The Implications of Brexit for UK and EU Regional Competitiveness

Any form of Brexit will impact heterogeneously in terms of sectors and regions on the
competitiveness of firms in both the UK and Europe. The ongoing uncertainty about the
conditions under which the UK will be leaving the EU, creates difficulties in structurally
estimating these impacts. Using uniquely-detailed interregional trade data on goods and
services for the EU, we apply a novel methodology that disentangles region-sector
sensitivities (elasticities) of firms’ competitiveness to (non)tariff barriers from the
implications of different post-Brexit UK-EU trade scenarios. This enables us to derive the
impact of Brexit on the competitiveness of firms along with the degree of uncertainty that
surrounds these impacts, independently from the scenarios. Our analysis demonstrates that
the adverse international competitiveness shocks on UK firms are much larger than those on
the rest of the EU due to the dependency of the UK on the EU via global value chains. The
competitiveness shocks mean that within the UK, Brexit is likely to increase both
interregional inequalities and also intra-regional inequalities. In contrast interregional
inequalities across Europe may actually fall, depending on the nature of the post-Brexit UKEU trading arrangements.