Thursday, February 27, 2020

BREXIT AND US TARIFFS: Trade and income losses likely to be substantially larger than anticipated 
Rita Cappariello, Sebastian Franco-Bedoya, Vanessa Gunnella, Gianmarco Ottaviano   
CEPR DP No. 14423 | 19 February 2020

A new CEPR study by Gianmarco Ottaviano and colleagues finds that previous estimates of the trade and income losses from Brexit, US protectionism and the rise of global trade barriers are substantially under-estimated. Using a new framework, with a richer input-output structure across countries and sectors, the study investigates the relationship between the effects of changes in trade policies and global value chains (GVCs). Among the findings: 

  • For almost all countries, the income effects are considerably larger in a world characterised by the more developed GVCs existing in 2014 than by the less developed GVCs of 2000.
  • On average, income effects in 2014 are 36% larger (and as much as 219% larger for some countries) than in 2000.
  • Accounting for GVCs can make a sizable difference to quantification of the impacts of trade policies on economic activity, prices and income.
  • Impacts can vary substantially both across sectors due to their specific input-output linkages and across countries due their different degree of participation to global production networks.

When the authors apply the model to assess the effects of Brexit under alternative trade policy scenarios, the model predicts a fall in bilateral trade between the UK and the EU that would be more severe in the case in which trade between the two parties fell back to ‘no deal’ terms. This is due to the close integration of UK-EU production networks and implies that denser GVCs amplify the adverse effects of protectionist trade policies. Among the findings:

  • In a free trade agreement (FTA) scenario, exports from the UK to the EU27 fall by -31.4% and -38.3% for intermediates and final goods respectively. Those from the EU27 to the UK fall by -27.3% and -28.2% respectively. While exports from the Rest of the World increase only towards the UK (by 6.9%) for final goods.
  • The trade effects of Brexit are more pronounced in the ‘No Deal’ scenario. Exports from the UK to the EU27 fall by -45.5% and -53.7% for intermediates and final goods respectively. Those from the EU27 to the UK fall by -40.6% and -43.9% respectively. Again, exports from the Rest of the World increase only towards the UK (by 13.9%) for final goods. 
  • For imports, the fall in real flows is more pronounced than for exports in all scenarios, especially for the UK whose imports decrease by more than 15% in the FTA scenario and by more than 20% in the ‘No Deal’ one. 
  • Less trade is associated with lower incomes: UK and EU27 real household income levels decrease respectively by -2.1% and -0.4% in the FTA scenario, and by -3.1% and -0.6% in the ‘No Deal’ scenario.
  • Country-level results show very heterogeneous income losses, with Malta, Luxembourg and Ireland hit the most by Brexit. 
  • The largest price increases are observed for Ireland and Cyprus, due to their heavy reliance on UK final products and intermediate inputs.

Figure 2: The evolution of the GVC network 

Source: WIOD (2016 release) and authors’ calculations.

Note: Each dot (node) in the picture represents a sector in a country. Colours distinguish countries. Gray lines (edges) connecting the dots represent trade flows in intermediate inputs between sectors. To reduce complexity, only nodes with betweenness centrality above 3000 and edges representing flows above 1 billion USD are shown.  

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POPULISM: The latest research evidence
Sergei Guriev, Elias Papaioannou                 
CEPR DP No. 14433 | 22 February 2020

A new CEPR study by Sergei Guriev and Elias Papaioannou reviews the latest research evidence on the recent rise of populism. The authors discuss the role of economic factors, such as trade and automation, non-economic determinants of populism, such as identity politics and cultural backlash, as well as online media, immigration and the refugee crisis. Among the findings: 

  • While there are many definitions of populism, there is a consensus on the lowest common denominator: ‘anti-elitism and anti-pluralism’.
  • Populism is a ‘thin-centred’ ideology or even non-ideology, a style of political discourse.
  • There is a major rise of populism in advanced economies, especially in Europe. In the last two decades, the vote share of populist parties has roughly doubled, and populist parties have taken power in many countries.
  • The rise was especially salient after the Global Crisis. Populists found fertile ground for their anti-elite narrative that now blended old politicians, bankers, technocrats and even academic economists who did not foresee the crisis.
  • The main beneficiaries of this increase have been mostly right-wing, nativist, xenophobic and authoritarian parties rather than pro-redistribution radical-left parties.
  • The specific types of elites that populists target include academics (experts), ‘old’ establishment politicians, unelected technocrats, judges and journalists.
  • Certain key global challenges, such as climate change or antimicrobial resistance, are missing from populist discourse as they are not compatible with anti-expert sentiment.
  • The rise of populism reflects economic factors, both secular (trade and automation) and crisis-related (the rise in unemployment and the crisis-related austerity).
  • Rising competition from imports from low-wage countries, such as China and Vietnam, and increased automation of low/middle-skilled jobs have contributed to stagnated wages among non-college graduates and rising inequality in the West. This in turn has caused an anti-globalisation backlash, a message on which populist leaders often campaign. 
  • There is growing evidence that the internet and online social media have also played a major role.
  • Populists tend to fit complex economic or security issues into simple messages, designed to elicit a ‘with us’ or ‘against the people’ separation of responses. 
  • Even though economics alone cannot account for the spectacular rise of populism, even small-to-moderate effects can be pivotal in bringing populists in power.
  • Economic shocks may have activated pre-existing cultural divides and exacerbated polarisation and identity politics. 
  • Populism has found fertile ground in formerly manufacturing-based communities that have experienced a decline in the recent decades. Small cities specialising in labour-intensive manufacturing have lost jobs, as multinationals moved operations offshore and upgraded technology, and many smaller producers were forced to shut down.
  • There is substantial evidence on the role of immigration. But the direction of the effect is mixed, depending on the magnitude of the influx of refugees and immigrants.
  • Authoritarian populists almost everywhere try to undermine political institutions and remove constitutional checks and balances.

Figure 4: Left-wing and right-wing populists in Europe and Latin America. 

Source: Rodrik (2018a).  

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