Breaking Down Brexit’s Trade Bite

While the ordeal known as Brexit finally ended with a new trade deal taking effect last month, the years of uncertainty preceding the messy divorce between the United Kingdom and European Union have already damaged international trade, according to new research led by a University of Maryland economist.

The research spans the period starting when the Conservative Party won the general election in Britain in May 2015 through the passage of the Brexit referendum in June 2016, signaling the U.K.’s intentions to leave the E.U. In a series of papers summarized in a column published by the Centre for Economic Policy Research, the researchers showed that as the probability of Brexit increased, the value of traded U.K. goods and services declined significantly.

“Long before any actual policy changes took place, the uncertainty surrounding Brexit was enough to have a seriously negative impact on the U.K. trade with the E.U. in goods and services,” said economics Professor Nuno Limão, who led the research. “We also found that this spilled over to trade partners outside the E.U.—such as South Korea, Turkey and Israel with which the U.K. will have to renegotiate current agreements that operated through the EU.”

Although a Brexit agreement has finally arrived and the U.K. government is busily negotiating new trade pacts with governments around the world, it’s going to take time for firms to learn and adapt to the new rules, meaning the period of uncertainty is far from over, Limão said. The rough road to Brexit laid out in the research can serve as a kind of guidebook for what to avoid in future trade talks.

“Economic leaders need to use this as a lesson for future trade negotiations and understand the consequences of so much uncertainty,” he said.

Co-authors on this research include UMD economics alumni Kyle Handley Ph.D. ’11, now an associate professor at the University of California-San Diego, and Alejandro Graziano PhD ’20, now an assistant Professor at the University of Nottingham.