Brexit Uncertainty and Trade Disintegration
We estimate the uncertainty effects of preferential trade disagreements. Increases in the probability of Britain’s exit from the European Union (Brexit) reduce bilateral export values and trade participation. These effects are increasing in trade policy risk across products and asymmetric for UK and EU exporters. We estimate that a persistent doubling of the probability of Brexit at the average disagreement tariff of 4.5% lowers EU-UK bilateral export values by 15 log points on average, and more so for EU than UK exporters. Neither believed a trade war was likely.
Corresponding Author: Limao: University of Maryland, Economics Dept.,Tydings Hall, College Park, MD 20742. We acknowledge financial support from the NSF under grant SES-1360780 (Limao). We received helpful comments from Sebastian Sotelo and seminar participants at Maryland, Michigan, Chicago Booth, the London School of Economics, World Bank and the Bank of Canada. J. Frank Li provided excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.