The EU–UK Trade and Cooperation Agreement: A short and long-term comprehensive analysis including FDI

Abstract

This study thoroughly assesses the impact of Brexit through trade, combining a static and dynamic computable general equilibrium (CGE) model and a structural gravity model. Our analysis allows us to shed light on the role of trade and the potential effects of foreign direct investment (FDI), which has received less attention in the context of Brexit. We simulate a hard Brexit and the new trade and cooperation agreement negotiated by Boris Johnson. We analyse several reductions in the United Kingdom's (UK) capital stock, consistent with the empirical evidence on potential reductions in the FDI capital stock after Brexit. This approach allows us to disentangle the effects of trade's static (short-term) impact from its dynamic (long term) impact. We focus on the impact for the UK but offer macro-economic results for the European Union (including individual countries), the United States, China and the rest of the world. The gravity model estimates considerably larger contractions in the UK's gross domestic product but a smaller role for FDI than the CGE. UK services sectors are affected more negatively than what previous analyses of Brexit focusing on trade suggest.