Discussion paper

DP12370 Brexit - balancing trade and mobility?

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 EU’s 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.

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Citation

Forslid, R (2017), ‘DP12370 Brexit - balancing trade and mobility?‘, CEPR Discussion Paper No. 12370. CEPR Press, Paris & London. https://cepr.org/publications/dp12370