Throwing the Baby Out with the Bathwater: Brexit and the Economics of Disengaging from a Free Trade Association

For nearly six decades or more, international trade policy has been largely dictated by UN (now WTO) supervised rounds of mutual tariff reductions, starting with the Kennedy round in 1961. Initially attention was focused on tariffs as such, but more recently the scope has been extended to include services, investment, intellectual property rights, free trade associations, and sensitive issues like agricultural goods. As the negotiations became more complicated (and controversial), the speed at which new agreements were agreed slowed down markedly. It became popular to argue that bilateral deals, and then agreements that allowed the emerging trade associations to merge, would be a better way forward-in the hope that mergers between the larger associations would lead to free trade world-wide. Instead, as the academic literature predicted, trading arrangements have gone in the opposite direction with economies withdrawing from established associations or violating old ones. This paper, by “reverse engineering” the costs of Brexit as an example, sets out and examines the costs and different ways a country might disengage itself from a trade association suspected to no longer be advantageous.