Modelling the impact of future trade agreements on the UK economy   

By Dr Anamaria Nicolae and Dr Michael Nower

Dr Anamaria Nicolae and Dr Michael Nower, researchers at the Centre for Banking, Institutions and Development (CBID) at the Business School, have undertaken research regarding the implications of various Brexit related trade scenarios for the United Kingdom’s economy which has had a significant impact on Bank of England analysis, parliamentary scrutiny of Government activity and policy, and the business community.

About the research

The research project was motivated by existing research conducted immediately prior to and after the UK's referendum on EU membership, which focussed on the longer-term impact of the UK leaving the EU. Little focus at the time was given to examining the shorter-term effects of the UK's exit. However, understanding any short-run effects was of vital importance to monetary and fiscal policymakers, as well as to businesses.

Combining Dr Anamaria Nicolae (project leader) and Dr Michael Nower’s expertise in cutting-edge macroeconomic models of international trade, and Professor Stephen Millard’s expertise in conducting policy-oriented research, a three-country macroeconomic model of international trade was developed. This model allowed the quantification of the potential impact of post-Brexit changes in tariff and non-tariff barriers to trade on the UK economy in both the long run and, vitally, in the short run as well.

This model was calibrated so that the three countries in the model corresponded to the United Kingdom, the EU and the Rest of the World (all countries which are not in the EU). This original model was further extended to incorporate the potential changes in unemployment that could result from the UK's exit from the EU.

As the information on the UK's exit from the EU became available, the calibrated models were applied, in a timely manner, to analyse the short-run effect of various changes in tariff and non-tariff barriers to trade. These changes in tariff and non-tariff barriers were adjusted to correspond to various possible trade agreements and future trade scenarios for the UK Post-Brexit. The scenarios that were analysed included a possible No-Deal scenario, which received significant attention from political organisations and the media.  

Impact of the research

1. Since our research could provide unique insights into the dynamic short-run path of the UK economy after withdrawal, it was presented to the Monetary Policy Committee at the Bank of England, which benefitted monetary policymakers by offering a view of the likely path of the UK economy in the months following Brexit.
2. The bespoke macroeconomic model was part of the suite of models employed in the Bank of England’s ‘EU withdrawal scenarios and monetary and financial stability: A response to the House of Commons Treasury Committee’ report, published November 2018, offering unique insights into the effects of various No-deal/no-transition scenarios on the short-run dynamic pattern of GDP, which informed and influenced monetary policy-making; the report received a substantial amount of public and media interest at the time.
3. The Bank’s report and its unique insight into the short-run behaviour of GDP impacted the voting decisions of MPs in their votes on the “indicative vote on No Deal” and “Benn Bill” in the House of Commons.
4. The research contributed to influencing the work of the International Trade Select Committee and other parliamentary bodies on a number of Brexit and trade-related publications; written and oral evidence was given to several inquiries of the International Trade Select Committee, and this evidence was later referred to in the final report to the government. (See The findings of the research project featured in the section below under Publications)
5. The research supported North-East businesses through engagement with the local MEP and the North East England Chamber of Commerce, in particular through the North East England Chamber of Commerce International Trade Committee in their campaigns with local businesses, to both inform them of the necessary changes needed in preparation for Brexit and ensure that these were made. (See the Policy Notes and Briefing Note sections below under Publications)

Further Information

• Read Dr Anamaria Nicolae’s staff profile
• Read Dr Michael Nower’s staff profile
• Read Professor Stephen Millard’s staff profile

Policy Notes 

Future UK Trade Arrangements: Potential Impact on the UK Economy

(This Policy note was previously hosted on the North East England Chamber of Commerce webpage ‘Brexit Knowledge Hub’ in ‘Preparing for Brexit’, offering regional businesses accessible information regarding the implications of different trade scenarios to help them prepare for Brexit and it has been cited by The North East Brexit Group 2018 in their report Leaving the European Union, in which a review of the opportunities, challenges and risks to the North East economy and its key sectors, with recommendations for action are presented.)

Future UK Trade Arrangements: Potential Impact on the European Union Economy 

FAQs 

(Written at the request of the North East England Chamber of Commerce, International Trade Committee, following the circulation on ‘Future UK Trade Arrangements: Potential Impact on the UK Economy’ to the Committee.)

Future UK Trade Arrangements 'No Deal' Mitigation 

Briefing Note 

Analysis of the UK Government’s ‘No-Deal’ Tariff Schedule 

The findings of the research project featured in 

• As a result of our  Written Submission to the International Trade Select Committee UK's trade relationship with Australia and New Zealand Inquiry, we have been invited to give oral evidence to the International Trade Select Committee on 9th January 2019, which has been presented by Dr Nower. 
• Written Submission (published 6th December 2018) to the Treasury Select Committee The UK’s economic relationship with the European Union The submission presents: (1) an economic analysis and forecasts of the short and long-term impact of the Government’s proposed Withdrawal Agreement and the joint Political Declaration; and (2) an economic analysis and forecasts of the short and long-term impact of the UK leaving the EU without a deal and moving to WTO rules both with or without a transition period, by providing our quantitative assessment of the impact of these scenarios on UK GDP, productivity and the average real wage. 
• Written Submission (published 31st January 2018) to the International Trade Select Committee UK's trade relationship with Australia and New Zealand The submission addresses: the nature of two-way trade between Australia, New Zealand and the UK, including the economic significance of UK-Australia and UK-Zealand trade. 
• Written Submission (published 10th January 2018) to the International Trade Select Committee Continuation of the EU's current Free Trade Agreements by the UK post-Brexit The submission addresses two relevant points: (1) grandfathering will play an important role in minimizing reduction in UK GDP post-Brexit, and (2) although grandfathering, in general, is important, many of the EU Free Trade Agreements (FTAs) and other trade-related treaties to which the EU is a party are predicted to have a limited impact on the UK economy. 

This submission has been quoted directly within the body of the House of Commons International Trade Committee report  Continuing application of EU trade agreements after Brexit, First Report of Session 2017–19 (Published on 28 February 2018). 

• Written Submission (published on the 24th of January 2017) to the International Trade Select Committee UK Trade Options beyond 2019  The submission addresses the trade-offs faced by various government priorities, and the key role of imports in determining the effect of trade on the UK economy, based on our work on trade and productivity. 

This submission has been quoted directly quoted in:

• The House of Commons International Trade Committee report  UK trade options beyond 2019, First Report of Session 2016–17 (Published on 7 March 2017). 
• UK trade policy and Brexit, The Scottish Parliament, SPICe Briefing, 7 March 2018.