Example 11.4 Demand and Cost for Electricity Modeling Possibilities.
Consequences of Brexit and Options for “Global Britain” · -Example: UK’s nal demand for cars...
Transcript of Consequences of Brexit and Options for “Global Britain” · -Example: UK’s nal demand for cars...
This seminar series is an activity in the framework of FIW ('Forschungsschwerpunkt InternationaleWirtschaft'), which is a project designed to build a center of excellence in research on InternationalEconomics, funded by the Austrian Ministry of Science, Research and Economy (BMWFW).
Consequences of Brexit and Options for “Global Britain”
Tristan KohlUniversity of Groningen, The NetherlandsThe presentation is based on a paper co-authored with Steven Brakman (University of Groningen) and Harry Garretsen (University of Groningen).
Seminar in International Economics15 May 2017
Brexit Methodology Data Scenarios Conclusion
Consequences of Brexit andOptions for “Global Britain”
Steven Brakman, Harry Garretsen and Tristan Kohl1
1University of Groningen
wiiw SeminarMay 15, 2017
Brakman, Garretsen and Kohl Brexit May 15, 2017 1 / 31
Brexit Methodology Data Scenarios Conclusion
Timeline
- 2013-01-23: PM Cameron announces in-out referendum ifConservatives are re-elected into government.
- 2015-05-07: Tories re-elected.
- 2015-05-28: Bill passed to enable in-out referendum.
- 2015-11-15: PM Cameron announces Britain’s goals in EUreform negotiations.
- 2016-02-22: PM Cameron announces the date of the in-outreferendum and discusses the outcome of renegotiation of EUmembership in the House of Commons.
- 2016-04-13: “Vote Leave” is official Out campaign.
- 2016-06-23: Referendum.
- 2016-06-24: Leave wins (51.9% of votes, turnout 72.2%).
Brakman, Garretsen and Kohl Brexit May 15, 2017 2 / 31
Brexit Methodology Data Scenarios Conclusion
2017-03-29: HM Government 2017, p. 8
I UK aims to “forge a new strategic partnership with the EU,including a wide-reaching, bold and ambitious free tradeagreement”. . .
I . . . and “forge ambitious free trade relationships across theworld.”
Key question: What are viable options for the UK?
Brakman, Garretsen and Kohl Brexit May 15, 2017 3 / 31
Brexit Methodology Data Scenarios Conclusion
Contribution
I Quantify consequences of Brexit for UK and other majoreconomies
I Explore viability of trade policy options for the UK
I Results in terms of countries’ trade, in particular value addedexports
Brakman, Garretsen and Kohl Brexit May 15, 2017 4 / 31
Brexit Methodology Data Scenarios Conclusion
METHODOLOGY
Brakman, Garretsen and Kohl Brexit May 15, 2017 5 / 31
Brexit Methodology Data Scenarios Conclusion
Structural Gravity
I Starting point: Structural Gravity with CES preferences acrosscountries for national varieties differentiated by place of origin(Armington 1969, Anderson 1979).
I Related applications: Egger & Larch (2011 EER), Head &Mayer (2014).
I Today, specific methodology set out in recent papers byAnderson, Larch and Yotov (see a.o. Anderson, Larch & Yotov2015; Anderson & Yotov 2016 JIE; Larch & Yotov 2016).
Brakman, Garretsen and Kohl Brexit May 15, 2017 6 / 31
Brexit Methodology Data Scenarios Conclusion
Structural Gravity
Xij =YiEj
Y(
tijΠiPj
)1−σ (1)
Π1−σi = Σj(
tijPj
)1−σ Ej
Y(2)
P1−σj = Σi (
tijΠi
)1−σYi
Y(3)
pi = (Yi
Y)
11−σ
1
βiΠi(4)
Ei = φiYi = φipiQi (5)
Brakman, Garretsen and Kohl Brexit May 15, 2017 7 / 31
Brexit Methodology Data Scenarios Conclusion
Procedure
I Estimate baseline gravity equation.
I Predict baseline trade costs.
I Introduce counterfactual change in trade costs (e.g. Brexit).
I Iteratively solve to obtain counterfactual MRTs, trade andoutput.
I Calculate % change in normalized trade (welfare) w.r.t.baseline.
Brakman, Garretsen and Kohl Brexit May 15, 2017 8 / 31
Brexit Methodology Data Scenarios Conclusion
Procedure
Step 1: Baseline
Xijt = exp[πi + pj + η1ln(DISTij) + η2CNTGij + η3BRDRij + η4TAijt ] + εijt
tBSLNijt = exp[η1ln(DISTij) + η2CNTGij + η3BRDRij + η4TAijt ] + εijt
Step 2: Counterfactual
tCFLijt = exp[η1ln(DISTij) + η2CNTGij + η3BRDRij + η4TACFLijt ] + εijt
Step 3: Solve the Baseline and Counterfactual Model
Brakman, Garretsen and Kohl Brexit May 15, 2017 9 / 31
Brexit Methodology Data Scenarios Conclusion
Solution (see Anderson et al., 2016)
Partial equilibrium for given MRTs, production and expenditure
Xij =YiEj
Y(tCFLijt
ΠiPj)1−σ
Conditional general equilibrium for changed MRTs, givenproduction and expenditure
Π1−σi = Σj(
tCFLijt
Pj)1−σ Ej
Y
P1−σj = Σi (
tCFLijt
Πi)1−σYi
Y
Brakman, Garretsen and Kohl Brexit May 15, 2017 10 / 31
Brexit Methodology Data Scenarios Conclusion
Solution (see Anderson et al., 2016)
Full endowment general equilibrium
pi = (Yi
Y)
11−σ
1
βiΠi
Ei = φiYi = φipiQi
Brakman, Garretsen and Kohl Brexit May 15, 2017 11 / 31
Brexit Methodology Data Scenarios Conclusion
DATA
Brakman, Garretsen and Kohl Brexit May 15, 2017 12 / 31
Brexit Methodology Data Scenarios Conclusion
Value Added Exports
I Value Added Exports (a la Johnson & Noguera 2012) is moreclosely linked to incomes of countries involved in grossexports, including (non-tradable) services used in producingtradable goods.
- Example: UK’s final demand for cars with German and Polishintermediate goods.
- Example: Austria’s final demand for Dutch chemicals usingBritish financial services.
- For simplicity, we make no distinction between manufacturingand services.
Brakman, Garretsen and Kohl Brexit May 15, 2017 13 / 31
Brexit Methodology Data Scenarios Conclusion
WIOD Country Coverage
Europe Asia and Pacific North America Latin AmericaAustria Germany Norway Australia Canada BrazilBelgium Greece Poland China USA MexicoBulgaria Hungary Portugal IndiaCroatia Ireland Romania IndonesiaCyprus Italy Slovakia JapanCzech Republic Latvia Slovenia KoreaDenmark Lithuania Spain RussiaEstonia Luxembourg Sweden TaiwanFinland Malta Switzerland TurkeyFrance Netherlands United Kingdom
Brakman, Garretsen and Kohl Brexit May 15, 2017 14 / 31
Brexit Methodology Data Scenarios Conclusion
Data
I World Input-Output Database, 43 countries, 2014. Ca. 85%of world output.
I Geographic distance, common border (Mayer and Zignano,2011).
I Trade agreements (binary indicators from Kohl 2014; WTO).
I Robustness: gross exports, and VAX from both TIVA andWIOD for different years — qualitatively similar conclusions.
Brakman, Garretsen and Kohl Brexit May 15, 2017 15 / 31
Brexit Methodology Data Scenarios Conclusion
SCENARIOS
Brakman, Garretsen and Kohl Brexit May 15, 2017 16 / 31
Brexit Methodology Data Scenarios Conclusion
I. Consequences of Brexit
I Hard Brexit: abandon FTAs with EU-partners
I Soft Brexit: retain FTAs with EU-partners
Brakman, Garretsen and Kohl Brexit May 15, 2017 17 / 31
Brexit Methodology Data Scenarios Conclusion
Figure: “Hard Brexit”. Bubbles proportional to VAX in 2014.
Brakman, Garretsen and Kohl Brexit May 15, 2017 18 / 31
Brexit Methodology Data Scenarios Conclusion
Figure: “Hard Brexit”. Bubbles proportional to VAX in 2014.
Brakman, Garretsen and Kohl Brexit May 15, 2017 19 / 31
Brexit Methodology Data Scenarios Conclusion
Figure: “Soft Brexit”. Bubbles proportional to VAX in 2014.
Brakman, Garretsen and Kohl Brexit May 15, 2017 20 / 31
Brexit Methodology Data Scenarios Conclusion
II. Options for Global Britain
I UK-US TA.
I All-But-EU TA.
Brakman, Garretsen and Kohl Brexit May 15, 2017 21 / 31
Brexit Methodology Data Scenarios Conclusion
Figure: “UK-US TA”. Bubbles proportional to VAX in 2014.
Brakman, Garretsen and Kohl Brexit May 15, 2017 22 / 31
Brexit Methodology Data Scenarios Conclusion
Figure: “All-But-EU TA”. Bubbles proportional to VAX in 2014.
Brakman, Garretsen and Kohl Brexit May 15, 2017 23 / 31
Brexit Methodology Data Scenarios Conclusion
III. Is It Raining or Pouring?
I US terminates NAFTA membership.
I Brexit, Frexit. . . EU collapses.
I Abolition of all TAs.
Brakman, Garretsen and Kohl Brexit May 15, 2017 24 / 31
Brexit Methodology Data Scenarios Conclusion
Figure: “Amexit NAFTA”. Bubbles proportional to VAX in 2014.
Brakman, Garretsen and Kohl Brexit May 15, 2017 25 / 31
Brexit Methodology Data Scenarios Conclusion
Figure: “Collapse EU”. Bubbles proportional to VAX in 2014.
Brakman, Garretsen and Kohl Brexit May 15, 2017 26 / 31
Brexit Methodology Data Scenarios Conclusion
Figure: “Collapse TAs”. Bubbles proportional to VAX in 2014.
Brakman, Garretsen and Kohl Brexit May 15, 2017 27 / 31
Brexit Methodology Data Scenarios Conclusion
CONCLUSION
Brakman, Garretsen and Kohl Brexit May 15, 2017 28 / 31
Brexit Methodology Data Scenarios Conclusion
Conclusion
I Uncertainty about what PM May’s envisioned “optimaloutcome” should be (or is).
I Paradoxical outcome: UK needs FTA with EU to “breakeven” in a post-Brexit world.
Brakman, Garretsen and Kohl Brexit May 15, 2017 29 / 31
Brexit Methodology Data Scenarios Conclusion
Further Reading
I Baldwin, RE (ed.), 2016. “Brexit Beckons: Thinking Aheadby Leading Economists.” CEPR Press.
I Dhingra, S, H Huang, G Ottaviano, J-P Pessoa, T Sampson,and J Van Reenen, 2017. “The Costs and Benefits of Leavingthe EU: Trade Effects.” CEP Discussion Paper No. 1478.
I Larch, M. and YV Yotov, 2016. “General Equilibrium TradePolicy Analysis with Structural Gravity.” CESifo WorkingPaper No. 6020.
I Los, B, P McCann, J Springford, and M Thissen, 2017. “TheMismatch Between Local Voting and the Local EconomicConsequences of Brexit.” Regional Studies 51(5): 786–799.
Brakman, Garretsen and Kohl Brexit May 15, 2017 30 / 31
Brexit Methodology Data Scenarios Conclusion
Thanks for your attention!
Consequences of Brexit and Options for “Global Britain”
CESifo Working Paper 6448
Steven Brakman, Harry Garretsen and Tristan Kohl
www.tristankohl.org
Brakman, Garretsen and Kohl Brexit May 15, 2017 31 / 31