The Economic Impact of Brexit: Evidence from Modelling Free Trade Agreements
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This paper assesses the economic implications of the United Kingdom (UK) leaving the European Union (EU). The basic data on trade in goods and services and investment between the two parties suggest that the cost of “Brexit” could be substantial. Trade between the UK and the EU-27 is large and of a similar order of magnitude as transatlantic trade (between the EU and the U.S.). The precise nature of the (hopefully free) trade agreement UK-EU-27 is still being negotiated. All available studies concur that a significant disruption of trade links will impose economic costs on both sides. However, the EU-27 would bear only a disproportionally small share of the total cost, not just because it is about five times larger than the UK in economic terms, but also for fundamental reasons such as greater market power of its enterprises. Other studies on different free trade arrangements confirm the general proposition that the smaller party has more to gain from eliminating trade barriers (and more to lose from imposing them). This implies that the EU will have a stronger negotiating position.
KeywordsBrexit European Union Free trade agreements Trade in goods and services FDI
JELF15 C63 C68
This paper profited very much from insights gained from the participants in the panel “The Macroeconomics and Political Economy of Brexit”, 83rd International Atlantic Economic Conference, March 22-25, 2017, Berlin, Michael Burda, Henrik Enderlein and Michael Wohlgemuth. The usual disclaimer applies.
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