Foreign multinationals in services sectors: A general equilibrium analysis of Brexit

We examine the role of foreign multinationals in services sectors in the context of Brexit, which we define as the combination of the increase in barriers to multinationals in services sectors as well as the increase in non-tariff barriers to trade and import tariff between the UK and the rest of EU. We use a state-of-the-art Melitz approach in manufactures with multinationals operating in imperfectly competitive services sectors in a multiregional general equilibrium framework. We find that the increased FDI barriers in services sectors explain about one third of the total welfare loss of Brexit. Furthermore, our decomposition analysis (by introducing each type of barriers separately) shows that the barriers against EU services multinationals in UK are harmful to British manufacturing sectors because they face a reduced (and more expensive) supply of intermediates of services.