Working Paper: CEPR ID: DP13446
Authors: Meredith A. Crowley; Oliver Exton; Lu Han
Abstract: The renegotiation of a trade agreement introduces uncertainty into the economic environment. In June 2016 the British electorate unexpectedly voted to leave the European Union, introducing a new era in which the UK and EU began to renegotiate the terms of the UK-EU trading relationship. We exploit this natural experiment to estimate the impact of uncertainty associated with trade agreement renegotiation on the export participation decision of firms in the UK. Starting from the Handley and Limao (2017) model of exporting under trade policy uncertainty, we derive testable predictions of firm entry into (exit from) a foreign market under an uncertain `renegotiation regime'. Empirically, we develop measures of the trade policy uncertainty facing firms exporting from the UK to the EU after June 2016. Using the universe of UK export transactions at the firm and product level, and cross-sectional variation in `threat point' tariffs, we estimate that in 2016 over 5300 exporters did not enter into exporting new products to the EU, whilst over 5400 exporters exited from exporting products to the EU. Entry (exit) in 2016 would have been 5.0% higher (6.1% lower) if firms exporting from the UK to the EU had not faced increased trade policy uncertainty after June 2016.
Keywords: trade policy uncertainty; trade agreement; export participation; extensive margin of trade
JEL Codes: F13; F14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| switch to a renegotiation regime (E63) | decrease firm entry into exporting to the EU (F23) |
| switch to a renegotiation regime (E63) | increase firm exit from exporting to the EU (F23) |
| 1 percentage point increase in threat point tariff (F13) | decrease growth rate of firm product entrants (D25) |
| 1 percentage point increase in threat point tariff (F13) | increase growth rate of exit (O49) |
| threat point tariffs over 15% (F19) | decline in growth rate of entry (O39) |
| threat point tariffs 10-15% (F19) | decline in growth rate of entry (O39) |
| increased trade policy uncertainty after June 2016 (F69) | firm product entry would have been 50% higher (L11) |
| increased trade policy uncertainty after June 2016 (F69) | firm exit would have been 61% lower (G33) |