Consequences of Brexit and options for a 'Global Britain’

Abstract

The United Kingdom has opted to leave the European Union. The consequences of Brexit on international trade are large and negative. While the UK aims for new, ambitious trade agreements after Brexit, it is not explicit about the type of agreements it envisions or with whom specifically. This paper considers the UK's options. We confirm Brexit's substantial, negative trade effects for the UK, EU, and major countries around the world. After reviewing all potential options, our answer to the question whether the UK has an alternative for the existing agreement with the EU is: No.Paradoxically, only a trade agreement with the EU can compensate for Brexit's trade losses. The EU swiftly responded on March 31 that this "creates significant uncertainties that have the potential to cause disruption, in particular in the UK but also in other member states."1 Indeed, Brexit creates uncertainties on many fronts: political, social, and economic. In this paper, we will focus on the economic aspects of Brexit and highlight the consequences of the Brexit on trade flows, and analyse the trade options of the UK.From an international trade perspective, the choice of the UK to leave the EU is remarkable. Leaving a large free trade area as the EU is most likely trade and welfare reducing. Without a new agreement, relative trade barriers will change by making trade with the EU relatively more expensive compared to outside-EU trade, resulting in trade creation with the non-EU world and trade diversion away from the EU. The balance between these developments is most likely trade and welfare reducing, as trade barriers between the UK and the largest trading block in the world increase. 2 This sombre evaluation is corroborated by almost all analyses of Brexit. The estimates range between roughly 1.5% reduction in GDP to more than 7%, depending on assumptions made how Brexit takes place (Baldwin, 2016). Only 'Economists for Brexit' produced a positive estimate, but this seems to be an outlier in the available estimates (see Miles, 2016, for an overview). -------------------------------------------------------------------------------------------------------©The challenge for the UK is to find a new position within the world of trade agreements. The letter of the UK prime minister (see footnote 1) indicates that the principles of Brexit with respect to international trade are outlined in the White Paper of 2 February 2017, which says that the UK aims to "forge a new strategic partnership with the EU, including a wide reaching, bold and ambitious free trade agreement" and that "we will forge ambitious free trade relationships across the world." 3 The various comments of politicians indicate that the negotiations will at times become confrontational; the UK links the trade negotiations to security issues and Gibraltar, whereas Donald Tusk (EU president) has warned that 'cherry picking' by the UK will not be accepted by the EU (see footnote 1).In this paper, we will not predict or speculate what the most likely outcome of Brexit negot...

EU economic integration agreements, Brexit and trade

“…A typical counterfactual comparative static exercise using the gravity model involves hypothetically changing some bilateral friction (for example, the removal of a tariff) and calculating the effects on trade flows (Anderson et al 2015). Following the burgeoning Brexit related literature, the counterfactual change in the dependent variable is estimated by hypothetically altering the values for the RTA indicator (Brakman et al 2018;Oberhofer and Pfaffermayr 2018).…”

“…2 Although the EU has experienced territorial reductions with the exit of Algeria in 1962 upon independence and the exit of Greenland in 1985, no country has previously terminated EU membership. see, for example, Van Reenen (2016); Brakman et al (2018); Dhingra et al (2017); Felbermayr et al (2018). In effect, the data facilitate a quantitative trade model of the global economy, allowing for the channels through which trade affects consumers, firms and workers, thereby providing a map from trade to welfare analysis (Van Reenen 2016).…”

Local Economic Effects of Brexit

“…Almost all studies predict that the effect on UK welfare will be negative for any potential deal that is negotiated between the two parties Brakman et al, 2017;Ebell and Warren, 2016;HM Treasury, 2016;OECD, 2016;Oxford Economics, 2016;PWC, 2017;Van Reenen, 2017). 4 The magnitude of the effect depends on the terms under which the UK leaves the EU.…”

“…Reductions in trade are the main driver of these significant long-run costs, resulting from increases in tariff and non-tariff barriers to trade. Brakman et al (2017) use a general equilibrium model to predict that UK value added exports will fall by 13% under soft Brexit and 17% under hard Brexit.…”

A Spatial Perspective on European Integration: Heterogeneous Welfare and Migration Effects From the Single Market and the Brexit

“…Third, we contribute to the debate on the economic consequences of a withdrawal of the United Kingdom from the EU. There are a number of papers quantifying welfare effects of the Brexit (e.g., Brakman, Garretsen, and Kohl ; Dhingra et al ; Los et al ; Van Reenen ). Dhingra, Machin, and Overman () study how locations within countries are differentially affected by the Brexit, but do not build on a spatial model with labor mobility.…”