Brexit - balancing trade and mobility?

Rikard Forslid and Sten Nyberg

No 2017:7, Research Papers in Economics from Stockholm University, Department of Economics

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 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.

Keywords: Brexit; immigration; trade; sequential game (search for similar items in EconPapers)
JEL-codes: F15 F22 F55 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2017-10-27
New Economics Papers: this item is included in nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www2.ne.su.se/paper/wp17_07.pdf (application/pdf)

Related works:
Working Paper: Brexit - Balancing Trade and Mobility (2017)
Working Paper: Brexit - balancing trade and mobility? (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:sunrpe:2017_0007

Access Statistics for this paper

More papers in Research Papers in Economics from Stockholm University, Department of Economics Department of Economics, Stockholm, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Anne Jensen ( this e-mail address is bad, please contact ).