Brexit: Trade Diversion Due to Trade Policy Uncertainty

Abstract

During the long process of negotiation after the 2016 Brexit referendum there was a high uncertainty about the final shape of bilateral trade relations between the European Union (EU) and the United Kingdom (UK), especially for particular sectors and firms. Given this context, the paper explores whether a fraction of Spanish trade with the UK was diverted to other markets after the referendum as a function of Spanish firms’ exposition to the British market. The paper shows that firms more exposed to that particular market (above 10% of foreign sales and purchases) were able to almost fully divert the shock in their sales and purchases, mostly to other European countries. Instead, there was an heterogeneous responses of Spanish firms with a low share of British bilateral flows over total trade. Given a particular share, trade diversion appears to be more limited for imports relative to exports and for big companies.

Keywords: policy uncertainty, Brexit, trade diversion

JEL Classification: F02, F13, F14, F15, F61, F68