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Trade effects of Brexit for the Netherlands

CPB Background Document, 9 June 2016

On June 23th the United Kingdom (UK) will hold a referendum on its European Union’s (EU) membership. Brexit will occur in the event of a leave vote and this will have far-reaching consequences. Brexit will affect all legal, economic and political relationships between the UK and the EU. In this paper we focus on the medium- to long-term trade consequences of Brexit. In particular, we look at the potential trade and macroeconomic effects that Brexit will have for the Netherlands.

Read also CPB Policy Brief 2016/07 and the accompanying press release.

This background document describes the methodology used to derive the numerical results used in the CPB Policy Brief 2016/07 entitled ‘Brexit costs for the Netherlands arise from reduced trade’.

In this background document, we focus on the medium- to long-term trade consequences of Brexit. In particular, we look at the potential trade and macroeconomic effects that Brexit will have for the Netherlands.  Given the uncertainty about the ultimate relationship between the EU and the UK after Brexit, we employ a scenario-based analysis that simulates the expected economic effects of the most likely trade policy outcomes.  In the first scenario, the trade between the UK and the EU will be bounded by WTO rules --i.e. tariffs will increase to the most-favoured nation levels and non-tariff barriers (NTB) costs will increase as a consequence of the UK leaving the EU's single market. In the second scenario, the UK successfully negotiates a free trade agreement (FTA) with the EU, but only after 10 years. Once this new FTA is in place, tariff levels will return to zero, but NTB costs will remain half-way between EU membership and the non-EU NTB levels. 

We simulate these scenarios with WorldScan, the CPB in-house CGE model.  For both scenarios we find that Brexit will significantly reduce bilateral trade between the UK and the Netherlands, which reduces GDP and real income per capita. The size of the losses is directly related to the kind of the post-Brexit trade deal. The effects will be larger for the UK than for the rest of the EU.

The Netherlands has larger trade flows with the UK than the average EU country and will therefore suffer larger trade and GDP losses. Dutch GDP is expected to decrease by around 1.2% when Brexit leads to a WTO-based trade relation between the UK and the EU. If a trade agreement is reached after Brexit, the losses will be mitigated (0.9%) but still significant. Our main scenario assessment should be taken as a lower-bound estimation of potential economic losses from Brexit. First, we only consider the trade-related effects of Brexit and do not evaluate other potential economic impacts (e.g. short term volatility and adjustment costs, FDI, migration, and financial effects). Secondly, increased trade costs may generate changes in innovation that positively affect productivity which would aggravate the costs of Brexit for the Netherlands.

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