The New York Times reports:

Britain has watched President Trump’s tariffs with a mix of shock, fascination and queasy recognition. The country, after all, embarked on a similar experiment in economic isolationism when it voted to leave the European Union in 2016. Nearly nine years after the Brexit referendum, it is still reckoning with the costs.

The lessons of that experience are suddenly relevant again as Mr. Trump uses a similar playbook to erect walls around the United States. Critics once described Brexit as the greatest act of economic self-harm by a Western country in the post-World War II era. It may now be getting a run for its money across the Atlantic.

Even Mr. Trump’s abrupt reversal last week of some of his tariffs, in the face of a bond-market revolt, recalled Britain, where Liz Truss, a short-lived prime minister, was forced to retreat from radical tax cuts that frightened the markets. Her misbegotten experiment was the culmination of a cycle of extreme policies set off by Britain’s decision to forsake the world’s largest trading bloc.

“In a way, some of the worst legacies of Brexit are still ahead,” said Mark Malloch Brown, a British diplomat who served as deputy secretary general of the United Nations. Britain, he said, now faces a hard choice between rebuilding trade ties with Europe or preserving them with Mr. Trump’s America.

“The fundamental issue remains the breach with our biggest trading partner,” Mr. Malloch Brown said, adding, “If the U.K. ends up in the arms of Europe because neither of them can work with the U.S. anymore, that’s only half a victory.”

Mr. Trump was a full-throated champion of Brexit in 2016, drawing explicit parallels between it and the political movement he was marshaling. He initially imposed lower tariffs on Britain than the European Union, which some cast as a reward for Britain’s decision to leave.

Brexit’s drag on the British economy is no longer much debated, though its effects have been at times hard to disentangle from subsequent shocks delivered by the coronavirus pandemic, the war in Ukraine and, now, Mr. Trump’s tariffs.

The government’s Office of Budget Responsibility estimates that Britain’s overall trade volume is about 15 percent lower than it would have been had it remained in the European Union. Long-term productivity is 4 percent lower than it would have been because of trade barriers with Europe.

Productivity was lagging even before Brexit, but the rupture with Europe compounded the problem by sowing uncertainty, which chilled private investment. The years between the referendum and Britain’s formal departure at the end of January 2020 were paralyzed by debate over the terms of its exit.

By the middle of 2022, investment in Britain was 11 percent below what it would have been without Brexit, based on a model by John Springford, who used a basket of comparable economies to stand in for a non-Brexit Britain. Trade in goods was 7 percent lower and gross domestic product 5.5 percent lower, according to Mr. Springford, a fellow at the Center for European Reform, a think tank in London.

Mr. Trump has kicked off even more volatility by imposing, redoubling and then pausing various tariffs. His actions, of course, affect dozens of countries, most drastically the United States and China. Already, there are predictions of recession and a new bout of inflation.

Brexit and its aftermath had multiple second-order effects, both economic and political. Ms. Truss’s plan for debt-funded tax cuts, which were driven by a desire to jump-start Britain’s torpid economy, instead triggered a sell-off of British government bonds as investors recoiled from her proposals.

A similar sell-off of American bonds began last week, with far-reaching implications for the United States. Rising bond yields put pressure on governments because it means they must pay more to borrow funds. Sell-offs are also destabilizing because they signal deeper anxiety about a country’s creditworthiness.

In Britain’s case, fears of a credit crisis forced Ms. Truss to shelve the tax cuts, and she soon lost her job. While that calmed the markets, it left a residue of doubt among investors about Britain. Mortgage rates remained elevated for months, reflecting what one analyst unkindly labeled a “moron premium.” [Continue reading…]