Bargaining post-Brexit trade deals: worse even than “project fear”
https://www.opendemocracy.net/uk/david-harbord-tim-lord/bargaining-post-brexit-trade-deals-worse-even-than-project-fear
Nearly four months after the United Kingdom’s referendum vote in which 51.9% of voters elected to withdraw from the European Union, the world spotlight remains on British PM Theresa May and her future course of action. However, before the referendum vote and Theresa May, former PM David Cameron was lobbying to keep his nation in the EU. “Project Fear,” is the name given to the side campaigning to remain in the EU. This side would frequently publish grave projections about a post-Brexit life to rally support for a European Union with the United Kingdom. In their June 2016 article David Harbord and Tim Lord examine the Brexit with game theory and conclude that even Project Fear fails to paint a grim enough picture. Project Fear harped on a study published by the Organization of Economic Co-operation and Development (OECD) which, “published [an] analysis of the economic consequences of Brexit concluding that by 2020, UK GDP will be 3.1% smaller than it would be with continued EU membership, and more than 5% smaller by 2030”. Numbers like this are already crushing to what is currently the world’s fifth largest economy. The OECD study is predicated on the assumptions that the UK, “will not reach a new trade deal with the EU until 2023, implying that trade after 2018 will be conducted under WTO rules, which will raise costs for UK exporters. They also assume that the UK will not sign any new free trade deals with non-EU countries before 2030.”
This is where David Harbord and Tim Lord predict the same game theory discussed in class will hurt the UK more that the OECD predict. “A key factor in the negotiations is the fact that any trade deal with the EU requires the approval of all 27 other member countries (plus the European Parliament). This means that any member state, even if it has only negligible trading ties with the UK, can use its veto power to extort concessions before approving an agreement.” This creates a Nash Bargaining network where each nation is a node, and each node has a varying level of bargaining power. Ironically, the nations that have little to no trade or dependency with the UK have the most power in this scenario. They simply have nothing to lose, and thus, they stand to gain the most, because they can veto any deal that doesn’t give them an advantage. Although there would be 30 nodes in this network, to look at the effects on a micro level let’s imagine a network with three nodes: UK, Germany, and Malta. The UK and Germany trade very frequently, and the non-intra-EU trade laws which include tariffs would damage both economies. As the authors say, “Germany places a great deal of importance on its trade with the UK, leaving the UK and Germany in symmetrical negotiating positions, or in positions of equal bargaining power. “ This would mean the outcome would be in accordance to the following scenario. “If trade between the two countries creates a total surplus of 2X million Euros over the status quo of restricted or no trade, the Nash Bargaining Solution would allocate X to each side. That is, the gains from trade will be split equally between the two countries.” When we add Malta back into the network, at first one may think they have no affect on the trade on the outcome as they have nearly no trade with the UK. However, the fact that they have veto power complicates the network. “Since Malta has veto power over the deal which allows Britain to obtain X from trade with Germany, the Nash Bargaining Solution gives Malta a payoff of (1+X)/2. That is, Malta is able to “extort” half of X from the UK simply by wielding its veto power.” Therefore, the UK is in a weaker bargaining position than initially thought to be. When we incorporate several other nodes that have no trade with the UK but also has veto power, the bargaining power of the UK is smaller and smaller, and thus the trade deals may be weaker than initially thought to be.
This scenario will only occur if nations were to act rationally in accordance to what is best for their circumstances. Something to note is that there may be extrinsic factors that this network doesn’t account for as it is an oversimplified representation of an incredibly complex geopolitical conflict. For example, the UK being a great military power may give them more bargaining power. Nonetheless, despite the UK beating economic predictions for 4 months post-Brexit, the OECD still has bleak predictions for the future, and principles of game theory describe why.