Following the United Kingdom’s decision to leave the European Union, the UK economy experienced considerable increases in consumer prices (Breinlich et al. (2022)). We propose to assess how much of the rise in consumer prices was due to increased trade costs following Brexit. Additionally, we plan to examine whether and by how much Brexit increased production within Britain, either through expanded production by domestic firms or reshoring of manufacturing activity from the EU to Britain.
There is a wide consensus that geographic market integration improves the welfare of the average person (Donaldson (2015)). In contrast, studies examining historical market disintegration (e.g. Irwin (2005) and Etkes and Zimring (2015)) find substantial negative welfare effects. Recently, Breinlich et al. (2022) and Bakker et al. (2023) concluded that British consumer prices increased more in product categories with higher initial import shares and higher non-tariff barriers. While suggestive of increased post-Brexit trade costs, analyses comparing the trajectory of consumer prices of foreign products relative to domestic products cannot identify how trade costs changed in the presence of non-trivial general equilibrium effects (e.g. Broadbent et al. (2023)). Utilizing data on consumer prices paid by British and European consumers for the same goods produced in the EU over a long time span, we will quantify the extent to which Brexit induced higher prices via changes in trade costs.
A second potential effect of Brexit was the relocation of production into the UK, either through substitution towards domestically produced products or through reshoring of production by multinationals. If such a relocation has occurred, increased UK employment could have softened or even overturned the welfare effect of increased consumer prices. To date, papers studying the employment effects of Brexit have focused on the short-run effects following the 2016 depreciation (Costa, Dhingra, and Machin (2022)) or pre-2020 policy uncertainty (Javorcik, et. Al. (2020)).
Our proposed projects will contribute to the Keynes Fund objectives by examining the relationship between government policy barriers to international trade, inducing inefficient market allocations, and the welfare effects of those market inefficiencies. In particular, Brexit has potentially increased non-tariff barriers for economic activity involving cross-border transactions. The introduction of such trade barriers may have disrupted the functioning of markets by forcing firms to change their prices and the allocation of multinational production. Our research will shed new light on the magnitude, sources, and ensuing reallocation of cross-country production of this increase in market inefficiencies.
