A game theory guide to Theresa May's negotiation strategy

A game theory guide to Theresa May's negotiation strategy

by Mike Nevin
article from Thursday 19, January, 2017

THE PRIME MINISTER'S Brexit speech on January 17th marked the opening move in the negotiation process that will lead to the UK’s departure from European Union. The UK’s best strategy through these negotiations will depend upon how the other side responds. Clues are offered, however, by Game Theory, defined as “the study of models of conflict and co-operation between intelligent rational decision makers.”

1. The opening move. Game Theory suggests that the person making the opening move should propose co-operation to arrive at a mutually beneficial solution. The PM’s offer of a “bold and ambitious free-trade agreement” between the UK and her EU partners meets this criterion. Under her proposals, the UK would leave the Single Market, and so regain control over her borders, laws and finances, but continue to offer all EU Member States tariff-free access to British markets, provided they do the same.

2. The response. As demonstrated by The Prisoner’s Dilemma, the EU’s optimal response would be to co-operate. In their initial responses to the PM’s speech, some EU leaders did make positive noises, welcoming the clarity of her approach. However, Game Theory suggests that, unless trust between two parties is high, one party may believe it has more to gain by ending co-operation and pursuing a “beggar my neighbour” policy, advancing their own interests at the expense of the other party. In his Brexit speech on October 7th 2016, President Hollande of France declared that “There must be a threat, there must be a risk, there must be a price.” 

3. The principle of reciprocity. Happily for the long-suffering citizens of France, they will shortly be shot of the most incompetent and unpopular President in the history of the Fifth Republic. So what he has to say on the subject is irrelevant. What is more worrying is that certain EU leaders have strongly criticised British Ministers for suggesting that Hollande’s approach is not helpful, while refraining from any comment on what he said back in October – suggesting that they agree with his position. Which begs the question – who on earth wants to be a member of any club that threatens to punish them should they decide to leave? 

Should the EU adopt Hollande’s policy of vindictive retribution, however, then Game Theory gives clear guidance on the UK’s response. The very worst response would be to continue to co-operate. Game Theory indicates that the best strategy in the face of threats from the other side is “tit-for-tat”, or “do unto others as they do unto you.” Comments over the past week by the Prime Minister, the Chancellor of the Exchequer and the Foreign Secretary have made it clear that the UK will retaliate against any attempt to “punish” the UK for its temerity in exiting the EU. So, for example, should the EU impose a 10% tariff on UK exports to the single market, the UK should reciprocate by imposing a 10% tariff on any EU imports to the UK. 

4. Know your BATNA. The Prime Minister spelt out her BATNA – Best Alternative To a Negotiated Agreement – on January 17th when she stated that “no deal is better than a poor deal”. This is the strongest possible BATNA as it signals that the UK is prepared to walk away, so cannot be held to ransom by the EU. Under this scenario, UK–EU trading relationships would be governed by World Trade Organisation rules, with the UK free to pursue trade deals with the rest of the world on a bilateral basis. 

5. Apply leverage and be prepared to “divide and rule”. By referring to security issues in her speech, the PM subtly alluded to the possibility that the UK’s military support to other EU Member States might be compromised if they seek to pursue a punitive policy against the UK during Brexit negotiations. While this has provoked predictable criticism from europhiles, it seems to me to be simple common sense. I can’t think of a single example of a nation giving military support to another nation that is attacking it economically. As the Prime Minister stated, such an approach could not be regarded as that of a friend. And interestingly, after her speech, the President of the EU Council, Donald Tusk of Poland, adopted a notably more conciliatory tone than in some of his earlier statements, or indeed than the views expressed by some of his colleagues from Western European Member States. Could his more moderate approach by any chance have anything to do with anxiety in his native land and the Baltic States about potential threats from the East?

Conclusion: The PM and her Ministers have played their hand well in the first move of the Brexit Game. How it progresses from here depends upon the response of the EU. It is to be hoped that the EU will also enter into co-operative mode, leading to a mutually beneficial Clean Brexit and UK-EU Free Trade Agreement in 2019. However, there is a real risk that negotiations could break down, not because of disagreements between the EU and the UK, but because of fractures within the EU itself. Eastern Members like Poland and the Baltic States may wish to pursue a co-operative strategy but be frustrated by Western Members foolishly seeking to “make an example” of the UK in a misguided attempt to dissuade other Member States from leaving. In that case, the UK’s second best strategy is clear – to leave the negotiating table, cancel subscriptions to the EU, and continue to trade with EU Member States under WTO rules.

In either event, the Prime Minister’s January 17th speech may in time come to be regarded as a case study in the successful application of Game Theory.

You can read more of Mike Nevin at his blog the www.goldenguinea.com

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