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INVITED RESEARCH NOTE

Brexit negotiations: From negotiation space

to agreement zones

Ursula F Ott

and

Pervez N Ghauri

Nottingham Business School, Nottingham Trent

University, Nottingham NG1 4BU, UK;

Birmingham Business School, University of

Birmingham, Edgbaston Park Road,

Birmingham B15 2TY, UK

Correspondence:

PN Ghauri, Birmingham Business School,

University of Birmingham, Edgbaston Park

Road, Birmingham B15 2TY, UK.

Tel: +44-121-414 5868;

Fax: +44-121-4147380;

e-mail: p.ghauri@bham.ac.uk

Abstract

Brexit is decidedly a ‘‘big question’’. We agree with International Business

scholars who say that such questions need to be addressed using an inter-

disciplinary approach. We use bargaining theory models of rational behavior

and the negotiation literature to explain various Brexit options and predict their

consequences. Considering the lack of relevant experiential knowledge, and

the multidimensional high-stakes negotiations underway, it is little wonder that

anxiety is growing across all 28 European Union member states. Our analysis

supports a coherent approach from rational bargaining model to real-life

international negotiation. We position outcome scenarios in different

agreement zones and explore their ramifications.

Journal of International Business Studies (2019) 50, 137–149.

https://doi.org/10.1057/s41267-018-0189-x

Keywords: bargaining theory; negotiation analysis; agreement zone; Brexit negotia-

tions; outcome scenarios

INTRODUCTION

Some are doubtful whether international business (IB) research is

up to tackling business – and indeed societal–big questions

(Buckley, 2002; Buckley, Doh, & Benischke, 2017). Brexit is

undeniably such a question. International business takes place

within a framework of institutions that govern the movement of

goods, services, capital, and people, basically, the European Union

four freedoms spelled out in the Treaty of Rome. These institutions

are often challenged by patriotic and nationalist rhetoric. Agree-

ments between nations, firms, and individuals facilitate trade and

ensure smooth interaction. The negotiation of such agreements has

long been an important research topic for IB scholars (Kapoor,

1970 1998 1965 1982; Money, ; Sawyer & Guetzkow, ; Tung, ).

Especially now, in an era fraught with nationalist movements, IB

researchers are challenged to undertake inter-disciplinary and

phenomena-driven negotiation research.

Negotiation, as Walton and McKersie (1965: 3) succinctly put it,

is ‘‘the deliberate interaction of two or more complex social units

which are attempting to define or redefine the terms of their

interdependence.’’ Lewicki, Weiss, and Lewin (1992) emphasize

that negotiations do not only take place between individuals, but

The online version of this article is available Open Access

Received: 29 May 2017

Revised: 28 February 2018

Accepted: 10 September 2018

Online publication date: 2 November 2018

Journal of International Business Studies (2019) 50, 137–149

www.jibs.net

between groups and organizations. The literature

consistently shows that greater gains can be

achieved when a negotiation takes place within a

single culture than when across a cultural divide

(Imai & Gelfand, 2010), and that the negotiation

process is more difficult when parties have different

values and traditions (Volkema, 2012). Diverse

cultural backgrounds affect the actors, their behav-

ior in negotiations, and hence outcomes (Ghauri,

2003a).

Article 50 of the European Union Lisbon Treaty

states that any member state may withdraw from

the Union, and spells out the process for doing so.

In a referendum held on June 23, 2016, the British

electorate voted by a margin of 3.8% to accept a

proposal to exit the EU. Months of uncertainty

followed. In March 2017, the UK triggered Article

50, thereby beginning the process of exiting. A

process dubbed Brexit, with far-reaching economic,

social, and environmental consequences was

underway. Brexit constitutes a major discrete event,

which affects governments, firms, and individuals.

It also presents an opportunity for IB scholars to

examine the negotiation of an interesting set of

international business issues and to have a say in an

important geo-political event. International busi-

ness, as a field that combines economics, sociology,

psychology, political science, anthropology, and

management studies, is ideally positioned to

address the Brexit big question.

We investigate the negotiation space – in essence,

the ground covered by the UK government and the

European Commission representing the states that

will remain in the EU – and the agreement zones for

Brexit outcomes. After much heated internal polit-

ical debate, what the UK government would seek to

achieve in Brexit negotiations was published in a

white paper (HM Government, 2017). This article

focuses on the 12 principles set out in that policy

statement, i.e., the strategic scenarios over the

duration of the Brexit negotiations and the move

from negotiation space (where the UK and EU

meet) to agreement zones.

After more than 40 years of UK membership in

the EU, the Brexit negotiations involve consider-

able complexity and uncertainty, and will have a

life-changing impact on millions of citizens on

both sides. There are an infinite number of poten-

tial outcomes in a negotiation like this one, but

there are some salient possibilities. There are coun-

tries that do not have full EU membership but

which do have a close relationship with the EU

along the lines of which Brexit might be negotiated

(Malhotra, 2016; Po¨tsch & Van Roosebeke, ).2017

These countries constitute models as well for Brexit.

The UK might look to the (1) Norway model, (2)

Switzerland model, (3) Canada model, (4) Ukraine

Plus model, (5) Turkey model (in order from high to

low trade and immigration integration). It is also

possible that no agreement for a future relationship

will be struck, i.e., a No Deal option. Article 50

allows up to 2 years after a declaration of the

intention to withdraw for the negotiation of a new

relationship, a time constraint that adds to the

pressure on negotiators. Our research questions are:

What negotiation scenarios need to be considered?

How will the strategic profiles of the various players

influence the outcome? What agreement zones can

be envisaged that would allow us to predict the

outcome?

The Brexit negotiation space can be analyzed

from rational and behavioral perspectives. Interac-

tive decision-making can follow a game theory path

with negotiators assumed to be rational players

anticipating strategies and the outcome of their

choices, or a behavioral one with uncertainties

dominating their decision-making. International

negotiations fall under the economics of interna-

tional business with players exhibiting different

forms of rationality (Casson & Wadeson, 2000), i.e.,

rational, bounded rational, or meta-rational. Raiffa,

Richardson, and Metcalfe (2002) see the negotia-

tion process through four lenses: asymmetrically

descriptive (psychological), symmetrically prescrip-

tive (game theoretical), asymmetrically descriptive

and prescriptive (negotiation analytical), and exter-

nally descriptive and prescriptive (conflict resolu-

tion via mediators). In summary, rational and

behavioral models of decision-making have a place

in the negotiation analysis of international busi-

ness and political negotiations. We apply bargain-

ing theory to the Brexit case and consider zones of

feasible and potential agreements.

THE NEGOTIATION SPACE AND NEGOTIATION

STRATEGIES

Political Background

We start with the state of affairs at the outset of

negotiations, sometimes termed the initial endow-

ment. We highlight the policy positions of the UK

and EU, then consider the movement of goods,

services, capital, and people as important points in

the negotiation space. The UK position summa-

rized in the White Paper lists 12 negotiation goals

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

138

Journal of International Business Studies

(see Table 1): (1) provide certainty and clarity, (2)

take control over own laws, (3) strengthen the

union of England, Northern Ireland, Scotland, and

Wales, (4) protect ties with the Republic of Ireland

and maintain the common travel area, (5) control

immigration, (6) secure rights of UK and EU

nationals, (7) protect workers’ rights, (8) ensure

free trade with European markets, (9) secure new

trade agreements with third countries, (10) ensure

continued science and innovation excellence, (11)

cooperate with Europe on crime and terrorism, (12)

achieve an orderly and smooth exit. It is important

to note that the UK is economically dependent on

the EU, indeed some 40% of its exports go to the

EU, while just 10% of EU exports go to the UK.

As for the EU, the European Commission holds

that EU trade policy is created and implemented in

a transparent and democratic manner and its goal is

to serve European citizens by creating jobs and

ensuring economic prosperity (EC Tradoc 151381).

To this end, European negotiators rely on informa-

tion received from the public before any negotia-

tions start. During negotiations, the Commission

acts on instructions received from the EU member

states, and remains throughout fully accountable to

them as well as to European civil society and to the

European Parliament (European Commission,

2017a, b). These terms mean that trade negotia-

tions are usually quite complicated, as agreements

must honor and safeguard trade and migration

rules. The EU has three main types of agreements

(http://ec.europa.eu/trade/policy/countries-and-

regions/agreements/): Customs Union, which elimi-

nate customs duties in bilateral trade and establish

joint customs tariffs on foreign imports, Association

Agreements, Stabilization Agreements, Free-Trade

Agreements, and Economic Partnership Agreements,

which remove or reduce custom duties on bilateral

trade, and ,Partnership and Cooperation Agreements

which provide a general framework for bilateral

economic relations leaving as is existing tariffs. The

Norway model, Switzerland model, Canada model,

and Ukraine Plus model are illustrative of these

types of agreements (see Table 2). They are con-

sidered to be models that the UK might follow in its

negotiations with the EU (Malhotra, 2016; Po¨tsch &

Van Roosebeke, 2017). We outline each of them

briefly below:

Norway model As a member of both the European

Free Trade Association (EFTA) and the European

Economic Area (EEA), Norway has access to the

single market, for which it makes payments to the

Table 1 The UK White Paper 12 principles Source: Based on HM Government, White Paper ( )2017

UK Brexit objectives Definitions

1. Provide certainty and clarity Brexit negotiations will be conducted as transparently as possible. Initially, EU law

will continue to apply as national law after Brexit. Any Brexit agreement with the

EU will be put before both Houses of Parliament for ratification

2. Take control over own laws Laws applicable in the UK will be made in the UK and interpreted only by UK

courts, not by the European Court of Justice

3. Strengthen the union of England, Northern

Ireland, Scotland, and Wales

The governments of England, Scotland, Northern Ireland, and Wales will work

closely together to implement Brexit

4. Protect ties with the Republic of Ireland and

maintain the common travel area

The freedom to travel between Northern Ireland and the Republic of Ireland will

be maintained

5. Control immigration The UK intends to control the number of immigrants from the EU

6. Secure rights of UK and EU nationals The rights of EU citizens living in the UK and of UK citizens living in the EU will be

guaranteed

7. Protect workers’ rights The level of protection provided workers under EU law will be maintained and

extended

8. Ensure free trade with European markets The UK will seek the greatest possible access to the EU single market for goods

and services, and be willing in return to make financial contributions to the EU

9. Secure new trade agreements with third

countries

The UK aims to conclude its own free-trade agreements with third countries

10. Ensure continued science and innovation

excellence

The UK aims to continue to collaborate with the EU in the areas of basic science

and research and development

11. Cooperate with Europe on crime and

terrorism

The UK aims to continue to collaborate with the EU in the areas of foreign and

defense policy and in combating crime and terrorism

12. Achieve an orderly and smooth exit The UK seeks to have a transition period, which will allow government and

business time to adapt

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

139

Journal of International Business Studies

EU. Norway is required to abide by the EU 4-free-

doms principle of free movement of goods, services,

capital, and people. It also must abide by most EU

laws but does not have a formal say in their

formulation and has no veto rights on their

application.

Switzerland model Switzerland is a member of the

EFTA, but not the EEA. It has less access to the

single market than Norway, but more latitude in

the application of EU laws. It is further connected

to the EU by various treaties covering specific

sectors. There are about 100 bilateral agreements,

none of which cover the financial sector. The UK

will therefore need to consider whether to use this

model with a very strong financial service sector.

The Agreement on the Free Movement of Persons

(AFMP) finalized this year reduces the ability of

Switzerland to place limits on EU citizen

immigration.

Canada model The Comprehensive Economic and

Trade Agreement (CETA) eliminates 98% of tariffs.

There is visa-free travel between Canada and most

EU member states but there is no right of free

movement of people between Canada and the EU.

Ukraine Plus model Ukraine, like Canada, has

entered a comprehensive free-trade agreement with

the EU to remove or reduce tariffs in bilateral trade.

There is visa-free travel between Ukraine and most

EU member states, but no right of free movement

of people between Ukraine and the EU.

Turkey model Turkey and the EU have agreed to a

customs zone in which tariffs are imposed. There is

no visa-free travel between Turkey and the EU nor

is there free movement of people between Turkey

and the EU.

No Deal option If no future relationship can be

negotiated, World Trade Organization rules with

strict regulations on quotas and tariffs would apply,

as is currently the case between the United States

and the EU.

The UK government’s aim is to negotiate an

agreement that meets as many of its current and

future objectives as possible. This means negotiat-

ing a 21-month transition period beyond March 29,

2019 and keeping open options for collaboration

on free trade in goods and services, on investment,

and on immigration. One UK negotiation position,

which has been dubbed ‘‘hard Brexit’’, envisages no

exit payment, a single market, and an end of the

free movement of people between the UK and the

EU. An opinion poll of German economics profes-

sors suggests that the best path for achieving the

UK-stated goals would be to negotiate a Ukraine

Plus Model with a view to eventually being able to

negotiate a Norway model (Ga

¨bler, Krause, Krem-

heller, Loren & Potrafke, 2017). In the following

section, we apply a bargaining model to the

positions taken by UK and EU negotiators in order

to highlight the complexities and trade-offs

involved.

Immigration and Trade Agreements Between

the UK and EU – Indifference Curve Analysis

We use the concept of indifference curves from the

Edgeworth box (Edgeworth, 1925) with free move-

ment of goods (trade integration) and of people

(immigration integration) as the two ‘‘commodi-

ties’’ being traded. The concept of Pareto optimality

complements this by helping to determine an

optimal allocation of commodities. Pareto optimal-

ity is the allocation whereby it is not possible to

make one negotiator better off without making any

other negotiator worse off. This idea is further

developed in game theory as an interactive multi-

Table 2 Extent to which various deep and special trade agreement models of the EU meet UK objectives Source: Po¨tsch and Van

Roosebeke (2017, p. 5)

United Kingdom’s objectives Norway

model

Switzerland

model

Canada

model

Ukraine plus

model

No application of EU law (Objective 2) – (H) H H

No free movement (Objective 5) – – H H

Access to the internal market (Objective 8) H (H) (H) (H)

Own trade agreements with third countries (Objective 9) H H H H

Collaboration on security and defense policy

(Objective 11)

– – – (H)

– Does not align with UK objectives.

(H) Partially aligns with UK objectives, but needs special agreements.

H Fully aligns with UK objectives.

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

140

Journal of International Business Studies

player decision-making game. We use bargaining

theory as an application of game theoretical rea-

soning for an alternating offer scenario. Negotia-

tion space, a concept borrowed as well from the

Edgeworth box, is bound by two opposing objec-

tives: (1) the UK is reluctant to allow unfettered EU

immigration, and (2) unimpeded EU immigration

and trade are jointly the gateway to a future UK–EU

relationship. In the case of the UK and EU, we

consider trade integration (Mulabdic, Osnago &

Ruta, 2017), ranging from free-trade agreement, to

customs union, to a common market, and to

immigrant integration – a scalar view of the UK–

EU relationship.

We start with trade integration as x, and immi-

gration integration as y. The indifference curves of

the UK and the EU show a similar perspective in

terms of negotiation space. In terms of trade

integration, x, the EU accounts for 40% of UK

trade (x

) compared to 10% of trade to the UK

from the EU (x

). However, according to European

Statistics (European Union, 2017), the export of UK

goods to other EU member states grew from 100

billion euros in 2003 to 230 billion euros in 2015,

highlighting the need for a trade agreement. When

it comes to immigration integration, y

shows the

2.9 million EU citizens (0.6% of EU population)

living and working in the UK, and y

shows the

1.2 million UK citizens (1.9% of UK population)

living and working in the EU.

The endowment point W, through which the

slope of any line passes, represents the ratio of trade

integration and immigration integration. Thus, if

that line is relatively steep, more has to be given up

for immigration than for trade (immigration is

relatively more expensive than trade). If the line is

relatively flat, then the opposite is true. In the UK–

EU case, an initial endowment W represents the UK

and EU levels of trade and immigration integration

available before negotiations. At the outset, the

endowment position is common to both parties.

Thus (X

, Y

) = W

and (X

, Y

) = W

where W

and W

represent the UK and the

EU initial endowments in W. This would fit with

the negotiations between the UK and EU. For the

different bargaining positions, the two players will

need to have their utility functions determined and

positioned as in Figure .1

Nash bargaining suggests that the UK and EU will

end up dividing the gains from renegotiation. The

UK would prefer to end at the south-west border of

the space (on the EU indifference curve) and the EU

at the north-east border (on the UK indifference

curve). Starting from those positions, they eventu-

ally end up somewhere in the middle, depending

on the degree of symmetry in their bargaining

strength. To explain the outcome, we can use a

rational approach or a behavioral one.

A GAME THEORETICAL BARGAINING MODEL

FOR BREXIT

The economics literature is rich in bargaining models,

(Nash, 1950; Kalai & Smorodinski, 1975; Rubinstein,

1982 1995; Mas-Collel,Winston & Green, ; Muthoo,

1999). We use the indifference curve analysis pre-

sentedabove to throwlight on the Brexit negotiations.

We present a stylized representation of an alternating-

offers bargaining game where players attempt to reach

an agreement by making offers and counter-offers.

This is reflective of most real-life negotiations where

bargaining imposes costs on both players.

Let X denote the set of possible agreements for

the two players UK and EU, in which x is used for

one offer in the agreement set X. If the players

i = (EU, UK) reach an agreement at time tD on

x 2 X, then the players’ payoff is

xð Þ exp r

tDð Þ; ð1Þ

where U

: X ! R is player i’s utility function. For

each x 2 X, U

(x) is the instantaneous utility that

player i obtains from agreement . If the playersx

Figure 1 Negotiation space for Brexit models. TradeX

integration – from free-trade agreements to customs union to

common markets to full trade integration, ImmigrationY

integration – from restricted immigration to free movement to

full integration of immigrants into society, W UK and EU

endowment points, IC UK and EU indifference curves (see

‘‘Appendix’’).

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

141

Journal of International Business Studies

disagree, then each player’s payoff is zero. This

means a set of possible utility pairs X = {(u

, u

i.e., there exists x 2 X such that U

(x) = u

and

(x) = u

} is the set of utility pairs obtainable

through agreement. The Pareto frontier

of the

set X is a key concept in the analysis of the subgame

perfect equilibria. A utility pair (u

, u

)

2 X

if and

only if (u

, u

)2 X and there does not exist

another utility pair ( ’u

, u’

) ’2 X such that u

UK-

[ u

, u’

[ u

and for some ’i, u

[ u

Trade integration can be an x offer. Immigration

integration (Y in the indifference curve analysis)

can be added to the utility function of the bargain-

ing game in the following way: The set of possible

agreements X = {(x

, y

): 0  x

 1 and 0

 y

 1}, where x

and y

represent the levels

of trade and immigration integration obtained by

the UK and 1 x

and 1  y

those obtained by

the EU. Should agreement x 2 X at time betD

reached, then the EU payoff is

; y

ð Þ expðrtDÞ; ð2Þ

where x

= 1 x

and y

¼ 1  y

and r [ 0 is

the common discount rate of the player at .tD

The UK payoffs are

; y

ð Þ exp rtDð Þ: ð3Þ

The Pareto frontier

of the set X is possible with

an agreement that maximizes one player’s utility

and minimizes that of the other player. It is a

concave function w, which is in the interval I

 R

and the interval I

 R with 0 2 I

and 0 2 I

and

w(0) [ 0 as impasse points (I

, I

). For each u



0, w(u

) = max U

(x) subject to x 2 X and U

x

, 1  y

)  u

. In the Subgame Perfect

Equilibrium agreement x* 2 X is a solution to

max

ð1 1 x

;  y

xð Þ ð4Þ

Under the assumption that utility functions are

differentiable, the first-order conditions show that

( *x

, y*

) is the unique solution to

ð1  x

; 1  y

oUuk

xuk

¼ U

; y

ð Þ

oUeu

oxeu

ð5Þ

ð1  x

; 1  y

oUuk

yuk

¼ U

; y

ð Þ

oUeu

oyeu

ð6Þ

In the Rubinstein bargaining game, this is the

marginal rate of substitution between trade inte-

gration and immigration integration:

oUuk

=oxuk

oyuk

oUeu

=oxeu

oyeu

. Figure 2 shows the Pareto fron-

tier for both players, the impasse points and the

offer curve of the game. The frontier provides the

space within which negotiations will take place and

to which behavioral aspects can now be added.

This rational perspective helps identify the

options available for Brexit negotiators. In the next

section, we deal with the uncertainties and com-

plexities of the negotiation process. They are due to

the fact that players adhere to different norms

when it comes to information disclosure, use of

threats, timing of concessions, standards of fair-

ness, and willingness to enlist the help of mediators

and arbitrators (Raiffa et al., 2002; Ott, ).2013

NEGOTIATION ANALYSIS FOR BREXIT

An Application – Intuition and Real-Life

Bargaining Situation

We now consider utility functions from an intuitive

perspective given what we know about the UK and

EU. The UK only accounts for about 10% of total

EU trade, and some 3 million EU citizens reside in

the UK. The EU utility function u

reflects the EU

tradeoff between trade and immigration integra-

tion given that preserving the open border between

W (u

)

Offer curve

(u’

, u’

)

u’

Offer curve

u’

Figure 2 Alternating offer bargaining for the EU and UK. u

Utility function for the EU (u

= U

, y

)), u

utility

function for the UK (u

= U

, y

)), I

UK impasse point

EU impasse point

Pareto frontier.

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

142

Journal of International Business Studies

the Republic of Ireland and Northern Ireland is an

additional objective, as is the settling of financial

commitments made by the UK, that is, a UK exit

payment of €40 billion negotiated in stage 2. The

UK has a different utility function in which trade

integration is important, perhaps most of all the

possibility of negotiating trade agreements with

third parties, although curtailing immigration from

the EU is a main objective.

Stage 1 – Endowment situation UFor the UK,

( ,x

y u) =

and U

, y

) = 4x + 1.2y, with a trade

ratio of 4 (40% of UK trade being with the EU) and

1.2 million UK citizens having emigrated to the EU.

For the EU, U

(x, y) = u

and U

, y

= x+3y, with a trade ratio of 1 (10% of EU trade is

with the UK) and 3 million EU citizens having

emigrated to the UK. This picture of the situation

on the eve of Brexit is reflected in the endowment

point and sets the starting point for the

negotiations.

Stage 2 – Exit payment negotiations From a nego-

tiation analytical perspective, the EU starting point

is a €100 billion exit payment from the UK, as ‘‘z’’ in

an alternating offer game, the UK counter-offered

with €20 billion. After much back and forth, a 40€

billion (£39 billion) settlement was agreed. In

addition, the rights of UK citizens in the EU and

EU citizens in the UK were made reciprocal. There

may be any number of such negotiations involving

different stakeholders. In the case of Brexit, the UK

government must contend with a coalition partner

that is in a position to hold it hostage, the

Democratic Unionist Party of Northern Ireland.

The EU on the other hand determined that in order

to preserve the Good Friday Agreement, Northern

Ireland and the Republic of Ireland needed to be

treated in the same way. The objectives spelled out

in the White Paper will be part of negotiations in

the next stage of the process. The Northern Ireland-

Republic of Ireland situation is very complicated

and volatile, so it is not surprising that negotiations

related to it would be. Indeed, how the border

issues are settled could determine future UK secu-

rity, even unity.

Stage 3 – Trade agreements We now look more

closely at trade agreement options. We again use

bargaining results and add the 12 objectives from

the White Paper and negotiation outcomes. Con-

tinuing current security cooperation is in the

interest of both parties and might have been dealt

with in calculating the exit negotiation payment,

but we can add it as ‘‘s’’ to the utility function.

(x, y) = u

and U

(x, y) = a

x + ß

y - 40

billion exit payment, and U

(x, y) = u

and U

( ,x

y) = a

x + ß

y + 40 billion, where a and ß are

parameters for the variables x and y (trade integra-

tion and immigration integration). An Irish border

solution ‘‘ib’’ and security ‘‘s’’ can be added to the

utility function for the UK as expressed above. The

parameters can reflect the ratio used in the nego-

tiation for trade and/or immigration integration.

To capture the uncertainty of the outcome, we can

use the expected utility approach and assign prob-

abilities to the feasibility of the agreement. Setting

a variable 0 would mean that the preference

relation is taken off the utility function. We use

only the insights of the bargaining model, which

focus on the trade and immigration integration as a

bargaining mechanism leading to the package

negotiations of complex negotiations (Raiffa et al.,

2002) and a behavioral approach.

 0 and u

 0 are the rationality

assumptions for both players. In the case of no

deal, u

= 0, but still with an exit payment added

to the utility function, which is below the reserva-

tion value. The Norway model would have U

( ,x

y) = a

x + ß

y - 40 billion, and an additional

payment ‘‘z’’ for access to the single market U

( ,x

y, z) [ 0. The Switzerland model would have a

utility function of U

) with only ‘‘x’’ relevant

without immigration, but agreements for sectors,

financial services in the case of the UK. Finally,

‘‘deep and special agreements’’ would need to be

added to U

(x, y) and with ‘‘s’’ for security and ‘‘ib’’

for the Irish border. We now are able to assign

zones in the Pareto frontier where outcomes are

potentially feasible.

Figure 3 sets out the utilities of the players, with

the Pareto frontier divided into the region of

feasible and potential agreements. We use indiffer-

ence curves and the bargaining outcome of Figure 2

and positions the payoffs of the players in the

Pareto frontier. Our analysis shows clearly that the

region for trade agreements lies between the

impasse points of both players but also beyond

the reservation values.

Application of the bargaining theoretical and

negotiation analytical approach to the Brexit nego-

tiations and the agreement zone follows a behav-

ioral assumption of uncertainties. Raiffa et al.

(2002), Ghauri (2003a, b), and Ott (2011) argue

that cultural differences and strategic behavior are

reflected in time preferences, action profiles, height

of offers, and norms and values. In the next section,

we move a step closer to the potentially feasible

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

143

Journal of International Business Studies

agreement zones by showing how the best alterna-

tive to a negotiated agreement (BATNA) and Brexit

strategies can determine negotiation outcomes.

AGREEMENT ZONES FOR BREXIT

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 set-

tlements, trade-policy review mechanisms, multi-

lateral 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 negoti-

ation 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 negotia-

tors 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). Adopt-

ing the Norway model would mean starting with a

single market assumption for which the UK would

W(u

) Offer curve

Potential Feasible

u’

Potential

I u

EU EU

Figure 3 Feasible and potential agreement zones for the EU

and UK. u

Utility function for the EU (u

= U

, y

)), u

Utility function for the UK (u

= U

, y

)), I

UK impasse

point UK, I

EU impasse point EU,

Pareto frontier, RV EU and

UK reservation values, W EU and UK endowment points.

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

144

Journal of International Business Studies

have to make financial contributions, which some

argue would not be in keeping with the proposi-

tions 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, ; Ury, ; Malhotra,2003 1991

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 negotia-

tions 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., mak-

ing 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 prob-

lems, cultural differences, and complexity costs.

However, negotiation theorists offer a way around

these (Fischer et al., 1991; Ott, ; Subramanian,2011

2007 1991; Ury, ). Before proposing a contingency,

negotiators consider potential informational asym-

metries and differing incentives that need to be

resolved first, including complexity costs that

might arise. Without looking forward and reason-

ing 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 expec-

tations high during the process. To reduce con-

cerns, 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 2016; Ott et al., ). 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 coun-

ter-offers from the bargaining model can be

emphasized.

Reservation Values

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.

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

145

Journal of International Business Studies

Potential Agreement

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.

Feasible Agreement

The concessionary approach would consider free-

trade agreements (FTAs), with third country trade

agreements possible, which are low on trade inte-

gration but have the possibility to negotiate immi-

gration 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

(Ga¨bler 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.

Table 3 Currently held beliefs versus insights from our analysis

Currently held beliefs Specific insights of this analysis

The Norway, Canada, and Turkey models and also the No Deal

option would meet the UK objectives

The Ukraine Plus model, which so far has not been considered by

UK negotiators, aligns best with the principles outlined in the

White Paper. The agreement zones would be more easily reached

through alternative offers and BATNAs

The UK negotiation strategy can only be ‘‘hard’’ or ‘‘soft’’ There is a refined negotiation strategy which allows for a mixed

strategy approach that would fit the Ukraine Plus model or a

unique UK model. The UK has suggested the Norway model and

Canada model – with modifications. The Switzerland model has

been rejected by EU negotiators, as it would mean striking

agreements particular to some industries and regions

The key to fulfilling the wishes expressed by the majority of YES

referendum voters is a customs union or a free-trade agreement

Our analysis shows that indifference curves can be used to express

preferences for trade and immigration integration as a ratio, thus

showing the existence of tradeoffs and the possibility of designing

a trade agreement that maximizes joint utilities

A trade agreement is not compatible with a reduction in

immigration

The utility functions of the bargaining approach and Rubinstein

solution to the bargaining problem provide a mechanism which

shows the connection between trade and immigration integration

Negotiating a trade agreement is quick and easy Trade, immigration, security, an open Irish border, and an exit

payment all enter the utility function of both players. The

negotiation analysis positions the outcome inside the Pareto

frontier in which no player can be worse off. Feasible and potential

agreement zones show that all options make both parties worse

off than the pre-Brexit endowment situation

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

146

Journal of International Business Studies

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 endow-

ment point of trade and immigration integration

W, thus both parties will have lower utilities after

Brexit (Table ).3

CONCLUSION

Considering the short time period allowed for

Brexit negotiations, the UK government needs to

consider especially carefully its strategy profile and

possible negotiation outcomes. Then, negotiators

can align them with the agreement zones of the

two parties. If BATNAs are anticipated, it will also

be necessary to plan meticulously the strategy

profiles, agreement models, impasse points, and

feasible and possible agreement zones.

The UK and EU have such markedly opposed aims

and objectives that there could easily be major

conflicts. The indifference curves for trade and

immigration integration for both suggest that the

negotiation space has not yet been grasped. The

suggestion by the EU to start with a separate exit

negotiation to then be followed by future relationship

negotiations was a wise tactic and a rational approach

given the asymmetries between the negotiators.

The indifference curve analysis shows the critical

positions of the players regarding trade and immi-

gration integration. We compared the features of

the agreements between the EU and Norway,

Switzerland, Canada, Turkey, and Ukraine, as well

as the No Deal option leading to reliance on WTO

rules, with the objectives of the UK government.

We analyzed alternating bargaining games given

the utility functions of the parties based on prefer-

ences for trade and immigration integration. The

results of the game theoretical bargaining model

pave the way for the negotiation analytical part.

The insights of the analysis provide the feasible and

potential agreement zones for further Brexit nego-

tiations. The Ukraine Plus model can be seen as a

feasible option aligned with the objectives of the

UK government. A concessionary mixed strategy

approach shows a possible outcome and is better

than the Norway, Switzerland, or Turkey models,

which are potential agreement zones for the UK

and EU. The No Deal option falls below the

reservation value zone. Regardless of there being a

feasible agreement zone, we have shown that the

Pareto optimal outcome for both the UK and the

EU is the starting point of the negotiations – the

endowment point. Our international negotiation

analysis offers a basis on which we, as international

business scholars, can export knowledge to other

disciplines by using an interdisciplinary approach

to analyze an important current phenomenon.

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APPENDIX: GLOSSARY OF TECHNICAL TERMS

ABOUT THE AUTHORS

Ursula F Ott completed her Ph.D. at the Univer-

sity of Vienna in Austria where she also taught for

some years as a Lecturer. Over the years, she has

been working as Research Scholar at the London

School of Economics, as Senior Lecturer at Lough-

borough University and as Professor of Interna-

tional Business at Kingston University in the UK.

Currently, Ursula is Professor of International

Business at Nottingham Trent University in the UK.

Technical term Explanation

Edgeworth box (Edgeworth, 1925) A common tool in general equilibrium analysis which allows the study of the interaction of

two individual parties trading two different commodities. Exchange ratios between

commodities are determined through an hypothesized auction process

Indifference curve (in the context of

exit negotiations)

The curve of each party which shows equal utility for the two commodities traded. Along the

indifference curve, any combination of the two commodities yields equal satisfaction. In the

case of exit negotiations, each point on an indifference curve gives equal satisfaction for any

combination of trade and immigration

Utility function The utility function u(x) assigns a numerical value to each element in X, ranking them in

accordance with an individual’s preferences

Negotiation space The space in the Edgeworth box, where both parties have the possibility to negotiate a deal

due to the joint set of exchange possibilities marked by the shape of the indifference curves

between R and W

Initial endowment Assets at the beginning of the transactions, which can be financial or non-pecuniary

Agreement zone The space between the two parties, which has been derived from both sides offering over a

period of time. The zone shows the space where contracts and deals are arrived at

From negotiation space to agreement zones Ursula F Ott and Pervez N Ghauri

148

Journal of International Business Studies

Ursula has published books and articles in lead-

ing journals such as Journal of International Business

Studies, Organization Studies, Journal of Management

Studies, International Business Review and Journal of

Business Research.

Pervez N Ghauri completed his Ph.D. at Uppsala

University (Sweden) where he also taught for sev-

eral years. Currently, Pervez is Professor of Inter-

national Business at University of Birmingham

(UK). Recently, he was awarded an Honorary Doc-

tor of Economics by University of Vaasa (Finland).

Pervez is the Editor-in-Chief of the International

Business Review. Pervez is a Fellow for both the

European International Business Academy (EIBA)

and the Academy of International Business (AIB),

where he was also Vice President between 2008 and

2010. Pervez has published around 30 books and

numerous articles in top-level journals.

Accepted by Alain Verbeke, Editor-in-Chief, 10 September 2018. This article has been with the authors for one revision.

Open Access This article is distributed under the

terms of the Creative Commons Attribution 4.0

International License (http://creativecommons.

org/licenses/by/4.0/), which permits unrestricted

use, distribution, and reproduction in any medium,

provided you give appropriate credit to the original

author(s) and the source, provide a link to the

Creative Commons license, and indicate if changes

were made.

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Journal of International Business Studies (2019) 50, 137–149
ª 2018 The Author(s) All rights reserved 0047-2506/19 www.jibs.net INVITED RESEARCH NOTE
Brexit negotiations: From negotiation space to agreement zones Ursula F Ott1 and Abstract Pervez N Ghauri2
Brexit is decidedly a ‘‘big question’’. We agree with International Business
scholars who say that such questions need to be addressed using an inter-
disciplinary approach. We use bargaining theory models of rational behavior
1 Nottingham Business School, Nottingham Trent
and the negotiation literature to explain various Brexit options and predict their
University, Nottingham NG1 4BU, UK; 2
consequences. Considering the lack of relevant experiential knowledge, and
Birmingham Business School, University of
Birmingham, Edgbaston Park Road,
the multidimensional high-stakes negotiations underway, it is little wonder that Birmingham B15 2TY, UK
anxiety is growing across all 28 European Union member states. Our analysis
supports a coherent approach from rational bargaining model to real-life Correspondence:
international negotiation. We position outcome scenarios in different
PN Ghauri, Birmingham Business School,
agreement zones and explore their ramifications.
University of Birmingham, Edgbaston Park
Journal of International Business Studies (2019) 50, 137–149. Road, Birmingham B15 2TY, UK. Tel: +44-121-414 5868;
https://doi.org/10.1057/s41267-018-0189-x Fax: +44-121-4147380; e-mail: p.ghauri@bham.ac.uk
Keywords: bargaining theory; negotiation analysis; agreement zone; Brexit negotia- tions; outcome scenarios
The online version of this article is available Open Access INTRODUCTION
Some are doubtful whether international business (IB) research is
up to tackling business – and indeed societal–big questions
(Buckley, 2002; Buckley, Doh, & Benischke, 2017). Brexit is
undeniably such a question. International business takes place
within a framework of institutions that govern the movement of
goods, services, capital, and people, basically, the European Union
four freedoms spelled out in the Treaty of Rome. These institutions
are often challenged by patriotic and nationalist rhetoric. Agree-
ments between nations, firms, and individuals facilitate trade and
ensure smooth interaction. The negotiation of such agreements has
long been an important research topic for IB scholars (Kapoor,
1970; Money, 1998; Sawyer & Guetzkow, 1965; Tung, 1982).
Especially now, in an era fraught with nationalist movements, IB
researchers are challenged to undertake inter-disciplinary and
phenomena-driven negotiation research.
Negotiation, as Walton and McKersie (1965: 3) succinctly put it,
is ‘ the deliberate interaction of two or more complex social units Received: 29 May 2017
which are attempting to define or redefine the terms of their Revised: 28 February 2018
interdependence.’ Lewicki, Weiss, and Lewin (1992) emphasize Accepted: 10 September 2018
that negotiations do not only take place between individuals, but
Online publication date: 2 November 2018
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 138
between groups and organizations. The literature (Malhotra, 2016; Po
¨tsch & Van Roosebeke, 2017).
consistently shows that greater gains can be
These countries constitute models as well for Brexit.
achieved when a negotiation takes place within a
The UK might look to the (1) Norway model, (2)
single culture than when across a cultural divide
Switzerland model, (3) Canada model, (4) Ukraine
(Imai & Gelfand, 2010), and that the negotiation
Plus model, (5) Turkey model (in order from high to
process is more difficult when parties have different
low trade and immigration integration). It is also
values and traditions (Volkema, 2012). Diverse
possible that no agreement for a future relationship
cultural backgrounds affect the actors, their behav-
will be struck, i.e., a No Deal option. Article 50
ior in negotiations, and hence outcomes (Ghauri,
allows up to 2 years after a declaration of the 2003a).
intention to withdraw for the negotiation of a new
Article 50 of the European Union Lisbon Treaty
relationship, a time constraint that adds to the
states that any member state may withdraw from
pressure on negotiators. Our research questions are:
the Union, and spells out the process for doing so.
What negotiation scenarios need to be considered?
In a referendum held on June 23, 2016, the British
How will the strategic profiles of the various players
electorate voted by a margin of 3.8% to accept a
influence the outcome? What agreement zones can
proposal to exit the EU. Months of uncertainty
be envisaged that would allow us to predict the
followed. In March 2017, the UK triggered Article outcome?
50, thereby beginning the process of exiting. A
The Brexit negotiation space can be analyzed
process dubbed Brexit, with far-reaching economic,
from rational and behavioral perspectives. Interac- social, and environmental consequences was
tive decision-making can follow a game theory path
underway. Brexit constitutes a major discrete event,
with negotiators assumed to be rational players
which affects governments, firms, and individuals.
anticipating strategies and the outcome of their
It also presents an opportunity for IB scholars to
choices, or a behavioral one with uncertainties
examine the negotiation of an interesting set of
dominating their decision-making. International
international business issues and to have a say in an
negotiations fall under the economics of interna-
important geo-political event. International busi-
tional business with players exhibiting different
ness, as a field that combines economics, sociology,
forms of rationality (Casson & Wadeson, 2000), i.e.,
psychology, political science, anthropology, and
rational, bounded rational, or meta-rational. Raiffa,
management studies, is ideally positioned to
Richardson, and Metcalfe (2002) see the negotia-
address the Brexit big question.
tion process through four lenses: asymmetrically
We investigate the negotiation space – in essence,
descriptive (psychological), symmetrically prescrip-
the ground covered by the UK government and the
tive (game theoretical), asymmetrically descriptive
European Commission representing the states that
and prescriptive (negotiation analytical), and exter-
will remain in the EU – and the agreement zones for
nally descriptive and prescriptive (conflict resolu-
Brexit outcomes. After much heated internal polit-
tion via mediators). In summary, rational and
ical debate, what the UK government would seek to
behavioral models of decision-making have a place
achieve in Brexit negotiations was published in a
in the negotiation analysis of international busi-
white paper (HM Government, 2017). This article
ness and political negotiations. We apply bargain-
focuses on the 12 principles set out in that policy
ing theory to the Brexit case and consider zones of
statement, i.e., the strategic scenarios over the
feasible and potential agreements.
duration of the Brexit negotiations and the move
from negotiation space (where the UK and EU meet) to agreement zones.
THE NEGOTIATION SPACE AND NEGOTIATION
After more than 40 years of UK membership in STRATEGIES
the EU, the Brexit negotiations involve consider- Political Background
able complexity and uncertainty, and will have a
We start with the state of affairs at the outset of
life-changing impact on millions of citizens on
negotiations, sometimes termed the initial endow-
both sides. There are an infinite number of poten-
ment. We highlight the policy positions of the UK
tial outcomes in a negotiation like this one, but
and EU, then consider the movement of goods,
there are some salient possibilities. There are coun-
services, capital, and people as important points in
tries that do not have full EU membership but
the negotiation space. The UK position summa-
which do have a close relationship with the EU
rized in the White Paper lists 12 negotiation goals
along the lines of which Brexit might be negotiated
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 139
Table 1 The UK White Paper 12 principles Source: Based on HM Government, White Paper (2017) UK Brexit objectives Definitions
1. Provide certainty and clarity
Brexit negotiations will be conducted as transparently as possible. Initially, EU law
will continue to apply as national law after Brexit. Any Brexit agreement with the
EU will be put before both Houses of Parliament for ratification 2. Take control over own laws
Laws applicable in the UK will be made in the UK and interpreted only by UK
courts, not by the European Court of Justice
3. Strengthen the union of England, Northern
The governments of England, Scotland, Northern Ireland, and Wales will work Ireland, Scotland, and Wales
closely together to implement Brexit
4. Protect ties with the Republic of Ireland and
The freedom to travel between Northern Ireland and the Republic of Ireland will
maintain the common travel area be maintained 5. Control immigration
The UK intends to control the number of immigrants from the EU
6. Secure rights of UK and EU nationals
The rights of EU citizens living in the UK and of UK citizens living in the EU will be guaranteed 7. Protect workers’ rights
The level of protection provided workers under EU law will be maintained and extended
8. Ensure free trade with European markets
The UK will seek the greatest possible access to the EU single market for goods
and services, and be willing in return to make financial contributions to the EU
9. Secure new trade agreements with third
The UK aims to conclude its own free-trade agreements with third countries countries
10. Ensure continued science and innovation
The UK aims to continue to collaborate with the EU in the areas of basic science excellence and research and development
11. Cooperate with Europe on crime and
The UK aims to continue to collaborate with the EU in the areas of foreign and terrorism
defense policy and in combating crime and terrorism
12. Achieve an orderly and smooth exit
The UK seeks to have a transition period, which will allow government and business time to adapt
(see Table 1): (1) provide certainty and clarity, (2) European Parliament (European Commission,
take control over own laws, (3) strengthen the
2017a, b). These terms mean that trade negotia-
union of England, Northern Ireland, Scotland, and
tions are usually quite complicated, as agreements
Wales, (4) protect ties with the Republic of Ireland
must honor and safeguard trade and migration
and maintain the common travel area, (5) control
rules. The EU has three main types of agreements
immigration, (6) secure rights of UK and EU
(http://ec.europa.eu/trade/policy/countries-and-
nationals, (7) protect workers’ rights, (8) ensure
regions/agreements/): Customs Union, which elimi-
free trade with European markets, (9) secure new
nate customs duties in bilateral trade and establish
trade agreements with third countries, (10) ensure
joint customs tariffs on foreign imports, Association
continued science and innovation excellence, (11) Agreements, Stabilization Agreements, Free-Trade
cooperate with Europe on crime and terrorism, (12)
Agreements, and Economic Partnership Agreements,
achieve an orderly and smooth exit. It is important
which remove or reduce custom duties on bilateral
to note that the UK is economically dependent on
trade, and Partnership and Cooperation Agreements,
the EU, indeed some 40% of its exports go to the
which provide a general framework for bilateral
EU, while just 10% of EU exports go to the UK.
economic relations leaving as is existing tariffs. The
As for the EU, the European Commission holds
Norway model, Switzerland model, Canada model,
that EU trade policy is created and implemented in
and Ukraine Plus model are illustrative of these
a transparent and democratic manner and its goal is
types of agreements (see Table 2). They are con-
to serve European citizens by creating jobs and
sidered to be models that the UK might follow in its
ensuring economic prosperity (EC Tradoc 151381).
negotiations with the EU (Malhotra, 2016; Po ¨tsch &
To this end, European negotiators rely on informa-
Van Roosebeke, 2017). We outline each of them
tion received from the public before any negotia- briefly below:
tions start. During negotiations, the Commission
Norway model As a member of both the European
acts on instructions received from the EU member
Free Trade Association (EFTA) and the European
states, and remains throughout fully accountable to
Economic Area (EEA), Norway has access to the
them as well as to European civil society and to the
single market, for which it makes payments to the
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 140
Table 2 Extent to which various deep and special trade agreement models of the EU meet UK objectives Source: Po¨tsch and Van Roosebeke (2017, p. 5) United Kingdom’s objectives Norway Switzerland Canada Ukraine plus model model model model
No application of EU law (Objective 2) – (H) H H No free movement (Objective 5) – – H H
Access to the internal market (Objective 8) H (H) (H) (H)
Own trade agreements with third countries (Objective 9) H H H H
Collaboration on security and defense policy – – – (H) (Objective 11)
– Does not align with UK objectives.
(H) Partially aligns with UK objectives, but needs special agreements.
H Fully aligns with UK objectives.
EU. Norway is required to abide by the EU 4-free-
strict regulations on quotas and tariffs would apply,
doms principle of free movement of goods, services,
as is currently the case between the United States
capital, and people. It also must abide by most EU and the EU.
laws but does not have a formal say in their
The UK government’s aim is to negotiate an
formulation and has no veto rights on their
agreement that meets as many of its current and application.
future objectives as possible. This means negotiat-
Switzerland model Switzerland is a member of the
ing a 21-month transition period beyond March 29,
EFTA, but not the EEA. It has less access to the
2019 and keeping open options for collaboration
single market than Norway, but more latitude in
on free trade in goods and services, on investment,
the application of EU laws. It is further connected
and on immigration. One UK negotiation position,
to the EU by various treaties covering specific
which has been dubbed ‘ hard Brexit’ , envisages no
sectors. There are about 100 bilateral agreements,
exit payment, a single market, and an end of the
none of which cover the financial sector. The UK
free movement of people between the UK and the
will therefore need to consider whether to use this
EU. An opinion poll of German economics profes-
model with a very strong financial service sector.
sors suggests that the best path for achieving the
The Agreement on the Free Movement of Persons
UK-stated goals would be to negotiate a Ukraine
(AFMP) finalized this year reduces the ability of
Plus Model with a view to eventually being able to Switzerland to place limits on EU citizen
negotiate a Norway model (Ga¨bler, Krause, Krem- immigration.
heller, Loren & Potrafke, 2017). In the following
Canada model The Comprehensive Economic and
section, we apply a bargaining model to the
Trade Agreement (CETA) eliminates 98% of tariffs.
positions taken by UK and EU negotiators in order
There is visa-free travel between Canada and most to highlight the complexities and trade-offs
EU member states but there is no right of free involved.
movement of people between Canada and the EU.
Ukraine Plus model Ukraine, like Canada, has
Immigration and Trade Agreements Between
entered a comprehensive free-trade agreement with
the UK and EU – Indifference Curve Analysis
the EU to remove or reduce tariffs in bilateral trade.
We use the concept of indifference curves from the
There is visa-free travel between Ukraine and most
Edgeworth box (Edgeworth, 1925) with free move-
EU member states, but no right of free movement
ment of goods (trade integration) and of people
of people between Ukraine and the EU.
(immigration integration) as the two ‘ commodi-
Turkey model Turkey and the EU have agreed to a
ties’ being traded. The concept of Pareto optimality
customs zone in which tariffs are imposed. There is
complements this by helping to determine an
no visa-free travel between Turkey and the EU nor
optimal allocation of commodities. Pareto optimal-
is there free movement of people between Turkey
ity is the allocation whereby it is not possible to and the EU.
make one negotiator better off without making any
No Deal option If no future relationship can be
other negotiator worse off. This idea is further
negotiated, World Trade Organization rules with
developed in game theory as an interactive multi-
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 141
player decision-making game. We use bargaining
theory as an application of game theoretical rea-
soning for an alternating offer scenario. Negotia-
tion space, a concept borrowed as well from the
Edgeworth box, is bound by two opposing objec-
tives: (1) the UK is reluctant to allow unfettered EU
immigration, and (2) unimpeded EU immigration
and trade are jointly the gateway to a future UK–EU
relationship. In the case of the UK and EU, we
consider trade integration (Mulabdic, Osnago &
Ruta, 2017), ranging from free-trade agreement, to
customs union, to a common market, and to
immigrant integration – a scalar view of the UK– EU relationship.
We start with trade integration as x, and immi-
gration integration as y. The indifference curves of
Figure 1 Negotiation space for Brexit models. X Trade
the UK and the EU show a similar perspective in
integration – from free-trade agreements to customs union to
terms of negotiation space. In terms of trade
common markets to full trade integration, Y Immigration
integration, x, the EU accounts for 40% of UK
integration – from restricted immigration to free movement to
trade (xEU) compared to 10% of trade to the UK
full integration of immigrants into society, W UK and EU from the EU (x
endowment points, IC UK and EU indifference curves (see
UK). However, according to European
Statistics (European Union, 2017), the export of UK ‘ Appendix’ ).
goods to other EU member states grew from 100
billion euros in 2003 to 230 billion euros in 2015,
curve). Starting from those positions, they eventu-
highlighting the need for a trade agreement. When
ally end up somewhere in the middle, depending
it comes to immigration integration, yEU shows the
on the degree of symmetry in their bargaining
2.9 million EU citizens (0.6% of EU population)
strength. To explain the outcome, we can use a
living and working in the UK, and yUK shows the
rational approach or a behavioral one.
1.2 million UK citizens (1.9% of UK population) living and working in the EU.
The endowment point W, through which the
A GAME THEORETICAL BARGAINING MODEL
slope of any line passes, represents the ratio of trade FOR BREXIT
integration and immigration integration. Thus, if
The economics literature is rich in bargaining models,
that line is relatively steep, more has to be given up
(Nash, 1950; Kalai & Smorodinski, 1975; Rubinstein,
for immigration than for trade (immigration is
1982; Mas-Collel,Winston & Green, 1995; Muthoo,
relatively more expensive than trade). If the line is
1999). We use the indifference curve analysis pre-
relatively flat, then the opposite is true. In the UK–
sented above to throw light on the Brexit negotiations.
EU case, an initial endowment W represents the UK
We present a stylized representation of an alternating-
and EU levels of trade and immigration integration
offers bargaining game where players attempt to reach
available before negotiations. At the outset, the
an agreement by making offers and counter-offers.
endowment position is common to both parties.
This is reflective of most real-life negotiations where Thus (X
bargaining imposes costs on both players. EU,
YEU) = WEU and (XUK, YUK) = WUK - where W
Let X denote the set of possible agreements for
EU and WUK represent the UK and the
EU initial endowments in W. This would fit with
the two players UK and EU, in which x is used for
the negotiations between the UK and EU. For the
one offer in the agreement set X. If the players
different bargaining positions, the two players will
i = (EU, UK) reach an agreement at time tD on
need to have their utility functions determined and
x 2 X, then the players’ payoff is positioned as in Figure 1. U ð Þ expðr Þ; ð1Þ
Nash bargaining suggests that the UK and EU will i x itD
end up dividing the gains from renegotiation. The
where Ui: X ! R is player i’s utility function. For
UK would prefer to end at the south-west border of
each x 2 X, Ui(x) is the instantaneous utility that
the space (on the EU indifference curve) and the EU
player i obtains from agreement x. If the players
at the north-east border (on the UK indifference
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 142
disagree, then each player’s payoff is zero. This
In the Rubinstein bargaining game, this is the
means a set of possible utility pairs X = {(uUK, uEU),
marginal rate of substitution between trade inte-
i.e., there exists x 2 X such that UUK(x) = uUK and gration and immigration integration: U oUuk =oxuk =oxeu
EU(x) = uEU} is the set of utility pairs obtainable ¼ oUeu
. Figure 2 shows the Pareto fron- oUuk =oyuk oUeu =oyeu
through agreement. The Pareto frontier Xe of the
tier for both players, the impasse points and the
set X is a key concept in the analysis of the subgame
offer curve of the game. The frontier provides the
perfect equilibria. A utility pair (uEU, uUK)2 Xe if and
space within which negotiations will take place and
only if (uUK, u EU)2 X and there does not exist
to which behavioral aspects can now be added.
another utility pair (u’EU, u’UK)2 X such that u’UK-
This rational perspective helps identify the
[ uUK, u’EU [ uEU and for some i, u’ i [ ui.
options available for Brexit negotiators. In the next
Trade integration can be an x offer. Immigration
section, we deal with the uncertainties and com-
integration (Y in the indifference curve analysis)
plexities of the negotiation process. They are due to
can be added to the utility function of the bargain-
the fact that players adhere to different norms
ing game in the following way: The set of possible
when it comes to information disclosure, use of agreements X = {(x
threats, timing of concessions, standards of fair- UK, yUK): 0  x UK  1 and 0  y
ness, and willingness to enlist the help of mediators
UK  1}, where xUK and yUK represent the levels
of trade and immigration integration obtained by
and arbitrators (Raiffa et al., 2002; Ott, 2013).
the UK and 1 xUK and 1  y UK those obtained by
the EU. Should agreement x 2 X at time tD be reached, then the EU payoff is
NEGOTIATION ANALYSIS FOR BREXIT U
An Application – Intuition and Real-Life EU x ð EU; yEUÞ expðrtDÞ; ð2Þ Bargaining Situation
where xEU = 1 xUK and yEU ¼ 1  yUK and r [ 0 is
We now consider utility functions from an intuitive
the common discount rate of the player at tD.
perspective given what we know about the UK and The UK payoffs are
EU. The UK only accounts for about 10% of total
EU trade, and some 3 million EU citizens reside in UUKðxUK; yUKÞ expðrtDÞ: ð3Þ
the UK. The EU utility function uEU reflects the EU
tradeoff between trade and immigration integra-
The Pareto frontier Xe of the set X is possible with
tion given that preserving the open border between
an agreement that maximizes one player’s utility
and minimizes that of the other player. It is a
concave function w, which is in the interval IEU  R u and the interval I UK
UK  R with 0 2 IEU and 0 2 I UK and
w(0) [ 0 as impasse points (IEU, IUK). For each uEU 
0, w(uEU) = max U UK(x) subject to x 2 X and U EU(1
xUK, 1  yUK)  u EU. In the Subgame Perfect
Equilibrium agreement x* 2 X is a solution to
max UEUð1  xUK; 1  yUK UUKðxÞ ð4Þ x2X e
Under the assumption that utility functions are I W (u
differentiable, the first-order conditions show that UK EU,UK) Offer curve
(x*UK, y*UK) is the unique solution to oUuk oUeu U (u’ EUð1  x ; 1  y ¼ U ð Þ UK, u’EU) UK UK Þ oxuk UK xUK; yUK oxeu u’UK Offer curve ð5Þ oUuk oUeu u’EU IEU uEU UEUð1  x ; 1  y ¼ U ð Þ UK UK Þ oyuk UK xUK; yUK oyeu
Figure 2 Alternating offer bargaining for the EU and UK. uEU ð6Þ
Utility function for the EU (uEU = UEU(xEU, yEU)), uUK utility
function for the UK (uUK = UUK(x UK, yUK)), IUK UK impasse point
IEU EU impasse point Xe Pareto frontier.
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 143
the Republic of Ireland and Northern Ireland is an
UUK(x, y) = uUK and UUK(x, y) = aUK x + ßUK y - 40
additional objective, as is the settling of financial
billion exit payment, and UEU(x, y) = uEU and UEU(x,
commitments made by the UK, that is, a UK exit
y) = aEUx + ßEUy + 40 billion, where a and ß are
payment of €40 billion negotiated in stage 2. The
parameters for the variables x and y (trade integra-
UK has a different utility function in which trade
tion and immigration integration). An Irish border
integration is important, perhaps most of all the
solution ‘ ib’ and security ‘ s’ can be added to the
possibility of negotiating trade agreements with
utility function for the UK as expressed above. The
third parties, although curtailing immigration from
parameters can reflect the ratio used in the nego- the EU is a main objective.
tiation for trade and/or immigration integration.
Stage 1 – Endowment situation For the UK, UUK(x,
To capture the uncertainty of the outcome, we can
y) = uUK and UUK (xUK, yUK ) = 4x + 1.2y, with a trade
use the expected utility approach and assign prob-
ratio of 4 (40% of UK trade being with the EU) and
abilities to the feasibility of the agreement. Setting
1.2 million UK citizens having emigrated to the EU.
a variable 0 would mean that the preference
For the EU, UEU(x, y) = uEU and U EU(xEU, yEU)-
relation is taken off the utility function. We use
= x+3y, with a trade ratio of 1 (10% of EU trade is
only the insights of the bargaining model, which
with the UK) and 3 million EU citizens having
focus on the trade and immigration integration as a
emigrated to the UK. This picture of the situation
bargaining mechanism leading to the package
on the eve of Brexit is reflected in the endowment
negotiations of complex negotiations (Raiffa et al., point and sets the starting point for the
2002) and a behavioral approach. negotiations.
uUK  0 and uEU  0 are the rationality
Stage 2 – Exit payment negotiations From a nego-
assumptions for both players. In the case of no
tiation analytical perspective, the EU starting point
deal, uUK = 0, but still with an exit payment added
is a €100 billion exit payment from the UK, as ‘ z’ in
to the utility function, which is below the reserva-
an alternating offer game, the UK counter-offered
tion value. The Norway model would have UUK(x,
with €20 billion. After much back and forth, a €40
y) = aUK x + ßUK y - 40 billion, and an additional
billion (£39 billion) settlement was agreed. In
payment ‘ z’ for access to the single market UUK(x,
addition, the rights of UK citizens in the EU and
y, z) [ 0. The Switzerland model would have a
EU citizens in the UK were made reciprocal. There
utility function of UUK(xN) with only ‘ x’ relevant
may be any number of such negotiations involving
without immigration, but agreements for sectors,
different stakeholders. In the case of Brexit, the UK
financial services in the case of the UK. Finally,
government must contend with a coalition partner
‘ deep and special agreements’ would need to be
that is in a position to hold it hostage, the
added to UUK(x, y) and with ‘ s’ for security and ‘ ib’
Democratic Unionist Party of Northern Ireland.
for the Irish border. We now are able to assign
The EU on the other hand determined that in order
zones in the Pareto frontier where outcomes are
to preserve the Good Friday Agreement, Northern potentially feasible.
Ireland and the Republic of Ireland needed to be
Figure 3 sets out the utilities of the players, with
treated in the same way. The objectives spelled out
the Pareto frontier divided into the region of
in the White Paper will be part of negotiations in
feasible and potential agreements. We use indiffer-
the next stage of the process. The Northern Ireland-
ence curves and the bargaining outcome of Figure 2
Republic of Ireland situation is very complicated
and positions the payoffs of the players in the
and volatile, so it is not surprising that negotiations
Pareto frontier. Our analysis shows clearly that the
related to it would be. Indeed, how the border
region for trade agreements lies between the
issues are settled could determine future UK secu-
impasse points of both players but also beyond rity, even unity. the reservation values.
Stage 3 – Trade agreements We now look more
Application of the bargaining theoretical and
closely at trade agreement options. We again use
negotiation analytical approach to the Brexit nego-
bargaining results and add the 12 objectives from
tiations and the agreement zone follows a behav-
the White Paper and negotiation outcomes. Con-
ioral assumption of uncertainties. Raiffa et al.
tinuing current security cooperation is in the
(2002), Ghauri (2003a, b), and Ott (2011) argue
interest of both parties and might have been dealt
that cultural differences and strategic behavior are
with in calculating the exit negotiation payment,
reflected in time preferences, action profiles, height
but we can add it as ‘ s’ to the utility function.
of offers, and norms and values. In the next section,
we move a step closer to the potentially feasible
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 144 uUK
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 I e the EU.’ (Full Fact, 2017). UK W(uEU,UK) Offer curve
Hard Brexit would mean that the UK would not
allow free movement of people between the UK and Potential Feasible
the EU. As the free movement of goods, services,
capital, and people is at the core of the EU project, RVUK u’
and the EU sees the four as indivisible, a strategy UK Potential
calling for three of the four exposes a problematic RV EU IEU uEU
UK negotiation style. If the UK follows a hard Brexit
strategy, it is likely that there will not be a deal.
Figure 3 Feasible and potential agreement zones for the EU
This would mean that the UK would have to rely on
and UK. uEU Utility function for the EU (uEU = UEU(xEU, yEU)), uUK
World Trade Organization (WTO) rules. The WTO
Utility function for the UK (uUK = UUK(xUK, y UK)), IUK UK impasse point UK, I
agreement signed in Marrakesh in 1994, and
EU EU impasse point EU, Xe Pareto frontier, RV EU and
UK reservation values, W EU and UK endowment points.
updated since, serves as an umbrella agreement. It
has annexes on intellectual property, dispute set-
agreement zones by showing how the best alterna-
tlements, trade-policy review mechanisms, multi-
tive to a negotiated agreement (BATNA) and Brexit
lateral agreements, and other matters. While the
strategies can determine negotiation outcomes.
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 AGREEMENT ZONES FOR BREXIT
remedies are blunt instruments. With only WTO
Best Alternative to Negotiated Agreement
rules as a fallback position, it is clear that negoti- (BATNA)
ation expertise will be important.
Just like with any other negotiation, in Brexit both
Considering the short time horizon, the only
sides must calculate the possibility of deadlocks and
successful strategy is to be close to a fair deal from
anticipate possible agreements. If there is an
the outset. This would demand that the negotiators
impasse, what are the best outside options? Seasoned
put their cards on the table, which the EU negotia-
negotiators understand the value of determining
tors have done in publicizing their strategy and
their BATNA (Fisher, Ury, & Patton, 1991), otherwise
regularly updating information on their approach
they will not be able to confidently walk away from a
on their Web sites with supporting information
subpar offer (Fisher et al., 1991; Subramanian, 2007),
regarding the legal situation after the withdrawal
thus, UK and EU negotiator experts will be aware of
(information acts, customs tariffs, interim solutions
their bargaining power and their BATNA (Fisher
for exports, intellectual property rights, etc.).
et al., 1991; Malhotra, 2004). It is imperative that
Soft Brexit, on the other end of the spectrum,
negotiators calculate the reservation value, that is,
would mean having close links to the EU, similar to
the lowest-valued deal acceptable. If the value of the
those of the Norway model. While Norway is not a
deal proposed is lower than the reservation value, it
member of the European Union, it has close trade
is better to reject the offer and pursue the BATNA. If
links with the EU, and is in the EU single market –
the final offer is higher than the reservation value,
for which it pays about €400 million annually in
then acceptance is the best option. In the case of
grants. The citizens of Norway can move between
Brexit, it should be determined whether WTO rules,
EU countries freely and citizens of the EU can just
a customs union, the Switzerland model, the
as freely move to Norway (Full Fact, 2017). Adopt-
Ukraine Plus model, or the Norway model represents
ing the Norway model would mean starting with a the BATNA.
single market assumption for which the UK would
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 145
have to make financial contributions, which some
2007; Ury, 1991). Before proposing a contingency,
argue would not be in keeping with the proposi-
negotiators consider potential informational asym-
tions of the White Paper. Moreover, the UK would
metries and differing incentives that need to be
have to reckon with the fact that the EU often refers
resolved first, including complexity costs that
to ‘ cooperative exchange’ regarding customs tariffs
might arise. Without looking forward and reason-
and quotas, which indicates that payments alone
ing back, a move that could expand the pie might
would not be acceptable. This said, a soft approach
do just the opposite. We are left then with several
would be a quicker way to reach a settlement.
important questions to address regarding the aims
Mixed strategy profiles or a ‘concessionary’ Brexit
of the UK to find out whether they will be better off
strategy could lead to various ways to access EU
after the deal, whether they have considered a
goods, services, capital, and labor markets along the
BATNA, and how they can create a positive and
lines of the Canada, Turkey, and Ukraine Plus
cordial atmosphere to keep the other side’s expec-
models. The UK negotiation strategy position
tations high during the process. To reduce con-
strongly favors negotiating all these aspects at
cerns, Brexit negotiators must consider conflict-
once. Besides the negotiation strategy profiles,
resolution mechanisms. The EU started with an
which include strategies related to immigration
excellent analytical approach by insisting on step-
and trade, other strategies regarding planning,
by-step negotiations. UK negotiators would be wise
conflict resolution, and deal-making must be
to do the same, given that the negotiations are
included. In this regard, we can draw on the
complex, uncertain, and to be concluded under
mechanisms identified in the negotiation literature intense time pressure.
(Raiffa, 1983; Susskind, 2003; Ury, 1991; Malhotra,
We now consider the agreement zone between
2004, 2016). For Brexit, immigration needs to be
the negotiating parties. The agreement zone reflects
dealt with first – the rights of UK citizens and EU
possibilities to reach an agreement acceptable to
citizens secured and then perhaps a quota/tier
both sides when both parties cooperate (Raiffa,
system. Free-trade agreements (FTAs) and bilateral
1983; Ott et al., 2016). We assume that we have
investment treaties (BITs) are the next stage, with
three different strategy profiles (hard, soft, and
an exit payment and tariffs following. This position
mixed). Depending on the cultural and strategic
may entail extreme negotiation behavior, such as backgrounds of the negotiators, all three
haggling, i.e., starting with extreme offers, and
approaches and their response function or coun-
quickly reducing bids as concessions to make for a
ter-offers from the bargaining model can be
shorter bargaining horizon. On the other hand, it emphasized.
may mean using concessions as a relationship-
building approach, which means longer negotia- Reservation Values
tions that bind the parties and make it more
A UK hard Brexit strategy will lead to a narrow
difficult for them to opt out, and fair deal behavior
agreement zone and tit-for-tat measures (Axelrod,
for negotiations with a short-term view, i.e., mak-
1984), and the consequence will be that the UK will
ing offers close to what negotiators want in the end
has to fall back on WTO rules that will result in
(Ott, 2011). Concessions with a longer bargaining
tariffs and import quotas. The strategy will be on
horizon give negotiators the opportunity to focus
the trade integration axis of Figure 3 on the lower
on relationships – thus difficult issues are not
end towards the origin and low on the immigration
negotiated first, but only when a relationship has
integration as well (almost zero). The rationale for a
been established. This is a desirable strategy for the
hard Brexit is the belief that the UK will benefit
UK depending on background and atmosphere
after leaving the EU from third-country agreements implications (Ghauri, 2003b).
that will compensate for lower EU trade volume.
However many of those third countries, notably
Feasible and Potential Agreements
China and India arguably the biggest among them,
Negotiators on opposite sides of the table often
already have trade agreements with the EU, and
have different visions of the future. The zone of
will want to continue to deal with the world’s
possible agreement (ZOPA) can be overshadowed
biggest consumer market that also has the most
by information asymmetries, moral hazard prob- buying power.
lems, cultural differences, and complexity costs.
However, negotiation theorists offer a way around
these (Fischer et al., 1991; Ott, 2011; Subramanian,
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 146 Potential Agreement
to an end on June 1, 2019. On another front,
The White Paper suggests that the UK wants to
Switzerland is currently involved in negotiations
obtain strong access to the single market, as well as
with the EU over the ECJ role in resolving trade
the possibility of signing free-trade agreements
disputes, which means that it is unlikely that the
with third countries. This would mean European
EU would agree to what the UK wants regarding the
Economic Area (EEA) membership, as Norway has ECJ.
had since 1992. A soft Brexit strategy would mean
payment for single market access, but hand-in- Feasible Agreement
glove with that would be free movement of people,
The concessionary approach would consider free-
again like the Norway model. This implies high
trade agreements (FTAs), with third country trade
levels of trade and immigration integration and
agreements possible, which are low on trade inte-
would define the potential agreement zone for the
gration but have the possibility to negotiate immi-
EU utility functions (along the x axis). However,
gration quotas, since so far, no immigration
the UK wants complete control over immigration.
integration for this option has been considered. A
In addition, the UK does not want to be subject to
so-called ‘ deep and special partnership’ could be
rulings by the European Court of Justice (ECJ). In
based on the Canada model and Ukraine Plus
short, the aims of the UK diverge considerably from
model, which would mean open market access,
those of Norway. Alternatively, the UK could use
no free movement of people, and no ECJ oversight.
the Switzerland model, which offers access to the
The wide-ranging possibilities pose a complex
single market in specific sectors, although the EU’s
conundrum for scholars and civil servants. A recent
negotiation position makes it unlikely that it will
poll of the German Economists Expert Panel
consider industry-specific arrangements at this
(Ga¨bler et al., 2017) shows that 31% of respondents
point. In any case, the White Paper explicitly
believe that the UK will pursue a Ukraine Plus kind
rejects acceptance of the free movement of people,
of model, 14% the Norway model, and 23% the
and for all intents and purposes the restrictions that
Switzerland model, with some 14% saying the UK
Switzerland was allowed to place on the citizens of
will seek an alternative like a free-trade agreement
EU-2 countries (the newest EU members) will come
and 18% having no idea of what to expect.
Table 3 Currently held beliefs versus insights from our analysis Currently held beliefs
Specific insights of this analysis
The Norway, Canada, and Turkey models and also the No Deal
The Ukraine Plus model, which so far has not been considered by
option would meet the UK objectives
UK negotiators, aligns best with the principles outlined in the
White Paper. The agreement zones would be more easily reached
through alternative offers and BATNAs
The UK negotiation strategy can only be ‘ hard’ or ‘ soft’
There is a refined negotiation strategy which allows for a mixed
strategy approach that would fit the Ukraine Plus model or a
unique UK model. The UK has suggested the Norway model and
Canada model – with modifications. The Switzerland model has
been rejected by EU negotiators, as it would mean striking
agreements particular to some industries and regions
The key to fulfilling the wishes expressed by the majority of YES Our analysis shows that indifference curves can be used to express
referendum voters is a customs union or a free-trade agreement preferences for trade and immigration integration as a ratio, thus
showing the existence of tradeoffs and the possibility of designing
a trade agreement that maximizes joint utilities
A trade agreement is not compatible with a reduction in
The utility functions of the bargaining approach and Rubinstein immigration
solution to the bargaining problem provide a mechanism which
shows the connection between trade and immigration integration
Negotiating a trade agreement is quick and easy
Trade, immigration, security, an open Irish border, and an exit
payment all enter the utility function of both players. The
negotiation analysis positions the outcome inside the Pareto
frontier in which no player can be worse off. Feasible and potential
agreement zones show that all options make both parties worse
off than the pre-Brexit endowment situation
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 147
Based on various agreement models, and the
The indifference curve analysis shows the critical
BATNAs of the UK and EU, the result may be close
positions of the players regarding trade and immi-
to the second trade agreement option set out by the
gration integration. We compared the features of
EU–and already agreed between the EU and Canada
the agreements between the EU and Norway,
and the EU and Ukraine. Those agreements fall
Switzerland, Canada, Turkey, and Ukraine, as well
within the feasible agreement zone shown in
as the No Deal option leading to reliance on WTO
Figure 3 but would still be below the initial endow-
rules, with the objectives of the UK government.
ment point of trade and immigration integration
We analyzed alternating bargaining games given
W, thus both parties will have lower utilities after
the utility functions of the parties based on prefer- Brexit (Table 3).
ences for trade and immigration integration. The
results of the game theoretical bargaining model
pave the way for the negotiation analytical part. CONCLUSION
The insights of the analysis provide the feasible and
Considering the short time period allowed for
potential agreement zones for further Brexit nego-
Brexit negotiations, the UK government needs to
tiations. The Ukraine Plus model can be seen as a
consider especially carefully its strategy profile and
feasible option aligned with the objectives of the
possible negotiation outcomes. Then, negotiators
UK government. A concessionary mixed strategy
can align them with the agreement zones of the
approach shows a possible outcome and is better
two parties. If BATNAs are anticipated, it will also
than the Norway, Switzerland, or Turkey models,
be necessary to plan meticulously the strategy
which are potential agreement zones for the UK
profiles, agreement models, impasse points, and
and EU. The No Deal option falls below the
feasible and possible agreement zones.
reservation value zone. Regardless of there being a
The UK and EU have such markedly opposed aims
feasible agreement zone, we have shown that the
and objectives that there could easily be major
Pareto optimal outcome for both the UK and the
conflicts. The indifference curves for trade and
EU is the starting point of the negotiations – the
immigration integration for both suggest that the
endowment point. Our international negotiation
negotiation space has not yet been grasped. The
analysis offers a basis on which we, as international
suggestion by the EU to start with a separate exit
business scholars, can export knowledge to other
negotiation to then be followed by future relationship
disciplines by using an interdisciplinary approach
negotiations was a wise tactic and a rational approach
to analyze an important current phenomenon.
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APPENDIX: GLOSSARY OF TECHNICAL TERMS Technical term Explanation
Edgeworth box (Edgeworth, 1925)
A common tool in general equilibrium analysis which allows the study of the interaction of
two individual parties trading two different commodities. Exchange ratios between
commodities are determined through an hypothesized auction process
Indifference curve (in the context of
The curve of each party which shows equal utility for the two commodities traded. Along the exit negotiations)
indifference curve, any combination of the two commodities yields equal satisfaction. In the
case of exit negotiations, each point on an indifference curve gives equal satisfaction for any
combination of trade and immigration Utility function
The utility function u(x) assigns a numerical value to each element in X, ranking them in
accordance with an individual’s preferences Negotiation space
The space in the Edgeworth box, where both parties have the possibility to negotiate a deal
due to the joint set of exchange possibilities marked by the shape of the indifference curves between R and W Initial endowment
Assets at the beginning of the transactions, which can be financial or non-pecuniary Agreement zone
The space between the two parties, which has been derived from both sides offering over a
period of time. The zone shows the space where contracts and deals are arrived at
School of Economics, as Senior Lecturer at Lough- ABOUT THE AUTHORS
borough University and as Professor of Interna-
Ursula F Ott completed her Ph.D. at the Univer-
tional Business at Kingston University in the UK.
sity of Vienna in Austria where she also taught for
Currently, Ursula is Professor of International
some years as a Lecturer. Over the years, she has
Business at Nottingham Trent University in the UK.
been working as Research Scholar at the London
Journal of International Business Studies
From negotiation space to agreement zones
Ursula F Ott and Pervez N Ghauri 149
Ursula has published books and articles in lead-
and the Academy of International Business (AIB),
ing journals such as Journal of International Business
where he was also Vice President between 2008 and
Studies, Organization Studies, Journal of Management
2010. Pervez has published around 30 books and
Studies, International Business Review and Journal of
numerous articles in top-level journals. Business Research. Open Access
This article is distributed under the
Pervez N Ghauri completed his Ph.D. at Uppsala
terms of the Creative Commons Attribution 4.0
University (Sweden) where he also taught for sev-
International License (http://creativecommons.
eral years. Currently, Pervez is Professor of Inter-
national Business at University of Birmingham
org/licenses/by/4.0/), which permits unrestricted
(UK). Recently, he was awarded an Honorary Doc-
use, distribution, and reproduction in any medium,
tor of Economics by University of Vaasa (Finland).
provided you give appropriate credit to the original
Pervez is the Editor-in-Chief of the International
author(s) and the source, provide a link to the
Business Review. Pervez is a Fellow for both the
Creative Commons license, and indicate if changes
European International Business Academy (EIBA) were made.
Accepted by Alain Verbeke, Editor-in-Chief, 10 September 2018. This article has been with the authors for one revision.
Journal of International Business Studies

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