The Economic Impacts of Post-Brexit Trade Options

The UK's exit from the European Union presents policymakers with an unprecedented set of challenges, risks and opportunities. Perhaps nowhere are these more significant than in the decisions that the UK will have to make with regard to its future trade policy. It now appears increasingly likely that the UK will end up leaving both the European single market and the Customs Union. This will give the UK the ability to sign its own trade deals, but will undoubtedly pose many problems for those industries and regions of the UK for whom trade with the EU is important. Further steps towards liberalisation with third countries will also likely create both winners and losers.
We propose a detailed programme of research with the aim of understanding how new trade arrangements for the UK might affect different industries, regions and workers. We also propose to synthesise existing research on how policy can ease the burden of adjustment associated with potential future trade shocks, which we will discuss in the context of our empirical findings. Our research team is well-placed to do this: drawing together experts on the economics of international trade, labour markets, and the UK's current policy environment.
We plan to firstly document the exact nature of the UK's current trade patterns with the EU and the rest of the world. To do this we will draw on the World Input-Output Database (WIOD). This provides information not only on gross trade flows between the UK and different countries, but also on how inputs from different source countries are used by UK industries. This will enable us to paint a detailed picture of the UK's involvement in both global and European value chains. Much of the current public debate on the importance of UK trade with other countries focuses narrowly on the share of UK imports or exports to or from different countries. This however ignores the importance that imported inputs might have for some industries. Our analysis of UK industries will explicitly account for this and thus provide a more complete picture of the role of trade in the UK economy.
We will then make use of detailed administrative data on firms to describe the proportions of workers employed in different industries at a high degree of geographic disaggregation. Using this data in conjunction with the WIOD tables, we will be able to quantify the extent to which workers in different regions are potentially exposed to changes in the trade environment because the industries and regions they work in export to, use inputs from, or compete with imports from various different countries or trade blocs.
To understand the extent to which greater exposure to trade shocks actually leads to longer-lasting economic impacts on affected workers or regions, we will examine the labour market effects associated with two historic trade shocks. The particular shocks we will examine are the impressive growth of imports from China and the accession of Eastern European countries that occurred over the last two decades; we will also explore the possibility of using other policy reforms. This analysis will be backward-looking. However, we will do it with the aim of understanding the possible impacts of (analogous) trade shocks that might arise if the UK took further steps towards trade liberalisation with relatively low-wage economies in the future.
Finally, drawing on our results from the previous exercises, we will undertake a review of possible regional and labour market policies aimed at easing the burden of adjustment for those adversely affected by trade shocks. We will discuss these in the context of the UK's existing policy instruments and measures, including possible replacements for the EU's regional development funds that may occur post-Brexit.
Together these four different research strands will allow us to paint a detailed picture of the economic and social consequences of the UK's post-Brexit trade options.

Our work has the potential to have an important impact on the trade-policy debate in the coming years. We intend to maximise this impact in several ways, drawing on the IFS's extensive experience in this area.

Outputs: We will write up our findings in the form of two IFS reports and two academic working papers. These outputs will be accompanied by non-technical summaries of our main findings that will be made available on the IFS website, and will be press-released using the IFS's exhaustive list of press contacts. We will also make use of the IFS large and growing presence on social media platforms such as Twitter. In addition, we will be prepared to respond in real-time to developments in the discussion of trade policy as they unfold using blog posts ('observations') as and when our work allows us to make useful and informed contributions to the debate.

Steering Committee: In order to best understand and respond to the priorities of possible consumers of our research, at the onset of the work we will assemble a steering committee/advisory group. We will invite civil servants from relevant departments, those working for devolved administrations alongside representatives from business and industry. The committee will meet at several stages during the project, including at the beginning to discuss our initial research plan.

Website tools: We will summarise many of our results on the regional distribution of different industries and their trading relationships with other countries using heat maps. These are likely to be amenable to online dissemination. To this end we will create clickable maps of the UK for our website that will allow users to summarise the particular statistics of our choice. In addition, we propose to provide an online tabulation tool that will allow users to see the contributions of imported inputs to the UK for the industries of their choice (e.g. cars, telecommunications, pharmaceuticals and so on). This will neatly illustrate UK industries involvement in both global and European supply chains in an accessible way. The IFS has prior experience with such tools, including one which allows individuals to see their own position in the income distribution.

Launch events: Due to the regional focus of our work, we propose to hold two outreach events in different parts of the UK, in addition to a launch event in London (which we have budgeted to be live-streamed). These events will be tailored to their local audiences. We will present our general findings alongside information that is more specific to the locations we are visiting (giving for example more detail on local industry composition).

Video: We have budgeted to produce a short, partially animated video that will describe our key results on both the UK's involvement in UK and European value chains, and the importance of exporting and potentially import-competing industries in different UK regions. The IFS has prior experience with this. A similar video made by the IFS in conjunction with the consulting firm Econ Films now has over 4,500 views on Youtube.