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Journal article

The costs and benefits of leaving the EU: trade effects

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.

Swati Dhingra, Hanwei Huang, Gianmarco I. P. Ottaviano, Joao Paulo Pessoa, Thomas Sampson and John Van Reenen

1 October 2017

Economic Policy 32(92) , pp.651-705, 2017

DOI: 10.1093/epolic/eix015

This Journal article is published under the centre's Trade programme, Growth programme.

This publication comes under the following theme: Brexit