Deep Integration and Trade: UK Firms in the Wake of Brexit

How does dismantling deep integration affect international trade? This paper studies the consequences of economic disintegration by estimating the impact of Brexit on goods trade by UK firms. The UK’s exit from the EU’s single market and customs union in January 2021 led to an immediate, sharp drop in both exports and imports with the EU for the average UK firm, and caused many firms to stop trading with the EU altogether. But Brexit’s impact on aggregate trade was mitigated by three forces: larger firms were less hard hit; exports to non-EU countries were unaffected; and importers partially compensated for reduced EU imports by sourcing more from outside the EU. Our estimates imply that leaving the EU reduced worldwide UK exports by 6:4% and worldwide UK imports by 4:4% within the first two years. Adjustment patterns indicate that these effects were driven by higher variable and fixed UK-EU trade costs and imperfect input substitutability across origins, with little role for scale effects, capacity constraints, input cost shocks, or sourcing complementarities.