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

TY - UNPB

T1 - Supply chain networks, services trade and the Brexit deal

T2 - A general equilibrium analysis

AU - Garcia Lazaro, Aida

AU - Miśtak, Jakub

AU - Ozkan, Fatma

PY - 2021/12/31

Y1 - 2021/12/31

N2 - 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.

AB - 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.

U2 - 10.1016/j.jedc.2021.104254

DO - 10.1016/j.jedc.2021.104254

M3 - Working paper

BT - Supply chain networks, services trade and the Brexit deal

PB - Journal of Economic Dynamics and Control

ER -