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The costs and benefits of leaving the EU: trade effects

Swati Dhingra, Hanwei Huang, Gianmarco Ottaviano (), João Paulo Pessoa, Thomas Sampson and John van Reenen ()

Economic Policy, 2017, vol. 32, issue 92, 651-705

Abstract: SUMMARYSampson and John Van Reenen?>This paper estimates the welfare effects of Brexit in the medium to long run, focusing on trade and fiscal transfers. We use a standard quantitative general equilibrium trade model with many countries and sectors and trade in intermediates. We simulate a range of counterfactuals reflecting alternative options for European Union (EU)–United Kingdom (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. The negative effects of Brexit are widely shared across the entire income distribution and are unlikely to be offset from new trade deals.

Keywords: trade; Brexit; general equilibrium (search for similar items in EconPapers)
JEL-codes: F13 F15 F17 (search for similar items in EconPapers)
Date: 2017
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