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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 ()

CEP Discussion Papers from Centre for Economic Performance, LSE

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 Costinot and Rodríguez-Clare (2014). 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.

Keywords: Trade; Brexit; General equilibrium (search for similar items in EconPapers)
JEL-codes: F13 F15 F17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-int
Date: 2017-04
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