Trade and FDI-Related Impacts of Brexit

Abstract

We offer a general equilibrium analysis of Brexit incorporating the state-of-the-art differences in productivity and firms’ selection within manufacturing sectors à la Melitz (2003) and multinationals in services. Trade, output and average productivity diminish across most sectors in the UK and the Rest of the European Union (REU), as well as GDP, welfare, wages and capital remuneration. However, the UK loses more due to the missing preferential access to the huge EU market. Emergence of barriers against multinationals explains approximately one third of the negative effect in both the UK and REU. Other regions remain nearly unaffected.

Keywords: Multinationals, CGE, Melitz, Monopolistic Competition, Trade in Services

JEL Classification: C68, F14, F15, F17, F21