Abstract
The objective is to forecast the impact of potential Brexit scenarios on the export volume of passenger cars from Germany to the UK. Based on Germany’s total export volume of passenger cars, a double-logarithmic gravity model is specified and estimated using Ordinary Least Squares (OLS) regression. The final estimated model has strong explanatory power, with all variables significant at the 5% level. This is used for forecasting future export volumes under different Brexit scenarios. Diagnostic tests suggest that the model is robust and efficient. All tested Brexit scenarios are found to negatively impact passenger cars export volumes from Germany to the UK. The level of tariffs is found to have the most significant effect, but lower GDP due to Brexit is forecast to offset the benefits of trading with lower tariffs. The most pessimistic scenario for 2030 forecasts is a reduction of 15.4% compared to the ‘no Brexit’ base-case scenario.
Highlights
The United Kingdom (UK) held a referendum on continued membership of the European Union (EU) on June 23rd 2016
UK becomes a member of the European Economic Area (EEA); with EU non-member states treated as members of the Single Market as though they were part of the EU (European Union Committee 2016)
The future financial and trade-related uncertainties relating to Brexit will depend, to a large extent, on whether the UK retains access to the Single Market
Summary
The UK held a referendum on continued membership of the EU on June 23rd 2016. The ‘Leave Campaign’ won a surprising victory, meaning that what is commonly referred to as Brexit (Hunt and Wheeler 2017) has emerged as an imminent reality. Despite the fact that the UK would not be allowed to take part in future decision making processes within the EU (Emerson 2016), members of the EEA are required to contribute funds to decrease social and economic disparities; a form of grant to poorer EU members based on the contributor’s economic situation (HM Treasury 2016). To put this financial obligation into context, in 2011, the UK’s net contribution to the EU amounted to GBP 128 per capita while, as a member of the EEA, that of Norway amounted to GBP 108 per capita (House of Commons 2013). This type of agreement has suited smaller countries such as Norway, Iceland and Liechtenstein (OECD 2016)
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