The Economic Impacts of Post-Brexit Trade Options

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The UK's exit from the European Union presents policymakers with an unprecedented set of challenges, risks and opportunities. Perhaps nowhere are these more significant than in the decisions that the UK will have to make with regard to its future trade policy. It now appears increasingly likely that the UK will end up leaving both the European single market and the Customs Union. This will give the UK the ability to sign its own trade deals, but will undoubtedly pose many problems for those industries and regions of the UK for whom trade with the EU is important. Further steps towards liberalisation with third countries will also likely create both winners and losers.We propose a detailed programme of research with the aim of understanding how new trade arrangements for the UK might affect different industries, regions and workers. We also propose to synthesise existing research on how policy can ease the burden of adjustment associated with potential future trade shocks, which we will discuss in the context of our empirical findings. Our research team is well-placed to do this: drawing together experts on the economics of international trade, labour markets, and the UK's current policy environment.We plan to firstly document the exact nature of the UK's current trade patterns with the EU and the rest of the world. To do this we will draw on the World Input-Output Database (WIOD). This provides information not only on gross trade flows between the UK and different countries, but also on how inputs from different source countries are used by UK industries. This will enable us to paint a detailed picture of the UK's involvement in both global and European value chains. Much of the current public debate on the importance of UK trade with other countries focuses narrowly on the share of UK imports or exports to or from different countries. This however ignores the importance that imported inputs might have for some industries. Our analysis of UK industries will explicitly account for this and thus provide a more complete picture of the role of trade in the UK economy.We will then make use of detailed administrative data on firms to describe the proportions of workers employed in different industries at a high degree of geographic disaggregation. Using this data in conjunction with the WIOD tables, we will be able to quantify the extent to which workers in different regions are potentially exposed to changes in the trade environment because the industries and regions they work in export to, use inputs from, or compete with imports from various different countries or trade blocs. To understand the extent to which greater exposure to trade shocks actually leads to longer-lasting economic impacts on affected workers or regions, we will examine the labour market effects associated with two historic trade shocks. The particular shocks we will examine are the impressive growth of imports from China and the accession of Eastern European countries that occurred over the last two decades; we will also explore the possibility of using other policy reforms. This analysis will be backward-looking. However, we will do it with the aim of understanding the possible impacts of (analogous) trade shocks that might arise if the UK took further steps towards trade liberalisation with relatively low-wage economies in the future.Finally, drawing on our results from the previous exercises, we will undertake a review of possible regional and labour market policies aimed at easing the burden of adjustment for those adversely affected by trade shocks. We will discuss these in the context of the UK's existing policy instruments and measures, including possible replacements for the EU's regional development funds that may occur post-Brexit.Together these four different research strands will allow us to paint a detailed picture of the economic and social consequences of the UK's post-Brexit trade options.