Brexit deal done! A detailed micro- and macroeconomic analysis of its fallout

Abstract

We offer a rich set of macroeconomic and sectoral effects of Brexit in France, together with macroeconomic ones for the UK, the rest of the EU and the rest of the world. We explain the intuition for the impact on production and trade across the 21 sectors that underlie our macroeconomic estimations (national imports and exports, output, GDP, welfare, wages and rental rate of capital). Our comprehensive technique captures the direct and indirect effects of Brexit on trade. Four types of withdrawal are analysed, including the finally agreed between the EU and the UK on December 2020. This will avoid tariffs, but other medium size (non-tariff) barriers will emerge. The UK, France and the rest of the EU will be harmed by Brexit, although asymmetrically. While Brexit will substantially harm the UK economy, the negative impact on France and the rest of the EU will be limited and similar.

KEYWORDS:

• Computable general equilibrium
• CGE
• non-tariffs barriers (NTBs)
• trade

JEL CLASSIFICATIONS:

• C68
• F14
• F15
• F17

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

Source: Authors’ elaboration.

Source: Authors’ elaboration.

Source: Latorre, Olekseyuk, and Yonezawa (2020) for Soft and Hard Brexit and Changing Europe (2019) for Midway_NTBs. See text.

Source: Authors’ estimations.

Source: Authors’ estimations.

Source: Authors’ estimations.

Source: Authors’ estimations.

Source: Authors’ estimations.

1 As we will explain in Section 4, the Soft Brexit and the Boris Johnson scenarios only imply non-tariff barriers, whereas the Hard Brexit combines by both non-tariff barriers and tariffs.

2 Although FDI is not modelled as such in the paper, we believe that barriers to trade are, to some extent, barriers to the operations of multinational enterprises in agriculture and manufacturing. An important way for the provision of services abroad is through foreign affiliates, which is not modelled in this paper and would be an extra channel for the impact of Brexit.

3 NQTM’s combine some of the micro-foundations of CGE’s with a gravity relationship based on empirical series of trade flows. This ‘Gravity’ implies a parsimonious and transparent approach to bilateral trade flows, which mainly depend on the distance between the importer and the exporter, as well as on their respective economic dimensions.

4 July 2019 for the latest version available, which is version 10, the one that we are using.

5 An ad valorem equivalent is a ‘fictitious’ tax that, if real, would quantify the costs of NTBs providing an estimation of their corresponding percentage cost equivalence. Tariffs are also expressed as AVEs, because some of them are tariffs per unit of tons and need to be translated into value terms, as well.

6 Latorre and Yonezawa (2018), Ortiz and Latorre (2020), Dhingra et al. (2017) and Ottaviano et al. (2014) base their NTBs data on one of the most detailed studies on EU NTBs, namely, Ecorys (2009). Ecorys (2009) conducted business surveys, consultations with regulators and sector experts, literature reviews and econometric analyses to estimate NTBs. Latorre and Yonezawa (2018) add a few NTBs for sectors not covered by Ecorys (2009).

7 Burfisher (2016, p. 154) says: “Factor mobility assumptions are a useful way to categorize CGE model results as describing short-run, medium-run or long-run adjustments to economic shocks. In the short-run, some factors – usually capital – are immobile, and the economy’s production response is therefore limited”.

Additional information

Funding

This work was supported by the Ministerio de Economía y Competitividad [grant number ECO2016-78422-R].