Speaker: Michele Ruta, World Bank
Title: Deep Integration and UK-EU Trade Relations
This paper studies the impact of deep agreements on UK-EU trade relations. Specifically, we apply a standard gravity model to assess the effect that EU membership had on UK trade and then use the estimates from this analysis to evaluate the future of UK-EU trade relations under different scenarios. The key finding is that as the UK benefited from large trade gains from EU membership, its undoing may lead to substantial trade losses. Differently from previous studies, we use new information on the content of trade agreements to build a measure of “depth” based on the number of provisions they cover and we rely on information on goods, services and value added trade from the World Input Output Database (WIOD). Deep trade agreements are found to increase goods and services trade by 42 percent and value added trade by 14 percent on average. EU membership had a particularly strong effect on UK-EU services and Global Value Chains (GVC) trade. As a result of its membership, UK services trade more than doubled and UK’s backward and forward participation in GVCs increased by more than 30 percent each. We then use these estimates to evaluate the future of UK-EU trade under different scenarios. We find that UK-EU trade declines under all scenarios, ranging between 6 and 28 percent for trade in value added, and that this drop is sharper (particularly for services and GVC trade) the lower the depth of the future arrangement relative to the depth of the EU agreement. As trade flows adjust slowly to changes in trade costs, these effects are expected to emerge over time. But the tradeoff between the depth of trade agreements and trade intensity will delimit policy choices going forward.