Supply chain networks, services trade and the Brexit deal: A general equilibrium analysis

Aida Garcia Lazaro, Jakub Miśtak, Fatma Ozkan

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Abstract

We develop a multi-country general equilibrium model featuring (i) explicit supply chain networks both across sectors and across countries; (ii) migration flows across borders; (iii) services sector with a significant role in both production and trade; and (iv) a separate banking sector. We then carefully calibrate this model to the UK's withdrawal from the EU, guided by the terms specified in the recent Trade and Cooperation Agreement (TCA). We find that supply networks aggravate the losses from trade disintegration, raising the cost of Brexit significantly, even in the absence of tariffs. We also show that frictions to services trade, arising from the absence of provisions for the sector in the TCA, induce substantial costs for the UK economy. Our multi-country setting also enables us to quantify the effects of trade liberalization between the UK and the third countries, revealing gains, yet, only at a fraction of the losses arising from the new frictions to the UK-EU trade. As such, our model also provides a suitable setting for exploration of other recent episodes of trade disintegration such as tariffs on the US-China trade and the rewriting of NAFTA.
Original languageEnglish
PublisherJournal of Economic Dynamics and Control
Publication statusPublished - Oct 2021

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