Reduction analysis of hierarchical spatial economy: Trade strategy around Brexit

This paper investigates how international trade competition influences cross-country migration by using a general equilibrium model of economic geography. We employ a global--local system to represent local places grouped into countries, which collectively form a global network. Through the place-to-country reduction analysis proposed herein, the governing equation at the place level are reduced to a country-level equation that efficiently describes each country’s trade environment. We model and analyze international trade competition---including trade liberalization and protectionism---among the UK, France, and Germany, using the Helpman (1998) model. The recommended strategies for the UK and the EU include reducing domestic transportation costs, while tariffs and retaliatory tariffs act as a double-edged sword, potentially enhancing or undermining their trade positions.