How should the UK approach Brexit?

March 29, 2017

A study published in the Oxford Review of Economic Policy summarizes strategies for the United Kingdom to adopt when negotiating new trade arrangements with the European Union. Theresa May triggered Article 50 today and began the Brexit process. This article discusses the future of UK trade policy following the referendum vote.

What strategy should the UK government adopt to secure the best possible outcome for the UK in future trade negotiations? The authors maintain that there are options for future UK-EU trade relations: remain part of the Single Market like Norway; negotiate bilateral trade deals with the EU as Switzerland and Canada have; or trade with the EU under World Trade Organization (WTO) rules as the United States and many other non-European countries do.

Unless the UK chooses the WTO option, however, Brexit will require negotiating a new trade relationship with the EU. The authors of the study argue that a successful strategy for trade negotiations must be grounded in a clear understanding of why countries negotiate trade agreements and how agreements are reached.

The researchers propose four guidelines the UK should consider to guide its trade negotiating strategy:

(i) you get what you give

To reap the benefits of trade agreements, the researchers argue, the UK must be willing to give its trading partners something they value. Making concessions provides a reason for other countries to give the UK what it wants. In general, the more countries are willing to concede and the more policy control they give up, the bigger are the potential gains from reaching an .

(ii) where negotiations start matters

The paper argues that the outcome of any bargaining game depends upon where negotiations start from and trade agreements are no exception. The policies each country will adopt if no agreement is reached provide a reference point, or threat point, for the negotiations, according to the paper. Consequently, trade negotiations are path dependent and the final outcome depends upon the starting point.

(iii) bargaining power affects the outcome of trade negotiations

Countries that are desperate to obtain a deal at any cost have little bargaining power and are less likely to achieve their objectives, according to the researchers. As in any , being willing to walk away risks failure, but also strengthens a country's bargaining power by signalling the country will not accept a bad deal. Unfortunately, according to the paper, the UK is starting from a weaker position than the EU. Even though the UK has a trade deficit with the EU, UK-EU trade accounts for a much larger share of the UK's economy than the EU's economy.

The researchers argue that the UK's immediate objective after invoking Article 50 should be to neutralize the 2-year time limit by agreeing a transition arrangement to govern UK-EU trade relations for as long as necessary between when the UK leaves the EU and when a longer-term agreement is concluded.

(iv) invest in negotiating capacity.

Having not participated in trade negotiations for the past 40 years, the UK currently has very little negotiating capacity, according to the paper. To become a smart negotiator, the researchers argue the UK needs to invest heavily in four areas of expertise.

First, it should hire the best available trade negotiators to negotiate on its behalf. Trade lawyers are needed to understand and write the text of trade agreements. Second, it needs diplomatic expertise to provide information on the objectives and strategies of its negotiating partners. Third, the government should strengthen existing links and develop new links with UK businesses to obtain feedback on how they will be affected by different policies. Finally, the government should invest in the expertise needed to analyse the economic consequences of alternative possible trade agreements and identify which proposals are best for the UK's economy.

"Reaching agreements is about negotiation," said author Thomas Sampson, of the London School of Economics. "It's going to be a bargaining process. The UK needs to understand not only want it wants, but what it's willing to give up. The EU is likely to dictate the terms of any deal. The UK's goal should be to salvage what it can from a bad situation by working to avoid a hard Brexit"

Explore further: Preferential trade agreements enhance global trade at the expense of its resilience

More information: Swati Dhingra et al, A hitch-hiker's guide to post-Brexit trade negotiations: options and principles, Oxford Review of Economic Policy (2017). DOI: 10.1093/oxrep/grx005

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