A short- and long-term general equilibrium analysis of the impact of Brexit

This paper provides an impact assessment of Brexit and the role of foreign direct investment (FDI) in the United Kingdom (UK). We use both, a static and a dynamic Computable General Equilibrium (CGE) model, which are the Standard Global Trade Analysis Project (GTAP) and the Recursive Dynamic GTAP model, respectively. We offer a comparative analysis, which identifies the role of FDI and barriers to trade in the overall impact of Brexit. Regarding barriers to trade, we study three potential scenarios: soft Brexit, Johnson’s Brexit and hard Brexit. We extend our previous research including the simulation of the new agreement negotiated by Boris Johnson, which would introduce more barriers to trade and FDI than the one struck by Theresa May. To the best of our knowledge there are not many assessments which simulate the new agreement. With respect to FDI, we simulate several levels of FDI reductions. This CGE approach allows to estimate the impact on GDP, welfare, wages, and capital remuneration, together with the evolution of aggregate and sectoral output, exports and imports, for 21 sectors and five regions: UK, European Union (EU), the United States of America (USA), China, and the Rest of the World (ROW). Keywords: Foreign Direct Investment, FDI, Multinationals, Non-tariff Barriers, NTBs, European Union, United Kingdom, Recursive Dynamics. JEL codes: C68, F15, F23, F62