Moreover, incentives for businesses both domestic and foreign to invest in the UK would also be undermined. The UK’s revealed preferences, set out in broad strokes in the government’s recent White Paper, seems to plot a middle course between a soft and hard Brexit extremes. However, the devil will be in the detail which will only become clear in the negotiations that will follow.
Note: The non-linear impact is simulated through 25 iterations of the log-linearised model. In the left panel, the grey areas indicate the range between the flexible setup (yellow line) and the rigid setup (red line) and provide an illustration of the scope of the effects associated with the trade shock. The EU should also diversify its participation in supply chains.