Trade policy uncertainty facing firms exporting from the UK to the European Union (EU) after the Brexit vote in June 2016 meant that over 5,300 exporters did not start exporting new products to the EU that year, while over 5,400 exporters stopped exporting products to the EU.
These are the key findings of research by Meredith Crowley, Oliver Exton and Lu Han, to be presented at the Royal Economic Society's annual conference at the University of Warwick in April 2019. They find that entry (exit) in 2016 would have been 5% higher (6.1% lower) if firms exporting from the UK to the EU had not faced increased trade policy uncertainty after June 2016.
The study notes that the renegotiation of a trade agreement introduces uncertainty into the economic environment. In June 2016, the UK electorate unexpectedly voted to leave the EU, introducing a new era in which the UK and EU began to renegotiate the terms of their trading relationship.
The researchers make us of this ‘natural experiment’ to estimate the impact of uncertainty associated with trade agreement renegotiation on the export participation decision of firms in the UK. The results show that the switch to a renegotiation regime decreased firm entry into and increased firm exit from exporting to the EU for UK-based firms.
The impact was largest for products facing as threat points (a) higher ‘ad valorem’ tariffs; (b) tariff rate quotas; and (c) specific duties. This suggests that UK firms placed positive probability on the likelihood that negotiations could break down and leave some firms facing substantially higher barriers in exporting to the EU. On average, the threat of a one percentage point increase in the ad valorem tariff decreased (increased) the growth rate of entry (exit) by 1.1 percentage points (0.5 percentage points).
The researchers explore the responses at a more granular level with discrete categories of ad valorem tariffs and other trade policies. They find that:
- ‘Extreme' ad valorem tariffs of more than 15% ad valorem were associated with a 22.4 percentage points decline in the growth rate of entry.
- ‘High' ad valorem tariffs from 10% up to 15% were associated with a 13.2 percentage points decline.
- Tariff rate quotas were associated with a 16.2 percentage points decline.
- Specific duties were associated with a 19.8 percentage points decline.
The researchers estimate the aggregate impact of the trade policy uncertainty by conducting a aggregation exercise to calculate the number of missing entrants into (exiters from) the EU from the UK as a result of the heightened trade policy uncertainty post-Brexit.
This exercise estimates that 5,344 firms did not enter into exporting new products to the EU in 2016, while 5,437 firms exited from exporting products to the EU in 2016, in response to the uncertainty and tariff risk associated with renegotiation of the UK-EU trade agreement.
Overall, entry into (exit from) the EU would have been 5.0% higher (6.1% lower) in 2016 relative to a counterfactual of zero tariffs on all products and no uncertainty about future tariff rates.
These results show that trade policy uncertainty matters for firm exporting decisions and significantly reduces entry into exporting. But as entrants are small in terms of value, the large change in the number of firms entering into and exiting from exporting generated only a moderate impact on aggregate exports in 2016.
Specifically, the study estimates that the decline in entry and induced exit reduced the value of exports by between £394 million and £3.0 billion in 2016, a modest amount relative to total value of UK exports to the EU in 2016 of £139 billion.
‘Renegotiation of Trade Agreements and Firm Exporting Decisions: Evidence from the Impact of Brexit on UK Exports’ by Meredith Crowley, Oliver Exton and Lu Han