Brexit: an economy-wide impact assessment on trade, immigration, and foreign direct investment

Abstract

We assess the impacts of Brexit on the UK economy along three dimensions: EU market access based on consideration of tariffs and non-tariff barriers, reduced numbers of EU citizens working in the UK, and reductions in FDI. Using a Computable General Equilibrium model with an integrated Melitz (Econometrica 71(6): 1695–1725, 2003) framework, we consider capital accumulation and population size feedback on tax income and demand for public services. In the worst-case scenario where all dimensions are considered simultaneously, welfare losses of approximately 1100 USD per UK citizen are predicted, exceeding the results of many other studies, which we attribute to our relatively comprehensive scenario design and application of the Melitz framework for manufacturing sectors. We find that a reduced labor force as a consequence of expected reduced immigration to the UK has the greatest welfare impact. Therefore, policy measures that increase labor participation and/or allow for continued immigration of workers could mitigate negative impacts of Brexit.