An idealized two-layer shallow water model is applied to the study of the dynamics of the Arctic Ocean halocline. The model is forced by a surface stress distribution reflective of the observed wind stress pattern and ice motion and by an inflow representing the flow of Pacific Water through Bering Strait. The model reproduces the main elements of the halocline circulation: an anticyclonic Beaufort Gyre in the western basin (representing the Canada Basin), a cyclonic circulation in the eastern basin (representing the Eurasian Basin), and a Transpolar Drift between the two gyres directed from the upwind side of the basin to the downwind side of the basin. Analysis of the potential vorticity budget shows a basin-averaged balance primarily between potential vorticity input at the surface and dissipation at the lateral boundaries. However, advection is a leading-order term not only within the anticyclonic and cyclonic gyres but also between the gyres. This means that the eastern and western basins are dynamically connected through the advection of potential vorticity. Both eddy and mean fluxes play a role in connecting the regions of potential vorticity input at the surface with the opposite gyre and with the viscous boundary layers. These conclusions are based on a series of model runs in which forcing, topography, straits, and the Coriolis parameter were varied.