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Impact of Border Barriers, Returning Migrants, and Trade Diversion in Brexit: Firm Exit and Loss of Variety

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  • Nobuhiro Hosoe

    (National Graduate Institute for Policy Studies, Tokyo, Japan)

Abstract
We investigate the impact of Brexit (the UK's planned withdrawal from the European Union) using computable general equilibrium models featuring conventional constant returns-to-scale (CRS) and increasing returns-to-scale (IRS) technology and firm heterogeneity, a la Melitz. We show that the imposition of the tariff and nontariff barriers associated with Brexit triggers the significant contraction of bilateral trade between the UK and the remaining 27 members of the European Union (EU27), exacerbated by firm exit from export markets. Given the imposition of these trade barriers, budget savings, migrants returning to the EU27 from the UK, and intra-EU27 integration and free trade agreements with the US and Japan, the IRS model predicts a total export loss of 5.1-5.8% of UK GDP and a total welfare loss of 1.1-1.5%. This is 60% greater than the CRS model predictions. However, the impact on output would vary between industries, whereby the UK chemical and automobile industries would contract, but its food, business services, and information and communication technology industries would expand. In contrast, the EU27 would gain substantially from other integration programs, but lose very little from the stronger UK-EU27 border barriers. This suggests that the EU27 should have little interest in negotiations aimed at avoiding a "hard Brexit" (the surrendering by the UK of full access to the single market) and that it would be more productive for it to focus on integration programs with trade partners other than the UK.

Suggested Citation

  • Nobuhiro Hosoe, 2017. "Impact of Border Barriers, Returning Migrants, and Trade Diversion in Brexit: Firm Exit and Loss of Variety," GRIPS Discussion Papers 17-04, National Graduate Institute for Policy Studies.
    • Handle: RePEc:ngi:dpaper:17-04
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    Cited by:

    1. Palomba, Giulio & Tedeschi, Marco, 2024. "Contagion among European financial indices, evidence from a quantile VAR approach," Economic Systems, Elsevier, vol. 48(2).
    2. Hosoe, Nobuhiro & Akune, Yuko, 2020. "Can the Japanese agri-food producers survive under freer trade? A general equilibrium analysis with farm heterogeneity and product differentiation," Japan and the World Economy, Elsevier, vol. 55(C).
    3. Jafari, Yaghoob & Britz, Wolfgang, 2018. "Modelling heterogeneous firms and non-tariff measures in free trade agreements using Computable General Equilibrium," Economic Modelling, Elsevier, vol. 73(C), pages 279-294.
    4. Mustapha Douch & Terence Huw Edwards & Jan Van Hove & Janez Kren, 2021. "The Great Trade Collapse and the determinants of UK export margins: A cohort‐ and firm‐level matching approach," The World Economy, Wiley Blackwell, vol. 44(10), pages 2838-2857, October.
    5. Yaghoob Jafari & Wolfgang Britz, 2020. "Brexit: an economy-wide impact assessment on trade, immigration, and foreign direct investment," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 17-52, February.
    6. repec:eur:ejserj:574 is not listed on IDEAS
    7. Lin, Boqiang & Jia, Zhijie, 2019. "Tax rate, government revenue and economic performance: A perspective of Laffer curve," China Economic Review, Elsevier, vol. 56(C), pages 1-1.
    8. Nobuhiro Hosoe & Yuko Akune, 2019. "Can the Japanese Agri-food Sectors Survive by Promoting their Exports?:A General Equilibrium Analysis with Farm Heterogeneity and Product Differentiation," GRIPS Discussion Papers 19-06, National Graduate Institute for Policy Studies.
    9. Li, Hong, 2020. "Volatility spillovers across European stock markets under the uncertainty of Brexit," Economic Modelling, Elsevier, vol. 84(C), pages 1-12.
    10. Hosoe, Nobuhiro, 2021. "Impact of tighter controls on Japanese chemical exports to Korea," Economic Modelling, Elsevier, vol. 94(C), pages 631-648.
    11. Latorre, María C. & Olekseyuk, Zoryana & Yonezawa, Hidemichi & Robinson, Sherman, 2020. "Making sense of Brexit losses: An in-depth review of macroeconomic studies," Economic Modelling, Elsevier, vol. 89(C), pages 72-87.
    12. Hosoe, Nobuhiro & Akune, Yuko, 2019. "Impact of Trade Liberalization on the Japanese Agri-food Sectors: A General Equilibrium Analysis with Farm Heterogeneity and Product Differentiation," Conference papers 333025, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    13. Nobuhiro Hosoe, 2022. "Quantifying the Impacts of Sanctions Following Russia’s Invasion of Ukraine," GRIPS Discussion Papers 22-06, National Graduate Institute for Policy Studies.
    14. Lin, Boqiang & Jia, Zhijie, 2020. "Does the different sectoral coverage matter? An analysis of China's carbon trading market," Energy Policy, Elsevier, vol. 137(C).
    15. Catarina Ferreira & Catarina Cardoso & Mariana Travassos & Mariana Paiva & Micaela Pestana & João M. Lopes & Márcio Oliveira, 2021. "Disorders, Vulnerabilities and Resilience in the Supply Chain in Pandemic Times," Logistics, MDPI, vol. 5(3), pages 1-16, July.
    16. Latorre, María C. & Olekseyuk, Zoryana & Yonezawa, Hidemichi, 2017. "Trade and FDI-related impacts of Brexit," Conference papers 332876, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    17. Lin, Boqiang & Jia, Zhijie, 2019. "How does tax system on energy industries affect energy demand, CO2 emissions, and economy in China?," Energy Economics, Elsevier, vol. 84(C).

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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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