22 October 2017

VoxEU: Short-term impact of Brexit on the UK’s export of goods

If the UK fails to secure a new trade deal with the EU and must face tariffs with no preferences, total UK's exports to the EU would drop by at most 2%, according to researchers at VoxEU. The impact is small because the EU's import demand for UK exports is fairly inelastic.

In a recent paper, we analyse the short-term fallout of trade in goods from Brexit due to the potential changes in the trade policies of its main trading partners (Kee and Nicita 2017a). We construct an overall trade restrictiveness index (OTRI) (Kee et al. 2008 and 2009) for the UK's major trading partners. The OTRI summarises the trade policy stance of an importing country, taking into account the size and responsiveness of imported products facing tariffs and non-tariff measures (NTMs). The responsiveness of imports is measured using the estimated bilateral trade elasticities from Kee and Nicita (2017b). In that paper, we also provide the ad valorem equivalent (AVE) estimates for the NTMs. Our results show that if the UK fails to secure a new trade deal with the EU and must face tariffs with no preferences, total UK exports to the EU would drop by at most 2%. The impact is small because the EU's import demand for UK exports is fairly inelastic, especially for products that may face higher tariffs.[...]

It should be noted that the above analysis does not consider some important aspects, such as services trade, ‘passporting’, and the role of London as a financial centre post-Brexit, or immigration and the social aspect of Brexit.3 The long-run impact of Brexit could depend on whether the UK can continue to retain and attract foreign direct investment. Recent firm survey evidence from Bloom and Mizen (2017) suggests that while most firms expect a negative impact of Brexit on sales, investment, and costs, only larger firms and those that are more exposed to international markets are likely to think that they might move part of their business abroad. Thus, there are reasons to be optimistic post-Brexit.

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