Brexit: an analysis of UK trade flows

Abstract

This paper analyses the current situation of Brexit focusing on the UK trade. The aim is to evaluate how important the EU membership for the UK is because Free Trade and European Integration are beneficial for the UK. The Gravity Model of International Trade augmented with dummy variables is applied following two different approaches. First, 2016 Crosssectional data and second, 1995-2016 Panel data for United Kingdom. With this methodology it is demonstrated that the Gravity Model holds for the UK trade flows. Besides, the EU membership does enhance UK trade being more important for imports than for exports. The EU membership overcomes non-tariff barriers and has created more trade for the UK than diverted. Therefore, Brexit would shrink welfare mainly in the UK and unevenly in EU member states.