Brexit: How to Reach an Amicable Divorce*

Abstract

Control over borders and access to the common market were key issues in the Brexit negotiations concerning the UK's future relationship with the European Union (EU). The parties have expressed strong political commitments regarding both issues. We explore a sequential model, which allows us to analyze the effects of these commitments. It is assumed that the UK controls labor mobility, and that the EU can constrain trade to dissuade future secession, or to punish the UK. We find that the EU has an incentive to claim trade and mobility to be inseparable freedoms whether that reflects its true preferences or not. Our model also implies that both parties are better off if the UK commits to a mobility policy first. Moreover, UK contributions to the EU budget can substitute for trade restriction and allow for a more efficient outcome. Finally, while the EU lacks bargaining power without a readiness to impose trade restrictions, a stronger will to punish the UK does not affect mobility but harms trade. Hence, fueling resentment about Brexit does not benefit the EU.