The Collapse of EU Trade Relations: A Worst Case Scenario?

Abstract

This paper explores the welfare implications of two Brexit scenarios: no-deal Brexit, compared to the complete break-up of the EU where all EU member states are left to trade on WTO-only rules. Using a structural gravity approach, our estimates suggest that the rest of the EU countries have much more to lose from the disintegration of the EU compared to a disorderly Brexit. This analysis allows us to develop an understanding of the reasons for the resistance towards accepting the UK’s demands during the Brexit process. At the same time, neighboring developing and post-transition countries, such as Algeria and Ukraine, are expected to benefit from EU disintegration because they would increase their trade competitiveness with the EU relative to the other EU countries.

Keywords: Gravity model, trade policy, Brexit, EU

JEL Classification: F13, F14