Foreign multinationals in service sectors: A general equilibrium analysis of Brexit

Abstract

AbstractWe examine the role of foreign multinationals in service sectors in the context of Brexit, which is assumed to induce an increase in different types of barriers: (a) FDI barriers to multinationals in services; (b) non‐tariff barriers to trade; and (c) import tariffs between the UK and the rest of the EU. We use a state‐of‐the‐art Melitz approach in manufactures with multinationals operating in imperfectly competitive service sectors in a multiregional general equilibrium framework. We find that the increased FDI barriers in services explain about one third of the total welfare loss of Brexit. Furthermore, our decomposition analysis (by introducing each type of barriers separately) shows that the barriers against the EU service multinationals in the UK are harmful to British manufacturing sectors because they face a reduced (and more expensive) supply of intermediate services.