Ruhr Economic Papers

Ruhr Economic Papers #700

The Economic Impact of Brexit: Evidence from Modelling Free Trade Agreements

by Ansgar Belke and Daniel Gros

UDE, 06/2017, 25 S./p., 8 Euro, ISBN 978-3-86788-814-1 DOI: 10.4419/86788814

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Abstract

This paper assesses the economic implications of the United Kingdom leaving the European Union. The basic data on trade in goods and services and investment between the two parties suggest that cost of ‘Brexit’ could be substantial. Trade between the UK and the EU27 is large and of a similar order of magnitude as transatlantic trade (between the EU and the US). The precise nature of the (hopefully free) trade agreement UK-EU-27 is still being negotiated. But all available studies concur that a significant disruption of trade links will impose economic costs on both sides. However, the EU27 would bear only a disproportionally small share of the total cost – not just because it is about five times larger than the UK in economic terms but also for fundamental reasons such as greater market power of its enterprises. Other studies on different free trade arrangements confirm the general proposition that the smaller party has more to gain from eliminating trade barriers (and to lose from imposing them). This implies that the EU will have the stronger negotiating position.

JEL-Classification: F15, C63, C68

Keywords: Brexit; European Union; free trade agreements; trade in goods and services; FDI

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