Brexit Spillovers through International Trade and Foreign Investment: Empirical Evidence from EU-27 and the UK

Abstract

This study examines the Brexit spillovers upon the European Union Member States (MS) (EU-27) and the UK through two fundamental freedoms of regional integration: goods and services (international trade), and capital (foreign investment, FDI). We have applied cluster analysis and structural equation modelling on a strongly balanced panel of EU-27 and the UK. Both techniques explore two scenarios that focus on the performances achieved by the EU-MS in terms of GDP per capita and GDP growth, under the impact of trade and FDI, before and after the Brexit (1995-2019 and 2020-2025 periods). Our results show that the UK’s economy will be affected both related to GDP growth and GDP per capita levels, particularly on the short run. The EU-27 impact largely differs across countries and types of international activities, being decisively influenced through the FDI relations. Overall, the spillovers induced by international flows are positive, but significantly diminished after the Brexit. 

Key words: Brexit, Trade, Foreign direct investment, Econometric procedures, European Union.

JEL: F15, F21, F43, F47.