WIFO Foreign Trade Expert Michael Pfaffermayr Discusses the Welfare Effects of Brexit

27.11.2018

At the FIW-wiiw seminar in International Economics, Michael Pfaffermayr presented a joint paper with his colleague Harald Oberhofer that deals with the quantitative assessment of the trade effects of Brexit.

The negotiations between the UK and the EU on the modalities of Brexit are at a crucial stage. Against this background, estimates of the expected trade effects of Brexit are of particular interest – also to policy makers.

The European Union (EU) and the United Kingdom are at a critical stage in negotiations for the UK's withdrawal from the EU. Following the Salzburg summit of heads of state and government and the British Conservative Party congress, the fronts appear to have hardened and the likelihood of an unregulated withdrawal by the United Kingdom has increased. The British government has responded with new proposals that could add momentum to the final negotiations. Against this background, the working paper, written by Michael Pfaffermayr (WIFO foreign trade expert and professor at the University of Innsbruck) together with Harald Oberhofer (WIFO foreign trade expert and professor at the Vienna University of Economics and Business Administration) and presented at the FIW-wiiw Seminar in International Economics, discusses the possible trade and welfare effects of Britain's disorderly exit from the EU. The study is limited to the trade in goods. The results show that the United Kingdom would be much more negatively affected by a hard Brexit. For the remaining 27 EU member countries, a non-contractual Brexit would also have negative welfare effects. A positive conclusion of the negotiations would reduce these economic costs and would thus be in the interest of all negotiating partners involved.

Publications

This paper proposes a new panel data structural gravity approach for estimating the trade and welfare effects of Brexit. The suggested Constrained Poisson Pseudo Maximum Likelihood Estimator exhibits some useful properties for trade policy analysis and allows to obtain estimates and confidence intervals which are consistent with structural trade theory. Assuming different counterfactual post-Brexit scenarios, our main findings suggest that UK's exports of goods to the EU are likely to decline within a range between 7.2 percent and 45.7 percent (EU's exports to UK by 5.9 percent to 38.2 percent) six years after the Brexit has taken place. For the UK, the negative trade effects are only partially offset by an increase in domestic goods trade and trade with third countries, inducing a decline in UK's real income between 1.4 percent and 5.7 percent under the hard Brexit scenario. The estimated welfare effects for the EU are negligible in magnitude and statistically not different from zero.