What will be the long-run economic effects of the United Kingdom’s decision to leave the European Union—informally known as Brexit? Compared with remaining in the European Union, there will inevitably be higher trade costs with the rest of Europe, which accounts for about half of all U.K. trade. This will mean lower trade and foreign investment, and thus lower average U.K. incomes. These trade costs will arise from some combination of tariff and non-tariff barriers, and will be larger if there is a “hard Brexit,” whereby the United Kingdom would leave the Single Market and trade under World Trade Organization rules, rather than a “soft Brexit” option of staying in the Single Market (like Norway). Calculations using a standard multicountry, multisector, computable general equilibrium model show welfare losses of 1.3 to 2.6 percent, but dynamic models that incorporate productivity effects suggest that these could rise to 6.3 to 9.5 percent. Brexit’s supposed benefits—such as lower immigration, better regulations, and more trade deals with non-EU countries—would do little or nothing to offset these losses. It seems unlikely that voters were fully aware of the magnitude of these costs at the time of the vote.


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pp. 367-383
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