How Theresa May can win her game of chicken with the EU

Brexit is one of the most complicated affairs in policy. Dozens of trade treaties have to be renegotiated. Tens of thousands of pages of European law have to be replaced. And, of course, Britain wants to work out a custom deal with the European Union whereby, in essence, the island gets all the benefits of being in the EU — trade, especially — without any of the drawbacks — paying money, having to give up sovereignty.

This is where, on top of the mind-boggling technocratic complexity, the politics come in. Negotiating such a deal would be a headache in any situation. But many Eurocrats also want to "punish" Britain for trying to leave the EU. Their logic goes like this: If Britain does well out of leaving the European Union, then more countries might start to leave, and the EU project might unravel. Therefore, the EU should make sure that Britain suffers through Brexit, pour encourager les autres.

Never mind that such mobster-like behavior vindicates even the wilder Euroskeptics. What's more, even if you put aside such villainous behavior, plenty of more sensible EU types still don't see why they should give May what she wants when they have little incentive to do so.

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After all, as Dan Drezner has pointed out, Britain is smaller than the EU. Everyone agrees that both sides would suffer from a bad deal, but Britain would suffer more. This naturally puts Britain in a weaker situation.

This is fair enough. It's a tricky situation. And, after all, why should May expect to get something in exchange for nothing?

A first answer is that Britain often gets something in exchange for nothing. From Margaret Thatcher winning the famous "rebate" on EU payments from the recalcitrant Jacques Delors to various carve-outs from EU rules, the Brits have mostly gotten their way from the EU just from sheer obstreperousness. Psychology matters. The kind of people who invest in an idea like the European project and make it their careers do not tend to have the type of psychology that lends itself to brinkmanship, unlike the kind of people who, ah, for example, become KGB agents and dictators of Russia. (I mean, seriously, imagine Herman Van Rompuy and Vladimir Putin together alone in a room negotiating over the future of Europe. We'd all be speaking Russian in short order.)

This leaves U.K. Prime Minister Theresa May with an opening.

The Britain-EU negotiation is essentially a game of chicken: A bad Brexit deal would represent both sides hurting each other, so each is waiting until the other blinks. As game theorists have laid out, the way to win a game of chicken is to credibly signal that you will not give in, thereby forcing your opponent to give in. So, for example, in a game of chicken where both people drive their cars full speed at each other, you would throw the steering wheel out the window, signaling that you're not going to turn whatever happens; the other player has no option but to turn.

A basic rule of thumb in any negotiation is to always have what's called a "BATNA" (a "Best Alternative To Negotiated Agreement"). If you don't have an alternative to an agreement, then you have to sign on the dotted line, putting you at a disadvantage in the negotiation. This is where the EU thinks they have Britain. So May must create a BATNA.

To do that, she should pass a number of bills whose application would be automatically triggered in the absence of a U.K.-EU deal by the end of the two-year window for the countries to negotiate their exit. The bills should have two major provisions.

The first is that it would replace whatever EU rules and laws are currently in force with rules designed to arbitrage away jobs and economic activity from Europe. Finance and agriculture are two obvious industries where EU rules are strict by international standards, and a nearby country that became a regulatory haven would win a lot of business (Switzerland has done very well by this strategy).

The second is that it would seek to counteract the economic damage from the absence of a free-trade deal with the EU. Without such a deal, the U.K. would trade with Europe alongside WTO rules, which would raise trade barriers and hurt corporate margins, jobs, and consumption. So May's bill should institute a corporate tax credit and a VAT (sales tax) cut of the same amounts (or above) as the increased costs imposed by trade barriers. This would buffet the economic shock from reduced trade — and therefore May's own political position.

Then there are other bargaining chips May could put on the table, such as security cooperation (the U.K. has a comparative advantage in signals intelligence which is highly valued in Europe) and defense cooperation (which is very strong between the U.K. and France, especially).

The overall point is this: Theresa May should essentially throw the steering wheel out the window. By making all the necessary preparations for a Bad Brexit, she would signal to the EU that she doesn't need a Bad Brexit, and that they would be harmed by it as well. (She should make this last point very pointedly to German car manufacturers and French defense manufacturers, who have enormous influence with their respective governments.)

In international relations, negotiations are about brinksmanship. Without it, you get suckered. It just so happens that this is a great British tradition. The Brits can get a great deal out of Brexit. They just need to be clever and tough.