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posted on 30 December 2017

Brexit Through The Gift Shop: No Refunds

from the Dallas Fed

-- this post authored by Michael Sposi and Kelvinder Virdi

Britain voted to leave the European Union (EU) on June 23, 2016, setting the stage for the government to notify the EU of its intention to withdraw from the trade bloc by March 2019. While British voters were optimistic that greater protectionism would provide a gift of improved economic well-being, theory suggests otherwise.

Brexit, the common term for the United Kingdom’s departure from the EU, will likely significantly affect trade, foreign direct investment and immigration between Britain and much of the continent.

While Brexit will result in new policies, trade is likely to be among the most apparent changes, with the possibility of new barriers affecting economic activity and welfare. The U.K.’s negotiation with the EU and affiliated countries regarding new trade rules will determine Brexit’s economic ramifications. As an EU member, the U.K. has access to the European Single Market and largely duty-free trade.

If officials cannot reach an agreement with the EU by March, they may have to fall back on the tariffs and quotas set by the World Trade Organization (WTO) - a scenario often referred to as “hard" Brexit.

Assuming that the U.K. leaves the EU B Brexit Through the Gift Shop: No Refunds by Michael Sposi and Kelvinder Virdi and a new regime of tariffs follows, higher trade costs could mean the average U.K. household will incur an added expense of about 428 pounds or $580 in 2016 prices, analysis suggests. In aggregate, the EU will experience much milder overall effects that equate to a 0.10 percent loss in welfare. Non-EU members will not be meaningfully affected. Even if the U.K. and the EU enter a free-trade agreement in the future, Brexit will impose short-run losses.

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