The costs and benefits of leaving the EU: trade effects

This paper estimates the welfare effects of Brexit, focusing on trade and fiscal transfers. We use a standard quantitative general equilibrium trade model with many countries and sectors and trade in intermediates. We simulate a range of counterfactuals re ecting alternative options for EU-UK relations following Brexit. Welfare losses for the average UK household are 1:3% if the UK remains in the EU's Single Market like Norway (a \soft Brexit"). Losses rise to 2:7% if the UK trades with the EU under World Trade Organization rules (a \hard Brexit"). A reduced form approach that captures the dynamic effects of Brexit on productivity more than triples these losses and implies a decline in average income per capita of between 6:3% and 9:4%, partly via falls in foreign investment. The negative effects of Brexit are widely shared across the entire income distribution and are unlikely to be offset from new trade deals.