war.

Because tariffs are one thing, but red tape is another.

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[1] Given the distances involved and the already low tariffs with the US.

[2] Because of the vastly greater size of the US, it would involve Britain effectively giving Washington complete control over its policy – precisely Britain’s objection to the EU and Brussels.