UK in a Changing Europe Fellowship

What types of trade agreements should the UK join post-Brexit? The world trading system, comprised of multilateral, mega-regional, and bilateral trade agreements offers multiple paths forward for the future of UK trade. Which path to take depends crucially upon answers to questions like: How do the complex features of overlapping international trade agreements impact the choices of globally-engaged firms? How do trade policy and commitments over domestic policy among trading partners affects firms' decisions to enter and exit foreign markets, set prices and export volumes, and adopt production technologies?

The UK's future trade agreements must be crafted in a global environment in which the future direction of the world trading system is uncertain. The largest multilateral agreement, the World Trade Organization, is struggling to cope with some of the most intractable problems in international economic policy, including state support of industry and the protection of intellectual property. Mega-regional agreements, like the European Single Market, face serious complaints about rules and practices that infringe on national sovereignty and lack popular democratic support. Bilateral and smaller regional agreements are proliferating, but their value in creating trade seems to vary considerably.

Under this Fellowship, I will conduct research to better understand how individual firm responses to government policy and international agreements aggregate to global trade flows and, hence, impact welfare. Firstly, I will conduct empirical research estimating a firm and product level gravity model of trade, with detailed information on bilateral tariff preferences and the content of trade agreements provisions. This project will provide valuable guidance to policymakers regarding the global input sourcing choices of UK firms and the influence that specific trade agreements provisions exert over these decisions.

To evaluate the impacts of trade agreements, policymakers use standard economic models that assume markets within a country are competitive - that is, firms have no power to markup their prices over cost. I propose to build a multi-country model of trade featuring oligopolistic competition among producers charging variable markups and the use of local distribution services. Final consumer prices will thus embody foreign production costs, a global and destination-specific markup charged by the foreign producer, and a local distribution margin. Applying this model to analysis of proposed bilateral, regional, or multilateral trade agreements will highlight heterogeneity in changes to international and domestic prices across firms and industrial sectors under different types of trade agreements.

Finally, I will examine firms' choices of currencies in which to invoice their international sales. International trade is founded on micro transactions in different currencies. The currency in which exporters set their prices determines the degree to which movements in exchange rates affect the relative prices of internationally traded goods with implications for how export and import volumes will respond to large exchange rate shocks. Two projects will examine how (1) competition in foreign markets influences a firm's choice of an invoicing currency and (2) the relationship between the number of different currencies a firm uses for its foreign sales and the financing available to a firm.

This research will fill important gaps in policymakers' knowledge about UK trade which can be used to better predict the likely outcomes of different proposed trading arrangements. Regardless of the form Brexit takes, the need for concrete facts and more accurate models to evaluate policy is indisputable.

As a Senior Fellow, insights from my research will be used to inform evidence-based policy decisions around future trading arrangements for the UK post-Brexit. The new methodologies that I develop will enable more accurate policy evaluation and economic analysis of trade agreements.

The research proposal has been designed with policy relevance in mind. My four research outputs will target the following policy objectives: (1) identifying what form(s) of trade agreements will be most beneficial to UK trade post-Brexit, (2) developing a multi-country model of trade, featuring realistic firm-level behaviour, that can be used for evaluating the impact of different types of proposed trade agreements on the UK, and (3) estimating important parameters of economic models that capture pricing behaviour of UK firms that trade goods internationally.

The primary beneficiaries of my research are therefore policy officials and civil servants from the Department for International Trade (DIT), the Department for Exiting the European Union (DexEU), HM Treasury, and the Bank of England who are responsible for designing and negotiation trade agreements, forecasting growth and tax revenue, and conducting monetary policy. The ultimate beneficiaries will be the British public who will benefit from a more evidence-based public policy.

To disseminate the implications of this research to key beneficiaries, I will (1) hold a minimum of four in-house seminars at DIT or DexEU and two 'retreat style' policy workshops for a similar audience in Cambridge, (2) write four research articles designed to answer prominent policy questions, (3) share at least four accessible, non-technical policy articles on platforms that reach policymakers and the popular press, and (4) present my research at seven high-profile academic conferences over the Fellowship's three years.

I have based this programme of impact activities on the effectiveness of similar work on my Brexit priority grant. Feedback from two successful half-day workshops at DIT in 2017 clearly articulate the need for this type and format of knowledge exchange. My accessible policy briefs have bridged the gap to reach the popular press - two articles at VoxEU.org on the trade impact of Brexit have been read more than 30,000 times, and have led to research citations in The Economist, The Financial Times, Bloomberg News, The Telegraph and many BBC radio programs.

Responsiveness to the requirements of my stakeholders and flexibility to the changing environment will characterise my proposed dissemination program. For this reason, I have budgeted for the time, resources and skills of the Cambridge Faculty of Economics Knowledge Transfer Facilitator (KTF). The KTF will be responsible for project managing the policy workshops, enabling a continuous feedback and improvement loop. In tandem, the KTF will monitor the policy landscape to increase the instances where my research findings can be shared with relevant non-academic audiences.

Initially, the proposed impact activities will aid policymakers by providing answers to relevant policy questions post-Brexit. The new methodologies that I develop could be adopted to enable more accurate policy evaluation and economic analysis of trade agreements. Deepened engagement with UK policymakers and an expanded network will mean that I can continue to contribute to evidence-based policy formation in the future, beyond the tenure of this fellowship.