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The bilateral trade effects of announcement shocks: Brexit as a natural field experiment

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  • Mustapha Douch
  • Terence Huw Edwards

Abstract

We analyse the effects of uncertainty and anticipation shocks associated with the 2016 Brexit vote as a treatment on trade between the UK and 14 EU and 14 non‐EU trading partners, using the synthetic control method (SCM). After controlling for exchange rate and GDP changes, UK exports to both groups of countries fell below those of the ‘synthetic Britain’, with much of the shortfall developing over the year prior to the referendum, following the 2015 Conservative general election win. The results indicate that UK exports to EU countries may have lost nearly 25% by early 2018, due to the Brexit shock, somewhat more than those to non‐EU countries. Imports from the EU and non‐EU countries also declined a little, although there is tentative evidence that UK consumers may have been avoiding countries with preferential trade agreements (PTAs) with the EU, and possibly turning towards the Commonwealth. Overall, the results confirm that policy uncertainty has a major effect upon trade and that uncertainty about supply chain costs is a potential explanation for at least some of the shortfall.

Suggested Citation

  • Mustapha Douch & Terence Huw Edwards, 2022. "The bilateral trade effects of announcement shocks: Brexit as a natural field experiment," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(2), pages 305-329, March.
  • Handle: RePEc:wly:japmet:v:37:y:2022:i:2:p:305-329
    DOI: 10.1002/jae.2878
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    2. Castro-Pires, Henrique & Mello, Marco & Moscelli, Giuseppe, 2023. "Foreign Nurses and Hospital Quality: Evidence from Brexit," IZA Discussion Papers 16616, Institute of Labor Economics (IZA).
    3. Kren, Janez & Lawless, Martina, 2022. "How Brexit has changed EU-UK trade flows," Papers WP735, Economic and Social Research Institute (ESRI).

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