Research Papers in Economics, Department of Economics, Stockholm University
Brexit - balancing trade and mobility?
() and Sten Nyberg
Abstract: Control over borders and access to the common market are
key issues in the Brexit negotiations. We explore a sequential model, where
the UK can commit to mobility, and the EU may constrain trade to dissuade
future secession, or to punish the UK. The model highlights the importance
of whether the EU views trade and labor mobility as substitutes, in line
with standard trade theory, or as complements, as suggested by EU
statements about inseparable freedoms. In the former case, the UK can
attain its preferred mobility with impunity. Mobility and trade
restrictions are higher in the latter case. While the EU's bargaining
position hinges on a willingness to constrain trade, the EU does not
benefit from strengthen this, say by fueling resentment about Brexit. The
sequence of moves is clearly important. Our model implies that the UK
moving first is optimal for both parties. This sequence is also in line
with the phased approach guiding the negotiations. With uncertainty about
preferences, the EU benefits from claiming to have complements preferences,
irrespective of its true preferences. Uncertainty harms the UK.
Nevertheless, it is worse off moving second, despite the EUís preferences
then being revealed. Also, if the EU has substitute preferences it could
gain from committing to complement preference behavior. Finally, we discuss
the scope for efficient bargaining taking the inefficient equilibrium
points as points of departure. We note that contributions to the EU budget
could potentially substitute for trade restrictions, thereby contributing
to a more efficient outcome.
Keywords: Brexit; immigration; trade; sequential game; (follow links to similar papers)
JEL-Codes: F15; F22; F55; (follow links to similar papers)
25 pages, October 27, 2017
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