Vital Interests: Matthias, thanks very much for joining us today on the Vital Interests Forum. You study European economic integration, where the major event for the past four years has been the result of the June 2016 UK Referendum to leave the European Union -- a mandate that has been labeled “Brexit.”

We are now at the end of a long drama of negotiations for the UK to leave the EU with a last-minute agreement signed at the end of December 2020. In order for us to understand how this all played out, can you take us back to when the Brexit movement all began and set the stage for us? What were the issues that motivated the fervor to leave the EU? Who were the players? Why did this vote come about at that particular time?

Matthias Matthijs: Yes, thank you John. I'm delighted to have this conversation with you. Of course, the roots of British Euroscepticism go way back in time -- you can go back all the way back to Napoleon if you want, if not further.

I think the real beginning of the Brexit movement in favor of leaving the European Union has its roots in the early 1990s with the signing of the 1992 Treaty of Maastricht that established what we know today as the “European Union” - enlarging the scope of the original European Economic Community and in particular the powers of the European Parliament. That's when the UK Independence Party (UKIP) was born and when there was a big rift within the Tory Party -- the Conservative Party -- over further integration with Europe. This started during the second administration of Margaret Thatcher and then led to a big defeat of John Major at the hands of Tony Blair’s New Labour in 1997.

The point is that Euroscepticism as an integral part of the British Conservative Party had been simmering since the mid '80s. Margaret Thatcher's budget rebate, her policy of “no, no, no” to all new European initiatives (the single market and enlargement being big exceptions), her Bruges speech in 1988, and so on.

When David Cameron became the leader of the Conservative Party in 2005, he gave quite a good speech about Tory renewal -- one of his famous lines was, "We as the Conservative Party need to stop banging on about Europe."

That was met with applause and support. In 2010 when Cameron and the Tories narrowly defeated Gordon Brown's Labour Party, they had to form a coalition government with the Liberal Democrats who were very pro-Europe so the Europe question was put on ice during that five year coalition government.

That didn't mean that the backbenchers of the Conservative Party were happy with this. There was a real threat from the UK Independence Party led by Nigel Farage on the right, as well as a continuing threat from Labour on the left. Cameron realized that he needed to secure his right-wing flank by settling the Europe question once and for all.

In January 2013, Cameron gave a speech at Bloomberg headquarters in the City of London where he promised a referendum, a simple “up or down vote,” on European Union membership if the Tories were to win the next election scheduled for May 2015.

The broader background of this speech is the Eurozone crisis. The migration crisis hadn't even started, so it was a very appropriate time for Cameron to say, "Listen, we are fortunately not a part of this Euro debt disaster, but we also do not like many other things that limit our sovereignty."

Nobody at the time really believed that this was going to materialize because there was no way the Tories were going to outright win the next election. Under Cameron and his Chancellor of the Exchequer George Osborne, the Conservatives were doing radical austerity cuts in the budget, they raised university tuition fees, raised some taxes and took away benefits, so the Tory/Lib Dem coalition was very unpopular.

In the summer of 2013, I wrote my first article for the print edition of Foreign Affairs called “David Cameron's Dangerous Game” where I explained how Cameron started something that would be very hard to stop if this thing actually materialized. Of course, that is exactly what happened.

The Conservative Party won an outright majority in May 2015 -- all the polls in the spring had been wrong. Cameron wanted to quickly dispense with his pledged EU referendum; he didn't think it was going to be a big deal. He was going to renegotiate the terms of British EU membership and then put it forward to a referendum: remain in the EU with the better terms I negotiated or leave the European Union altogether.

Nobody talks about this anymore, of course, but Cameron did secure a few symbolic victories for the UK terms of membership. However what he did not get -- and the broader political background here again is important -- is a limit (or a unilateral emergency break) on the freedom of movement of people coming into the UK from the rest of the European Union. This was right at the height of the 2015 migration crisis where a million refugees had already come into Europe and many more were threatening to pour through Europe’s southern borders.

Basically, Cameron comes back from Brussels in March 2016 and says, "Okay, I've secured these better terms. Let's have the referendum in a few months." Shortly after, all of Cameron’s achievements in talks with the EU are quickly cast aside and the debate quickly becomes a simple choice: remain versus leave.

At that time of course, Boris Johnson makes his fateful decision. He wrote two columns for The Daily Telegraph -- one advocating remaining in the EU and the other supporting leaving the EU. He submitted the one to his editor that said he was going to campaign in support of leaving. For David Cameron this was a complete betrayal.

You then see a referendum campaign that is all about migration, it is all about sovereignty and of course some of the Tories campaigned on free trade with the rest of the world, the global Britain idea. Much of the rhetoric surrounding the EU referendum from the Leavers was that Europe was failing economically, that they didn’t want to “shackle themselves to a corpse,” and that Europe because of uncontrolled migration was a threat to the future of British culture and society.

You have these two Leave campaigns. The more right-wing and nastier version of it is led by Nigel Farage and Aaron Banks that is all about the threat of immigration. The official Leave campaign is led by Boris Johnson and Michael Gove and is all about sovereignty, making our own laws, bringing money back to the UK that we can then use for the National Health Service and things like that.

Against all the polls which had shown a fairly consistent margin in favor of remain, we see the Referendum results come in with 52% voting to leave, 48% to remain. It was a shocking result that made divisions within the United Kingdom immediately clear.

England voted 53.5% to leave, Wales voted 52.5% to leave, but Scotland voted 62% to remain and Northern Ireland also voted to remain with 56%. So, the nations of the United Kingdom are divided with respect to the vitally important issue of membership in the EU but from June 24, 2016 on the train left the station and it was going to be very hard for any government to ignore this public verdict on being part of the EU.

VI: Matthias, you talked about the percentages of those who participated in the Referendum wanting to stay or leave, but did a large percentage of the electorate turn out to vote? What was the percentage of people that actually paid attention to the Referendum and took it seriously?

Matthias Matthijs: The Referendum actually had a very high turnout and that's another thing which all kinds of pollsters, pundits and analysts got completely wrong. It was always believed that the silent majority of the UK wanted to remain.

The higher the turnout, the more likely that Remain was going to prevail. Turnout was actually quite high at 72%. If you put that in context, it has been a long time since these turnouts were so high in a UK general election.

In 1992 John Major won with a turnout of 78% percent and Blair won in 1997 with a landslide but turnout was already down to 72%. When Blair was re-elected in 2001 turnout dropped significantly to only 59%. So the Referendum prompted a lot of attention from the electorate and a historically high turnout.

In other words, you could say that there really was a popular mandate for Brexit, but did those who voted to leave really know what leaving was all about? Fine to get rid of “EU entanglements” but what was the replacement to EU membership going to look like? What was the future relationship with the EU going to look like? That I think is something that the Leave campaign very cleverly managed to avoid talking about.

Basically, the option was “A,” which was EU membership, or “not A,” which was something else. If that's the choice, “not A” doesn't look too scary. If the choices would have been, “well, this is what the likely implications of exiting the EU are really going to be,” that would have been a very different discussion and campaign.

VI: Let's take a look at what British society was like in the years leading up to Brexit.  In the aftermath of the Brexit vote it is being linked to a spread of populist movements across Europe and the United States. Donald Trump embraced Brexit as a manifestation of British sovereignty. Nigel Farage came to the U.S. and actively campaigned for Trump in 2016 and 2020. 

Wasn’t there a deep legacy of hostility to immigrants and multiculturalism in the UK even before the prospect of refugees arriving from Europe?  Significant immigration from the British Commonwealth -- India, Pakistan, the West Indies, and Africa -- resulted in a white backlash stoked by figures like Enoch Powell already back in the late 1960s. Didn’t a lackluster British economy exacerbate nationalists sentiments?

Matthias Matthijs: It's an excellent point because of course that was the background of the Referendum campaign. No doubt this was part of a populist revolt that many people had expected to happen five years earlier as a result of the global financial crisis and the great “bait-and-switch” that occurred when elites managed to bail out banks and then of course let the people pay for it through austerity cuts.

That's definitely part of it. But the ability of populists actually winning elections or referenda, which is true in the United States as much as it was in the UK, relies on the opportunism of political parties to appear to champion populist causes. Trump didn't run as an independent, he ran as the standard bearer of the Republican Party and let's be honest, most Republicans fell in line.

There were a few people that were “Never Trump” Republicans, but in the end they were a very small part of the Republican Party. In the UK you had the former Mayor of London, Boris Johnson, a very popular figure, and someone like Michael Gove, another well known figure who was the Justice Secretary at the time of the referendum and had been Education Secretary, campaigning for leaving the EU. Those two were prominent Conservatives, and many of the Tory Party joined them. These were establishment people who gave the Brexit campaign quite a bit of credibility and respectability.

The majority of British people didn't actually vote for sovereignty. Some of the educated elite who voted leave did. There was a significant minority of Labour voters that voted to leave as well. Not a majority because many Labour voters are people who live in urban environments and travel quite a bit through Europe and so on. But a lot of the traditional Labour voters -- blue-collar workers, and low-skilled services workers, many who live in the North of England -- voted to leave the EU.

So, a vote to leave signified a bit of a revolt against all manner of elites, whether they were academics, whether they were economists, whether they were leading big banks or big business. I think it is in many ways a backlash against not just the global financial crisis, but also the austerity politics of the Tory Party that were implemented together with the Liberal Democrats for five years between 2010 and 2015.

A lot of people then saw Brexit as this lightning rod for them to vote for. Think about it, if you have the whole establishment, the vast majority of elites telling everybody, "This is what you need to do or else." Then don't be surprised that a lot of people said, "Well, we're going to go exactly the other way." That I think was what was so predictable in hindsight about the Brexit outcome. 

VI: So Brexit happens and then we see four years of political tumult in the UK. You had Cameron resigning as prime minister because of the vote, Theresa May comes in and she had a very tortured time trying to negotiate with all the parties -- the Brexit groups in the UK but also with leaders in European Union. May was unable to conclude an acceptable leave agreement and was then replaced by Boris Johnson. How did that play out?

Matthias Matthijs: Here again, every time a decision had been made or somebody came to power, a few options were foreclosed. The sequencing matters a lot. In the end, the day after the Referendum vote, the question is, "Okay, you voted to leave. Fine. So, what do you want your future relationship with the European Union to be? Do you want to leave the political institutions of the EU but stay in the single market and customs union as many people were led to believe during the campaign?"

If you stay in the single market then you cannot control immigration from the rest of the EU. You cannot control your own laws because you have to follow all the guidelines and regulations that come with participation in the single market.

If you stay in the customs union, then you cannot strike your own trade deals with China, with India, or with the United States, because trade policy is an EU competency that's managed exclusively by the European Commission Brussels.

It was very clear early on when Theresa May -- the last woman standing after all kinds of Conservative party intrigue and backstabbing going on -- emerges rather quickly as the only one that the Tories want to deliver on a Brexit deal with the EU.

May immediately defines Brexit as a "Hard Brexit," or a Canada-style relationship with the European Union, in which the UK would leave the Customs Union, leave the single market, control immigration, strike its own free trade deals and control its own laws. May and many other Conservatives did not want any jurisdiction for the European Court of Justice.

That's how Theresa May immediately set the bar for Brexit. She gave quite a remarkable speech in the fall of 2016 during the Conservative Party’s annual conference in Birmingham where she famously said, "If you're a citizen of the world, you're a citizen of nowhere."

This seemed to be an attack against anybody who had a cosmopolitan identity, who was comfortable traveling all over the EU and wanted to be able to live, study and retire all over the world. In that speech, May clearly sided with the anti-immigration platform of the Brexit vote.

Of course, Theresa May struggled because after Article 50 gets invoked in March 2017 -- the Article that dictates leaving the European Union -- the UK is on a two-year ticking clock to negotiate a withdrawal agreement.

May and the Tories are riding quite high in the polls at the moment. As the Labour Party seemed to be struggling under its taciturn left-wing leader Jeremy Corbyn, May unexpectedly calls for an early general election, which she had explicitly said she wasn't going to do, since she intended to deliver on Brexit first. With a 20-to-30- points margin in some opinion polls, she thought, "I could use a bigger mandate so I can basically control the most ardent backbenchers of my party so I can negotiate a withdrawal agreement that actually keeps the UK quite close to Europe."

She was trying to have it both ways, but she lost that election. Well, she didn't lose, the Conservatives ended up with more votes than Labour but without a majority. From then on, we have this two-year Brexit drama. From summer of 2017 to the summer of 2019 (when Boris Johnson takes over), Theresa May tries to negotiate a complex deal where the UK stays in the Customs Union until a technological solution for the Northern Ireland border can be found, but would leave the single market for services, capital and labor, but stay in the single market for goods. It's very clear that with her minority government, relying on the 10 MPs from the Democratic Unionist Party (DUP) of Northern Ireland, she will not be able to get a majority for any deals she negotiates.

If you fast forward, after multiple votes and multiple debates and all kinds of parliamentary theater in Westminster, Boris Johnson takes over the leadership of the Conservative Party and moves into 10 Downing Street in the summer of 2019 and basically says, "Okay, we're going to leave the EU with or without a deal. We don't need an actual Withdrawal Agreement. We can just crash out when the clock runs out."

Boris Johnson is still working with a minority cabinet. In September 2019, he tries to prorogue Parliament, is overruled by the courts, and then has to bring Parliament back. Finally, realizing that he won't be able to get a majority in parliament for any withdrawal agreement, he calls an election, and the rest of the political parties who had objected to this course of action finally relented.

On December 12, 2019, Johnson wins quite a substantial majority for the Tory Party and then we know Brexit will happen one way or another. It will happen on January 31, 2020, which it did. The UK left the European Union with the withdrawal agreement that was negotiated by Theresa May in place. Boris Johnson changed one crucial thing: he made the Northern Irish “backstop” into a Northern Irish “front stop.”

His win basically means, “we're going to draw the border once we leave the customs union and the single market in the Irish Sea.” This means splitting the UK between Northern Ireland and the rest of Great Britain for regulatory purposes. Then, they spent the last 10 months negotiating a future relationship along the lines of a ‘zero tariff, zero quota’ free trade agreement, and fully left the EU as of January 1, 2021, which is where we are today.

VI: For those that are a bit confused about the composition of Great Britain/ the United Kingdom, can you describe the composite parts England, Wales, Scotland and Northern Ireland -- and what Brexit means for them?

Matthias Matthijs: From a population point of view, England is by and large the most significant part of the UK. It has 56 million people of the 66 million in total roughly speaking. England very comfortably controls 90% of the UK economy, and of course metropolitan London is a big part of that.

Scotland with a population of 5.5 million has traditionally been left-leaning politically and since UK Devolution in the late 1990s they've had their own parliament in Edinburgh. Now the center-left Scottish Nationalist Party (SNP) under the leadership of Nicola Sturgeon is firmly in control of the political landscape in Scotland, which used to be a Labour heartland.

Northern Ireland, of course, has a legacy of a long struggle for independence and Irish reunification. There are about 1.9 million people who live in Northern Ireland and they are split between pro-Great Britain Unionists (most of them Protestant or Anglican) and pro-Irish Republicans (most of whom are Catholic). The Troubles -- the decades-long conflict between Protestant Unionists and Catholic Republicans -- were settled by the 1998 Good Friday Agreement signed in Belfast. That peace accord was much easier to achieve within the European Union context because there were open borders, so the physical border between Northern Ireland and the Republic of Ireland was a non-issue for practical purposes.

Both countries are EU members and neither Ireland nor the UK were in Schengen. That means that there was free movement, complete free movement, passport free movement between Ireland and the UK but not necessarily between Ireland and the UK and the rest of the EU which, as they are both islands, made sense and was in accordance with their historical legacy. That union, the passport union, has existed quite a bit longer than membership of the EU for both Ireland and the UK. 

One more thing on Northern Ireland is that it was agreed that if a majority of Northern Ireland’s population wanted to reunify with the Republic of Ireland, there would be a possibility of a referendum. There would be a "border poll" if there was anything that was going to substantially change the Good Friday Agreement. A lot of people believe that splitting up Northern Ireland from the rest of the UK through this Brexit customs border will accelerate the process of reintegration between Northern Ireland and Ireland.

Finally, there is Wales with a population of about 3.1 million people. It is weaker economically in the sense that it's lagging behind the rest of England in GDP per capita and economic growth. Wales is quite dependent and close to England but that being said, there is a significant strain of Welsh nationalism in Cardiff as well.

For anybody who watches the soccer World Cup or the Euro Cup, they will know that all the component countries of the UK have their own football teams, and they have quite a strong national identity, these four parts of the UK.

VI: So now in January 2021, the UK has a new future to look forward to. It can interact with the rest of the world as a sovereign, independent free trader. There are three major trading blocs in the world: the United States, China and the European Union. The UK has just taken themselves out of one of these trading blocs.

Brexit promised that a free, more agile British economy and government can maneuver in the world and create advantages denied it by the restraints of the EU. What are the realities for the UK as it engages the world in a 2021 context?

Matthias Matthijs: That's an excellent question because what is striking to anyone who pays attention to this deal is that you immediately see that what the UK has negotiated with the EU is a simple free trade agreement, mostly for goods. It's a “zero-tariff, zero-quota” deal that basically means trade continues without costly tariffs or quotas. But what it doesn't mean is that trade will continue to be frictionless.

The UK-EU deal reintroduces a whole series of what is known as ‘non-trade barriers’ (NTBs). It means there are customs forms to be filled out, there are rules of origin documents that need to be filled out, there are domestic content requirements to be met, etc. And there's a significant cost that comes with this, especially in the food industry and other complex supply chains, that could prove to be prohibitive in the future.

I think that many people in the UK did not realize this. Also, as I've often remarked, let's be honest, the great winner from this deal is Germany because Germany is the economy with the big goods surplus in exports to the UK. German companies were the ones that were terrified of being punished by tariffs that the UK could have imposed in the case of ‘no deal’ and that would make German producers less competitive in the UK market.

In the end, it is a free trade deal for goods, but if you look at the UK economy today it consists of 80% services. There is at least theoretically a point to be made that when it comes to services trade, given that the UK has a comparative advantage in services trade -- financial services, legal services, business consulting services, marketing, you name it -- the British can now make deals to deliver services all over the world.

That being said, services trade globally also remains heavily protected. This is about licensing for professions. Every country has strict professional requirements, even within the United States, every state here has its own licensing standards and its own professional qualifications.

When it comes to the services trade, much of it can now be done online, through the internet or through electronic communications but a lot of it still requires the physical presence of people. That's where you need freedom of movement and significant liberalizing of that movement. It's not straightforward to see. It needs to be noted that in the greatest market, the United States, there is NAFTA and quite a bit of opening up of bilateral trade within the Americas.

There is also a very significant agreement that was just signed in Asia, RCEP, the Regional Comprehensive Economic Partnership  which includes 30% of the world economy and 30% of the world's population. RCEP includes China, ASEAN, so all of Southeast Asia, Australia, New Zealand, Japan and South Korea. Now, a key question is can the UK defy what economists call the gravity model of international trade? Not surprisingly, countries have as their major trade partners those that are in their region. Two of the three biggest trade partners of the United States are Canada and Mexico (the third one is China). You tend to trade significantly with those who are close to you because you develop these relationships over time but also because of lower transportation costs and easier logistics operations.

We'll have to see now if the UK, which will lose some of its goods trade with the EU because of the new non-trade barriers, can replace that loss with new trade deals with its old Commonwealth partners like India, Australia and New Zealand, and of course the United States.

What's striking is that the EU has long standing trade deals with many of these places already. The ones it doesn't have deals with, like India, are very tough places to trade with. It is hard to imagine that the UK can get better terms for its own trade deals with the rest of the world than the EU because it just doesn't have the market size to offer them.

That's why the UK partially flourished when it came to foreign direct investment, and attracting foreign investors to the UK because they could say, "Listen, once you're here, you're a Japanese company that has built a factory in Manchester in the UK, but you will have free trade access to practically all of Europe - a market of 450 million consumers.” Now all they can offer is a UK market of 66 million consumers. 

VI: At the end of December, the European Union, under the direction of Angela Merkel, signed a major investment deal with China. Increased access to the Chinese market was a key objective of UK companies but the Johnson government allied itself with the Trump administration's increasing adversarial relationship with China.

Where does that leave the UK now that the EU has signed this deal with China and Trump is leaving office?

Matthias Matthijs: That's where I think you will see quite quickly divergence between the UK and the rest of Europe, both when it comes to dealing with China and when it comes to dealing with Russia for that matter.

When you look at the bilateral investment deal that was struck between the EU and China, it is for the EU at least a way of catching up to Trump's “phase one” trade agreement with the Chinese that dates back to January 2020.

The deal makes it a bit easier for European companies to invest in China. You get rid of certain barriers to trade and so on. If you consider the issue of Huawei for example, the UK has been much more closely aligned with the United States on excluding Huawei from its 5G infrastructure for security reasons. 

Germany has been much more reluctant to do this as they want to keep their relationship with China on good terms. I know that the incoming Biden administration is disappointed with the EU for striking this agreement because they feel that transatlantic cooperation between the EU and US in dealing with China jointly could have delivered much better results.

Of course, the European Union has said, "After four years of Trump, we have to strike out on our own and make our own deals on our own terms." It doesn't mean that there can't be perfectly good transatlantic cooperation once Biden takes office.

Where you can see this heading, especially with a UK Conservative government that still has a very significant pro-American flank that really values its special relationship with the United States, is towards a closer alignment between the UK and the US in dealing with China, but also with Russia for that matter. This will inevitably complicate Britain’s relationship with the European Union in the years to come.

VI: The history of the special relationship between the UK and the United States goes back decades growing particularly close after the Second World War. The U.S. assisted the UK in developing their nuclear capability while thwarting French nuclear ambitions -- providing one of the reasons that motivated De Gaulle to withdraw France from NATO. Where does this relationship now stand? A principal argument of Brexit leaders was that we can leave the constraints of Europe and then negotiate a fabulous trade agreement with the United States. Trump added his support to this rhetoric.

Matthias Matthijs: The great prize for many Tory Brexiteers was indeed a shiny free trade deal with the United States. For them, the United States has always been a more dynamic, faster-growing, less-regulated, more free-market economy than the European Union, which they saw as a protectionist bulwark.

Obviously, as many people know, the “special relationship” has always been much more of a one-way street than it has been really properly a bridge. Americans like to use the UK when it suits them.

Now most U.S. policymakers look to Germany when it comes to having a reliable partner in Europe much more than they would look to the United Kingdom. This was already reality before Brexit. The UK  remains a valued partner, however, especially on the intelligence and the defense front, as it is a significant middle-sized power.

What I think is going to bedevil the relationship between the U.S. and the UK, is not the security front, where I think the relationship will flourish, with the UK very much looking to strengthen NATO and its own bilateral cooperation on defense. But on the trade front, it is not clear that the British electorate would be all that enthusiastic about a free trade agreement with the United States. What the United States would want from a trade deal with the UK is an opening up of the British agricultural sector. Many question opening up the agricultural goods markets for controversial American products which many in Britain consider tainted with GMO and chemical production methods (chlorine washed chickens!).

Also, U.S. interests are going to want the City of London to open up its financial services market for more American business and then, they are going to want to open up the UK’s pharmaceutical market where you have the British National Health Service as a major buyer of drugs.

None of these things are going to be an easy sell for the UK government to its electorate. The preferences of the British, when it comes to trade and the environment, are quite a bit closer to continental Europe's preferences.

That's where we're going to see quite a bit of friction, but I do think that the Biden administration will find quite a close ally in the UK, even though, of course, it's clear that most of Biden's people have their doubts whether Brexit was a good idea to begin with. Now that it's happened, they will have to deal with the Britain that they get.

VI: If 80% of the British economy is now in services, isn’t there a significant challenge to this sector that will come from Europe and the United States?

Matthias Matthijs: That's indeed going to be very hard for the UK in many ways because the one thing we do know from the first weeks of 2021, is that there's quite a bit of financial business that the City of London has already lost to other European capitals.

It wasn't quite clear at the time of the signing of the agreement what was actually going to happen. Also, what the free trade agreement between the UK and the EU stipulates is that there are quite a bit of things that still need to be sorted out. Two of those big things are financial services and data protection. The EU can unilaterally decide whether they don't want London to be a hub anymore for their financial services. 

One of the more striking things of the first seven days of this year, when it comes to food services for example, is that there's a lot of imports that come from the European continent, they go through food distribution centers in the UK, food that gets packaged for final sale -- Marks and Spencer sandwiches and the like -- that now face quite a significant hurdle to come back into the EU because of all the requirements around rules of origin.

What EU diplomats have said in response is, "Well, the idea that Britain was going to continue to be a hub for food distribution for the rest of the EU was always going to end after Brexit." Why am I saying this? Because this will have direct consequences for financial services.

The EU certainly has its interests to defend here and many other capitals, starting with Frankfurt, with Amsterdam, Dublin, Brussels, Paris, they will want a share of the financial services pie. Over time we'll see quite a bit of business move from London to the rest of Europe. But it’ll be gradual, not all at once.

Then the question is, and that was your earlier question, can the UK make up for this by basically providing financial services more globally? I'm somewhat skeptical of this. I think some of it sure, but these are very protected industries. There's something very political about finance because governments in the end like to be very close to their own financial sectors because money is such an important part of an economy.

Governments want to invest in things. They want their banks to extend credit to their own national champions and to provide jobs for their own people. The UK is about to find out that when it comes to services, especially financial services, there's way more protectionism including from the United States, Japan, and others then they had envisioned.

VI: These days everybody talks about the importance of new technologies - 5G, artificial intelligence, all the next-gen enterprises.

Countries are preparing for this by instituting national industrial planning. Certainly this is happening in China, the EU is considering a Europe-wide industrial policy agenda.

One part of the Brexit deal is a prohibition on UK industrial subsidies, can ideas of trying to create an industrial policy in the UK to assist industries embrace new technologies be challenged by the EU?

Matthias Matthijs: Here is actually an area that I think holds the most promise. One of the most coherent views of Brexit is a more left-wing view of industrial policy and getting ahead of your European competitors through smart subsidies from the government.

But you're absolutely right. When it comes to existing industries, all manufacturers, washing machines, cars, subsidizing companies and then having them enjoy a competitive edge with 50% lower price margins and shipping those to Europe, is not going to fly.

That said, it's a trade deal. If the UK, let's say, has a new COVID vaccine and the rest of Europe doesn't, and that's done through all kinds of industrial policy and government subsidies, then there is no issue because it's not like there's somebody losing out on business because there are simply no competitors to begin with.

That's the belief that when it comes to artificial intelligence, green technology, battery technology, electric power, and so on, that the UK given its nimbler economy, its more flexible labor market, the fact that it’s English-speaking, has a highly educated workforce, that it can attract investment from the rest of the world.

The British government can be very clever about this and when it comes to the next generation of technologies, Britain can be so far ahead of the rest of Europe that it can basically conquer those markets without there being a competitive issue in the first place because they will literally win the competitive race before it’s even started.

I think we've seen with the Oxford-AstraZeneca vaccine and how quick they've been in their rollout and so on, that it is clear how Brexiteers are thinking about this, that the UK can be faster and can actually thrive, which is something that many people have pointed out they could have done as well within the EU.

It's not that clear that they wouldn't be allowed to do this because of course, the single market was always about a level playing field for competition. When it comes to inventing the next big thing, the next generation of smartphones or whatever it is, that of course, is a different story. That said, I am less skeptical that that's possible. Given what we've seen in the last 30 years of the British economy, it's perfectly imaginable that they could race ahead of other countries in that fashion.

VI: One of the things that is absolutely necessary for innovation and entrepreneurship is an educated and talented workforce. As a result of Brexit, the British government, stating the expense, decided to pull out of the Erasmus Project, which allowed students, researchers, and academics to attend UK universities and UK academics and students to attend universities throughout Europe. This seems quite counter-productive if you want to encourage the best and brightest of your own students as well as those from Europe.

Matthias Matthijs: I agree with you. It's foolish. In the end, it is true that for continental European students, the chance of going to study in London, Warwick, Oxford or Cambridge, of course, had significant appeal.

Many of these talented people who come from the rest of Europe would like to become part of the academic and business community and stay in the UK. Just like the United States attracts the best and the brightest from all over the world and many end up staying here and making significant contributions. You get the immediate return of your investment of educating these people at the Master's or PhD level.

Yes, they have to put something in place of Erasmus. They can now of course open up themselves to the whole world. It doesn't just have to give priority to the European Union itself. Any new scheme can give priority to Chinese students, Indian students, American students, and so on in order to attract those students. Of course, Brexit was all about limiting immigration. We all know that the UK's labor market model relies quite a bit on low-skilled immigrant labor to come in and work in the UK.

That's the only reason the UK has been as flexible and as dynamic and that's one of its growth engines. People who voted for Brexit, did they vote to replace Polish and Romanian immigrants with immigrants from Jamaica and Pakistan? I doubt it, but that may well end up becoming the reality.

What we've seen since 2016 is that immigration in the UK hasn't gone down, but immigration from the rest of the EU has. It has been replaced with immigration from the rest of the world. I think this will accelerate the move towards a more pluralistic UK society, which will be an unintended consequence of the vote to leave the EU.

The UK will remain a country that will have to rely quite a bit on immigration. It's not just for high tech and innovation, it's nurses at the National Health Service, people to pick fruit at the end of the summer, things like that.

The British government is going to have to think very hard when it comes to their future immigration policy because there will be all kinds of shortages on the labor market now that there won't be free movement from the rest of Europe anymore.

VI: Matthias, we're coming to the end of our time. We've had a good conversation that has provided background of how Brexit came about, the mechanics of how leaving the EU was negotiated, and where things stand now.

We will have to pay attention in the years to come to see how this all plays out -- whether Boris Johnson can pivot from being someone who negotiated a Brexit agreement, to actually implementing it and moving the UK forward to its promised better future.

Matthias Matthijs: Yes, absolutely. Thank you so much for this. That was fun!

Matthias Matthijs is associate professor of international political economy at Johns Hopkins University’s School of Advanced International Studies (SAIS) and senior fellow for Europe at the Council on Foreign Relations. He is an award-winning author and teacher, and an expert in comparative and international political economy, the politics of economic ideas, and European integration. Since May 2019, he has also serves as the chair of the executive committee of the European Union Studies Association (EUSA).