A THEORY OF ECONOMIC DISINTEGRATION

We study the impact of unilateral economic disintegration, such as Brexit, on national and international policies. We introduce firm mobility and business-tax policies into a general-equilibrium trade model and analyze the effects of disintegration on tax policies of asymmetric countries. Although the disintegrating country taxes less, business taxes converge in the remaining economic area. We highlight important differences with existing two-country models. Moreover, we predict a realignment of trade policies with a deeper integration inside the union and lower tariffs worldwide. The leaving country's endogenous integration response with other countries may fully compensate for the disintegration-induced welfare losses.