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Abstract:

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CEP Discussion Paper
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 April 2017
Paper No' CEPDP1478:
Full Paper (pdf)

JEL Classification: F13;F15;F17


Tags: trade; brexit; general equilibrium

This paper estimates the welfare effects of Brexit, focusing on trade and fiscal transfers. We use a standard quantitative general equilibrium trade model with many countries and sectors and trade in intermediates, as in Costinot and Rodríguez-Clare (2014). We simulate a range of counterfactuals reflecting alternative options for EU-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 under World 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. These negative effects are widely shared across the entire income distribution and are unlikely to be offset from new trade deals.