Best Alternative to Negotiated Agreement (BATNA)
Just like with any other negotiation, in Brexit both sides must calculate the possibility of deadlocks and anticipate possible agreements. If there is an impasse, what are the best outside options? Seasoned negotiators understand the value of determining their BATNA (Fisher, Ury, & Patton, 1991), otherwise they will not be able to confidently walk away from a subpar offer (Fisher et al., 1991; Subramanian, 2007), thus, UK and EU negotiator experts will be aware of their bargaining power and their BATNA (Fisher et al., 1991; Malhotra, 2004). It is imperative that negotiators calculate the reservation value, that is, the lowest-valued deal acceptable. If the value of the deal proposed is lower than the reservation value, it is better to reject the offer and pursue the BATNA. If the final offer is higher than the reservation value, then acceptance is the best option. In the case of Brexit, it should be determined whether WTO rules, a customs union, the Switzerland model, the Ukraine Plus model, or the Norway model represents the BATNA.
Agreement Strategies and Scenarios
The EU referendum just gave people the choice to ‘Leave the European Union’ or ‘Remain a member of the European Union’, but there are lots of ways we could leave the EU. Hard Brexit is at one end of the spectrum. It is about moving further away from the EU and cutting the main formal ties with the EU … Soft Brexit is at the other end of the spectrum, where we continue to have close formal ties with the EU.” (Full Fact, 2017).
Hard Brexit would mean that the UK would not allow free movement of people between the UK and the EU. As the free movement of goods, services, capital, and people is at the core of the EU project, and the EU sees the four as indivisible, a strategy calling for three of the four exposes a problematic UK negotiation style. If the UK follows a hard Brexit strategy, it is likely that there will not be a deal. This would mean that the UK would have to rely on World Trade Organization (WTO) rules. The WTO agreement signed in Marrakesh in 1994, and updated since, serves as an umbrella agreement. It has annexes on intellectual property, dispute settlements, trade-policy review mechanisms, multilateral agreements, and other matters. While the WTO agreement is currently used for EU-US trade, the WTO does not set tariffs or taxes. Its conflict resolution process is exceedingly long, and its remedies are blunt instruments. With only WTO rules as a fallback position, it is clear that negotiation expertise will be important.
Considering the short time horizon, the only successful strategy is to be close to a fair deal from the outset. This would demand that the negotiators put their cards on the table, which the EU negotiators have done in publicizing their strategy and regularly updating information on their approach on their Web sites with supporting information regarding the legal situation after the withdrawal (information acts, customs tariffs, interim solutions for exports, intellectual property rights, etc.).
Soft Brexit, on the other end of the spectrum, would mean having close links to the EU, similar to those of the Norway model. While Norway is not a member of the European Union, it has close trade links with the EU, and is in the EU single market – for which it pays about €400 million annually in grants. The citizens of Norway can move between EU countries freely and citizens of the EU can just as freely move to Norway (Full Fact, 2017). Adopting the Norway model would mean starting with a single market assumption for which the UK would have to make financial contributions, which some argue would not be in keeping with the propositions of the White Paper. Moreover, the UK would have to reckon with the fact that the EU often refers to “cooperative exchange” regarding customs tariffs and quotas, which indicates that payments alone would not be acceptable. This said, a soft approach would be a quicker way to reach a settlement.
Mixed strategy profiles or a ‘concessionary’ Brexit strategy could lead to various ways to access EU goods, services, capital, and labor markets along the lines of the Canada, Turkey, and Ukraine Plus models. The UK negotiation strategy position strongly favors negotiating all these aspects at once. Besides the negotiation strategy profiles, which include strategies related to immigration and trade, other strategies regarding planning, conflict resolution, and deal-making must be included. In this regard, we can draw on the mechanisms identified in the negotiation literature (Raiffa, 1983; Susskind, 2003; Ury, 1991; Malhotra, 2004, 2016). For Brexit, immigration needs to be dealt with first – the rights of UK citizens and EU citizens secured and then perhaps a quota/tier system. Free-trade agreements (FTAs) and bilateral investment treaties (BITs) are the next stage, with an exit payment and tariffs following. This position may entail extreme negotiation behavior, such as haggling, i.e., starting with extreme offers, and quickly reducing bids as concessions to make for a shorter bargaining horizon. On the other hand, it may mean using concessions as a relationship-building approach, which means longer negotiations that bind the parties and make it more difficult for them to opt out, and fair deal behavior for negotiations with a short-term view, i.e., making offers close to what negotiators want in the end (Ott, 2011). Concessions with a longer bargaining horizon give negotiators the opportunity to focus on relationships – thus difficult issues are not negotiated first, but only when a relationship has been established. This is a desirable strategy for the UK depending on background and atmosphere implications (Ghauri, 2003b).
Feasible and Potential Agreements
Negotiators on opposite sides of the table often have different visions of the future. The zone of possible agreement (ZOPA) can be overshadowed by information asymmetries, moral hazard problems, cultural differences, and complexity costs. However, negotiation theorists offer a way around these (Fischer et al., 1991; Ott, 2011; Subramanian, 2007; Ury, 1991). Before proposing a contingency, negotiators consider potential informational asymmetries and differing incentives that need to be resolved first, including complexity costs that might arise. Without looking forward and reasoning back, a move that could expand the pie might do just the opposite. We are left then with several important questions to address regarding the aims of the UK to find out whether they will be better off after the deal, whether they have considered a BATNA, and how they can create a positive and cordial atmosphere to keep the other side’s expectations high during the process. To reduce concerns, Brexit negotiators must consider conflict-resolution mechanisms. The EU started with an excellent analytical approach by insisting on step-by-step negotiations. UK negotiators would be wise to do the same, given that the negotiations are complex, uncertain, and to be concluded under intense time pressure.
We now consider the agreement zone between the negotiating parties. The agreement zone reflects possibilities to reach an agreement acceptable to both sides when both parties cooperate (Raiffa, 1983; Ott et al., 2016). We assume that we have three different strategy profiles (hard, soft, and mixed). Depending on the cultural and strategic backgrounds of the negotiators, all three approaches and their response function or counter-offers from the bargaining model can be emphasized.
A UK hard Brexit strategy will lead to a narrow agreement zone and tit-for-tat measures (Axelrod, 1984), and the consequence will be that the UK will has to fall back on WTO rules that will result in tariffs and import quotas. The strategy will be on the trade integration axis of Figure 3 on the lower end towards the origin and low on the immigration integration as well (almost zero). The rationale for a hard Brexit is the belief that the UK will benefit after leaving the EU from third-country agreements that will compensate for lower EU trade volume. However many of those third countries, notably China and India arguably the biggest among them, already have trade agreements with the EU, and will want to continue to deal with the world’s biggest consumer market that also has the most buying power.
The White Paper suggests that the UK wants to obtain strong access to the single market, as well as the possibility of signing free-trade agreements with third countries. This would mean European Economic Area (EEA) membership, as Norway has had since 1992. A soft Brexit strategy would mean payment for single market access, but hand-in-glove with that would be free movement of people, again like the Norway model. This implies high levels of trade and immigration integration and would define the potential agreement zone for the EU utility functions (along the x axis). However, the UK wants complete control over immigration. In addition, the UK does not want to be subject to rulings by the European Court of Justice (ECJ). In short, the aims of the UK diverge considerably from those of Norway. Alternatively, the UK could use the Switzerland model, which offers access to the single market in specific sectors, although the EU’s negotiation position makes it unlikely that it will consider industry-specific arrangements at this point. In any case, the White Paper explicitly rejects acceptance of the free movement of people, and for all intents and purposes the restrictions that Switzerland was allowed to place on the citizens of EU-2 countries (the newest EU members) will come to an end on June 1, 2019. On another front, Switzerland is currently involved in negotiations with the EU over the ECJ role in resolving trade disputes, which means that it is unlikely that the EU would agree to what the UK wants regarding the ECJ.
The concessionary approach would consider free-trade agreements (FTAs), with third country trade agreements possible, which are low on trade integration but have the possibility to negotiate immigration quotas, since so far, no immigration integration for this option has been considered. A so-called “deep and special partnership” could be based on the Canada model and Ukraine Plus model, which would mean open market access, no free movement of people, and no ECJ oversight. The wide-ranging possibilities pose a complex conundrum for scholars and civil servants. A recent poll of the German Economists Expert Panel (Gäbler et al., 2017) shows that 31% of respondents believe that the UK will pursue a Ukraine Plus kind of model, 14% the Norway model, and 23% the Switzerland model, with some 14% saying the UK will seek an alternative like a free-trade agreement and 18% having no idea of what to expect.
Based on various agreement models, and the BATNAs of the UK and EU, the result may be close to the second trade agreement option set out by the EU–and already agreed between the EU and Canada and the EU and Ukraine. Those agreements fall within the feasible agreement zone shown in Figure 3 but would still be below the initial endowment point of trade and immigration integration W, thus both parties will have lower utilities after Brexit (Table 3).