"For the last two and a half years, Brexit has consumed the entire United Kingdom. The UK’s negotiations with the EU have dragged on through multiple déjà vu moments, and the consensus is that the economic fallout will be felt far more acutely in Britain than in the EU, let alone in countries elsewhere. Still, the rest of the world is facing profound challenges of its own. Political and economic systems are undergoing far-reaching structural changes, many of them driven by technology, trade, climate change, high inequality, and mounting political anger. In addressing these issues, policymakers around the world would do well to heed the lessons of the UK’s Brexit experience."

For the last two and a half years, Brexit has consumed the entire United Kingdom. The UK’s negotiations with the EU have dragged on through multiple déjà vu moments, and the consensus is that the economic fallout will be felt far more acutely in Britain than in the EU, let alone in countries elsewhere. Still, the rest of the world is facing profound challenges of its own. Political and economic systems are undergoing far-reaching structural changes, many of them driven by technology, trade, climate change, high inequality, and mounting political anger. In addressing these issues, policymakers around the world would do well to heed the lessons of the UK’s Brexit experience.

No immediate repercussions

When Britian decided to leave the EU, experts predicted that the UK economy would suffer an immediate and significant fall in output following the 2016 referendum. However, Brexit was different. There was no immediate break in British-EU trade. In the absence of clarity on what type of Brexit would ultimately materialise, the economic relationship simply continued “as is,” and an immediate disruption was averted.

The question therefore, is not whether the UK will face a considerable economic reckoning, but when. The UK economy is already experiencing slow-moving structural change. Foreign investment is falling contributing to the economy’s disappointing level of investment overall. Moreover, this trend is accentuating the challenges associated with weak productivity growth.

Maintaining global norms difficult

Companies with UK-based operations have also begun to trigger their Brexit contingency plans after a prolonged period of waiting, planning, and more waiting. In addition to shifting investments out of the UK, firms will also start to relocate jobs. And this process is likely to accelerate even if British Prime Minister Theresa May manages to get her proposed exit deal through Parliament.

The Brexit process thus provides a preview of what awaits an increasingly fractured global economy if this continues: In this context, costly self-insurance will replace some of the current system’s pooled-insurance mechanisms. And it will be much harder to maintain global norms and standards, let alone pursue international policy harmonisation and coordination. Tax and regulatory arbitrage are likely to become increasingly common as well. And economic policymaking will become a tool for addressing national security concerns (real or imagined). How this approach will affect existing geopolitical and military arrangements remains to be seen.

Uncertain outlook for liquidity growth

Lastly, there will also be a change in how countries seek to structure their economies. In the past, Britain and other countries prided themselves as “small open economies” that could leverage their domestic advantages through shrewd and efficient links with Europe and the rest of the world. But now, being a large and relatively closed economy might start to seem more attractive. And for countries that do not have that option—such as smaller economies in East Asia—tightly knit regional blocs might provide a serviceable alternative.

Brexit holds important lessons for and about the global economy. We live in an era of considerable technological and political fluidity. The outlooks for growth and liquidity will likely become even more uncertain and divergent than they already are.