Trade effects of policy uncertainty: Evidence from the Brexit referendum

This paper examines the trade effects of increased trade policy uncertainty following the Brexit referendum by viewing the referendum’s influence on UK exports of goods to EU27 during the time period 2012-2019. This is done to give insight of how trade policy uncertainty can impact real economic behaviour, even when no classical trade barriers are changed. Methodologically, this is approached by employing a modified gravity model with fixed effects estimating the counterfactual of what UK exports would have been like, without the treatment effect of the referendum, and exploring how this correlates with an uncertainty level index. The estimator used is Ordinary Least Squares in a panel framework outlining monthly exports of goods from UK to EU27 at a 2-digit HS product level. The results indicate that the Brexit referendum has reduced UK exports to EU27 from 2012-2019 by approximately 2,7% from what they otherwise would have been, ceteris paribus. The decrease is interpreted as being a probable result of increased trade policy uncertainty due to the Brexit referendum by deferring UK firms to enter the EU exporting market or choosing to exit and lowering their competitiveness on the EU market. (Less)