Brexit and global value chains: ‘No-deal’ is still costly

KEY POINTS • The production of exports depends on value chains – between firms in one country and, through global value chains (GVCs), across international borders. Thus exports from one UK sector depend on value added from (and hence generate incomes in) other UK sectors and other countries. • Trade policies and the costs of doing trade apply to the gross value of a trade flow (e.g. a tariff is levied on the whole value of an imported car). But focusing on gross value – e.g. the decline in exports of cars as the cost of exporting to the EU rises - may be misleading because it misses the effects on the sectors and other countries that supply inputs into UK cars. • Even after the immediate logistical disruptions have been smoothed out, a ‘No deal’ Brexit will cut trade with the EU, and although trade with other countries, e.g. China, will increase, it will not do so by enough to make up the loss. Moreover, ‘No deal’ will seriously disrupt global value chains and significantly reduce the UK’s benefits from ‘Factory Europe’. • We study the effects of the barriers to trade in goods that a ‘No deal’ Brexit implies. We estimate that they will cut UK exports of goods by about 18%; nearly one-fifth of that loss of sales will show up as a loss of income in UK service sectors. • The overall loss of UK value added (i.e. income) from the goods trade barriers in ‘No deal’ will be about 4% of GDP. The largest proportionate declines will be in textiles and motor vehicles. • We have not quantified the barriers to services trade under ‘No deal’, but those on goods trade alone are enough to lead the UK service sector to contract by 4% because they cut UK incomes in general and reduce the demand for services as inputs into export sectors. • By raising barriers to trade with the EU, a ‘No deal’ Brexit will worsen the UK’s terms of trade – imports will cost more and exports fetch less. This will directly reduce economic welfare in the UK.