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Abstract:

Journal article
The costs and benefits of leaving the EU: trade effects
Swati Dhingra, Hanwei Huang, Gianmarco I. P. Ottaviano, Joao Paulo Pessoa, Thomas Sampson and John Van Reenen October 2017
Paper No' :


JEL Classification: F15; F17; F13


Tags: brexit; trade; european union; welfare

This paper estimates the welfare effects of Brexit in the medium to long run, focusing on trade and fiscal transfers.We use a standard quantitative general equilibrium trade model with many countries and sectors and trade in intermediates. We simulate a range of counterfactuals reflecting alternative options for European Union (EU)- United Kingdom (UK) relations following Brexit. Welfare losses for the average UK household are 1.3% if the UK remains in the EU's Single Market like Norway (a 'soft Brexit'). Losses rise to 2.7% if the UK trades with the EU underWorld Trade Organization rules (a 'hard Brexit'). A reduced-form approach that captures the dynamic effects of Brexit on productivity more than triples these losses and implies a decline in average income per capita of between 6.3%and 9.4%, partly via falls in foreign investment. The negative effects of Brexit are widely shared across the entire income distribution and are unlikely to be offset from new trade deals.