The impact of trade policy and exchange rate shocks on trade volumes and prices in post-Brexit Britain

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How will Brexit affect the development and growth of British manufacturing firms? Britain's popular referendum vote to exit from the European Union has created a great deal of uncertainty about the future of Britain's external trade relations with countries that belong to the European Union as well as with other major trading economies external to the EU, including the United States and China. With the government preparing for exit negotiations, little is known about the future external trade policy the UK government intends to establish with regard to European Union states as well as with non-EU countries.Theresa May's announcement of her intention to withdraw Britain from the single market implies that Britain will be confronted with the task of conducting its trade policy independent of the EU. The imminent de-coupling of Britain's external trade policy from that of the EU raises a host of questions about the appropriate conduct of both trade and monetary policy to serve the needs of manufacturers located in Britain and the British population. For example, the EU (inclusive of Britain) currently has in place import restrictions on products that constitute roughly 7 percent of China's exports to the EU (Bown and Crowley, 2016). When Britain formally leaves the EU, the import protection afforded by these restrictions will disappear and Britain will have to decide whether it wants to re-institute new tariffs on these goods or go forward with a freer trade policy. Key to making a sound policy choice will be an understanding of the consequences of not only any tariff imposed by Britain, but also how the existence of the EU tariff will impact Britain's trade and domestic import-competing manufacturers who have been battered by intense global competition. Other practical and pertinent questions raised by Brexit include: How much will the price of Britain's imports rise as a consequence of the pound's devaluation? How will the volume of its exports change when the relative price of its imported inputs increases and the relative price of its exports fall on world markets? Which industrial sectors will benefit the most from the competitive advantage in foreign markets arising from the pound's devaluation? How will a new EU or US import tariff on Chinese steel affect British steel manufacturers?In order to predict the impacts of trade policy and exchange rate movements on important variables like import prices and export volumes, economic models need as inputs crucial parameters like the responsiveness (elasticity) of import prices to exchange rate movements and the responsiveness (elasticity) of British imports to changes in trade policy around the globe. How to identify and estimate these crucial parameters is an open research question in economics.The proposed project will address these challenges by developing economic models and estimating the key parameters of these models in order to answer these questions. To achieve this, we will develop the implications of Corsetti and Dedola (2005) and Bown and Crowley (2007), will build upon the existing methodologies in Bown and Crowley (2006, 2007) and Crowley, Song and Meng (2016), will build new and unique datasets, and will develop novel methodologies where necessary to inform, in a timely fashion, new questions that are raised by Brexit. The proposed research would result in cutting edge, timely economic analysis and forecasts. We will proactively engage with key stakeholders of this research in a targeted and timely way, namely (1) civil servants who will need to support the design, conduct and implementation of trade and monetary policy, (2) policy makers who must decide on the design of these two areas of policy, and (3) manufacturing firms and (4) manufacturing sector workers who will be impacted by the consequences of these policy choices.