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The Costs and Benefits of Leaving the EU: Trade Effects

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  • Dhingra, Swati
  • Huang, Hanwei
  • Ottaviano, Gianmarco
  • Pessoa, Joao Paulo
  • Sampson, Thomas
  • Van Reenen, John

Abstract

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 \citet{CR2014}. 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.

Suggested Citation

  • Dhingra, Swati & Huang, Hanwei & Ottaviano, Gianmarco & Pessoa, Joao Paulo & Sampson, Thomas & Van Reenen, John, 2017. "The Costs and Benefits of Leaving the EU: Trade Effects," Conference papers 332871, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
  • Handle: RePEc:ags:pugtwp:332871
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    Keywords

    International Relations/Trade;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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