How did Brexit impact EU trade? Evidence from real data

Abstract

AbstractAt the time it voted to exit in 2016, the UK was a leading economy within the EU. It contributed about 16 percent of the EU GDP, while the other EU countries accounted for almost half of UK's total trade. This study attempts to answer two research questions: First, how Brexit affected the EU–UK trade and second, how it affected the trade between remaining 27 EU members. To answer these questions, quarterly data are exploited for the period from 2005Q1 to 2022Q3 covering a total of 53 trading partners including the EU members. A gravity model that controls for unobserved bilateral heterogeneity and multilateral resistance is estimated by PPML. Three phases of Brexit (the referendum, transition, and post transition [under the TCA]) are analysed. The results indicate that the Brexit referendum phase depressed UK–EU trade by around 10.5%, and transition phase by around 15%. In both cases, particularly for the transition phase, the effect is greater on the UK imports from EU than the UK exports to EU. We do not find a significant effect due to the post transition (TCA) phase. Estimates show some mild but positive effect on intra‐EU trade of about 1.5% and 4.6% due to Brexit referendum and post Brexit respectively, but no significant effect from the transition phase. This suggests that some EU trade with the UK was redirected to other EU members. Hence UK should aggressively seek out new trade agreements with other countries and trade blocs as well as refine the workings of the trade and cooperation agreement signed with the EU to minimise the loss.