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Brexit Caused A Large Negative Effect On UK Trade Pre-Pandemic

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New research from economics experts at Aston University has found Brexit has caused a largely negative effect on UK services trade since the EU referendum.

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Professor Jun Du and Dr Oleksandr Shepotylo, from Aston Business School, analysed the causal effect of the Brexit referendum on UK’s services trade over the period between 2016 and 2019, in comparison to other major services exporters.

They found the uncertainty associated with the UK-EU trade negotiations following the referendum caused harms to the UK services economy as a whole, reducing firms’ exports of services. This damages the competitiveness of services sectors which make up a lion’s share of the UK economy in terms of gross output, value-added and jobs.

Professor Du and Dr Shepotylo used a Synthetic Difference in Differences (SDID) estimator to construct a counterfactual of the UK, had it not voted leave in 2016, to compare its services exports performance. This was done by comparing the actual performance of the UK with the modelled performance of a country that looks much like the UK, but did not vote to leave the European Union.

They found Brexit resulted in the UK experiencing an average shortfall of £18.5 billion worth of services exports every year between 2016 and 2019 relative to what it would have been, had the UK remained in the EU.

The impact varied considerably between different types of services. The UK’s exports in the category of transport, travel, insurance and telecom services saw a statistically significant decline following the referendum. No significant decline was found in business, intellectual property, construction, financial or personal, cultural and recreational services. In addition, Professor Du and Dr Shepotylo did not find evidence to suggest that UK businesses have redirected exports in services from the EU markets to those outside the EU, which is in contrast to exports in goods.

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The research suggested that Ireland has benefited significantly during this period, with growth in post-Brexit services exports up by £24 billion annually over 2016 to 2019 in the country compared to the counterfactual scenario if Brexit did not occur. This translates to 14.75% of Ireland’s 2019 total services exports, with growth clustered largely in the telecoms, business, intellectual property, and insurance sectors.

Jun Du, professor of economics at Aston Business School, said:

“Brexit marked a rupture in the highly integrated UK-EU services markets that had been developed during the UK’s membership of the single market. However, the UK’s strength in services was not reflected in the government’s ambitions for the sector in the EU-UK trade negotiations that followed the referendum.

“There are other winners besides Ireland in some post-Brexit services areas. The Netherlands have increased considerably in ‘Business’ and ‘Intellectual Property’ exports.

“Spain has seen growth in ‘Travel and transport’ services exports. Germany has gained in ‘Transport’, ‘Insurance’, ‘Telecom’ and ‘Intellectual Property’ services exports. While Ireland seems to have done exceptionally well in relation to the export of ‘Telecom’ services, a sharp contrast emerges to the lost exports not just from the UK, but also from the Netherlands, Switzerland and France.”

Dr Oleksandr Shepotylo, a senior lecturer in economics, finance and entrepreneurship at Aston University, co-wrote the working paper and said:

“UK services exports are 5.7% lower than they would be without Brexit. It reflects an overall decline of the UK as a place for doing business.

“What economists tend to agree on is that the UK’s exit from the EU’s custom union and single market may have more significant impacts on services than goods, and more severe impact on post-Brexit regulated services than unregulated services.

“It will take some time for the full impact of Brexit on UK services to emerge. Freedom of movement and data flow in some areas between the UK and EU could remain restricted. Stability, transparency and regulatory consistency in financial markets could be challenged. But new opportunities might surface.

“Continued trade negotiations and dialogues regarding trade liberalisation are essential with the EU and large, fast-growing markets beyond Europe. Crucial to understanding these impacts will be reliable data and rigorous analysis. Our modelling of marked losers and winners in post-Brexit services trade provides new evidence for an open discussion of the post-Brexit trade in services.”

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