Abstract
Exploiting changes in the geography of economic integration in Europe, this paper quantifies the effects of Brexit from ex post to ex ante using structural gravity. By isolating the directional treatment effects of EU agreements for the UK, the analysis reveals important heterogeneity across agreements, sectors, and within pairs. We find that these directional effects matter for the size and distribution of the welfare effects of Brexit—the withdrawal of the UK from EU agreements resulting into a return of trade costs to the situation quo ante. We make this point with the help of a modern multi-sector trade model that is able to capture inter- and intranational production networks. In line with other papers, the welfare costs of Brexit are higher in the UK than in most other EU countries. However, heterogeneity tends to attenuate overall costs while giving rise to substantial heterogeneity between EU27 members and sectors. A scenario that could shift bargaining power eliminates asymmetries in the costs of Brexit as soon as the UK fully liberalizes its market.
Highlights
The relationship between the European Union (EU) and the United Kingdom (UK) has always been fraught with complexity for reasons related to history, culture and geography
If trade elasticities and treatment effects vary across sectors, we find higher simulated costs from Brexit relative to estimates based on a two-sector model—but only for the combination of sectoral heterogeneity and directional UK-specific treatments
We find that UK exports to the EU27 fall by 25% in S1 and S3, which is 3 to 4 percentage points less than what is expected to happen to EU27 exports to the UK
Summary
The relationship between the European Union (EU) and the United Kingdom (UK) has always been fraught with complexity for reasons related to history, culture and geography. Separating tariff and non-tariff barrier (NTB) trade effects in EU membership, we use the estimated trade cost shocks to carry out our comparative statics exercise in the year 2014, for which we have real data.. Separating tariff and non-tariff barrier (NTB) trade effects in EU membership, we use the estimated trade cost shocks to carry out our comparative statics exercise in the year 2014, for which we have real data.4 This allows us to put special emphasis on sectoral heterogeneity. The results suggest that the EU–Korea FTA from 2011 has not had any positive effects on UK overall exports of goods, but on services trade We use these partial equilibrium estimates to define directional trade cost shocks for the counterfactual general equilibrium analysis. ∑N i=1 ji cji j which forms the core of a gravity equation
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