The Implications of Brexit for UK and EU Regional Competitiveness

Abstract

Any form of Brexit will impact heterogeneously in terms of sectors and regions on the competitive position of firms in both the UK and Europe. The ongoing uncertainty about the conditions under which the UK will be leaving the EU creates difficulties in structurally estimating these impacts. Using uniquely detailed interregional trade data on goods and services for the EU, we apply a novel methodology that disentangles region-sector sensitivities (elasticities) of firms’ competitive positions to (non)tariff barriers from the implications of different post-Brexit UK–EU trade scenarios. This enables us to derive the economic geography of competitive opportunities and vulnerabilities of Brexit of firms, along with the degree of uncertainty that surrounds these effects, independently from scenarios. Our analysis demonstrates that the adverse international competitive vulnerabilities of UK regions are much larger than those of the rest of the EU due to the dependency of the UK on the EU via global value chains. The impact on the competitive positions of firms means that within the UK, Brexit is likely to increase interregional inequalities. In contrast, interregional inequalities across Europe may actually fall, depending on the nature of the post-Brexit UK–EU trading arrangements. Moreover, the key political focus on the nature of the post-Brexit arrangements appears to be misplaced in that most UK regions are rather insensitive to the specific nature of the deal. As such, the economic geography implications of Brexit appear to be largely unrelated to UK domestic political narratives.