The Economic Impact of Brexit: Evidence from Modelling Free Trade Agreements

This paper assesses the economic implications of the United Kingdom (UK) leaving the European Union (EU). The basic data on trade in goods and services and investment between the two parties suggest that the cost of “Brexit” could be substantial. Trade between the UK and the EU-27 is large and of a similar order of magnitude as transatlantic trade (between the EU and the U.S.). The precise nature of the (hopefully free) trade agreement UK-EU-27 is still being negotiated. All available studies concur that a significant disruption of trade links will impose economic costs on both sides. However, the EU-27 would bear only a disproportionally small share of the total cost, not just because it is about five times larger than the UK in economic terms, but also for fundamental reasons such as greater market power of its enterprises. Other studies on different free trade arrangements confirm the general proposition that the smaller party has more to gain from eliminating trade barriers (and more to lose from imposing them). This implies that the EU will have a stronger negotiating position.     

International Monetary Instability All Over Again

One of the signature developments of 2016 was the move from globalization and market integration toward nationalism and protection. A headline in the Financial Times (April 13, 2017) read, “‘Sword of protectionism hangs over trade’, says IMF.” The headline demonstrates “Silo-ism”. The Fund does not recognize that the demand for import barriers in countries with large trade deficits and high unemployment have resulted from massive imbalances in international payments. Monetary instability in the 1920s and the 1930s was reflected in the overvaluation of the British pound, the undervaluation of the French franc and subsequent overvaluation of the U.S. dollar. Britain voted to leave the European Union in June 2016, in part because the high price of the British pound depressed exports and wages in manufacturing. U.S. gross domestic product (GDP) has doubled since 1980, yet manufacturing employment has declined by eight million. The demand for protection in the U.S. has increased because the more rapid growth of imports than exports has led to the decline of three to four million U.S. manufacturing jobs.     

The death of Canadian manufacturing plants: heterogeneous responses to changes in tariffs and real exchange rates

We examine simultaneously the effects of real-exchange-rate movements and tariff reductions on plant death in Canadian manufacturing industries between 1979 and 1996. Consistent with the implications of recent international trade models with heterogeneous firms, we find that the impact of exchange-rate movements and tariff cuts on exit is heterogeneous—particularly pronounced among least efficient plants. Our results further reveal multi-dimensional heterogeneity that current models featuring one-dimensional heterogeneity (efficiency differences among plants) cannot fully explain: exporters and foreign-owned plants have much lower failure rates; however, their survival rates are more sensitive to changes in tariffs and real exchange rates.     

The role of foreign direct investment in the host-country firm selection process: firm-level evidence from Slovenian manufacturing

This paper examines the role of inward foreign direct investment (FDI) in firm selection processes in the Slovenian manufacturing sector in the 1994–2003 period. It adopts the firm dynamics framework that allows testing of selection effects directly by assessing the impact of foreign firms’ activity on the probability of exiting of local firms (crowding out). The results show that intra-industry productivity spillover effects offset only a minor part of the competition pressure which results from foreign firm entry, hence incumbent firms experience a drop in their survival probability upon a foreign firm’s entry within a particular industry. This result is driven by foreign firm entry of the greenfield type, as entry through the acquisition of existing firms has no significant effect. The strength of the crowding-out effect decreases with the incumbent firm’s export propensity. There is no significant evidence that inward FDI would stimulate the selection process through backward linkages in the upstream supplying industries, whereas foreign firms’ activity reduces the exit probability of downstream local customers (through forward linkages).     

The spatial effects of trade openness: a survey

This paper surveys the literature on the implications of trade liberalisation for intra-national economic geographies. Three results stand out. First, neither urban systems models nor new economic geography models imply a robust prediction for the impact of trade openness on spatial concentration. Whether trade promotes concentration or dispersion depends on subtle modelling choices among which it is impossible to adjudicate a priori. Second, empirical evidence mirrors the theoretical indeterminacy: a majority of cross-country studies find no significant effect of openness on urban concentration or regional inequality. Third, the available models predict that, other things equal, regions with inherently less costly access to foreign markets, such as border or port regions, stand to reap the largest gains from trade liberalisation. This prediction is confirmed by the available evidence. Whether trade liberalisation raises or lowers regional inequality therefore depends on each country’s specific geography.     

Productivity-Wage Gaps Among Age Groups: Does the ICT Environment Matter?

This paper disentangles the age-productivity-wage nexus by estimating productivity and wage equations with longitudinal employer-employee panel data for Belgium. Results indicate that workers above 49 years are significantly less productive than their younger colleagues. Moreover, while relative productivities across age groups are not found to differ significantly between ICT and non ICT firms, the upward sloping age-wage profile appears to be somewhat steeper in ICT firms. Yet, whatever the ICT environment, findings show that young workers are paid below and older workers above their marginal productivity. This pattern is in line with the deferred payment model developed by Lazear (J Polit Econ 87:1261–1284, 1979).     

Strong Presidential Approval or Disapproval Influencing the Expected Benefits of Voting and the Voter Participation Rate

This empirical study seeks to broaden the interpretation of the rational voter model so as to identify and better understand key determinants of the expected benefits from voting and hence key determinants of the aggregate voter participation rate in the US. Using annual data for all years in the 1960–1997 study period, this study finds that the voter participation rate has been positively impacted by strong public approval or strong public disapproval of the incumbent President, a finding unique to this literature and study period. In addition, the aggregate voter participation rate has been positively impacted by such factors as the Gulf War, which is generally regarded as having been popular among the US electorate, and a rising unemployment rate. This study also finds the voter participation rate to have been negatively impacted by the publics dissatisfaction with government, as well as by the Watergate scandal.The author is indebted to Cassandra Copeland for helpful information, comments, and guidance.     

Renting Goodwill in International Marketing Channels: An Analysis of Pricing Strategies and Bargaining Power

This paper investigates the pricing decisions of foreign manufacturers in international markets within a bargaining framework with asymmetric information and the rental of goodwill. The key findings are: first, the foreign manufacturer follows a mark-up pricing strategy in which its gross margin and the quality premium over the domestic product are shared with the importer. Second, a manufacturer–importer contract occurs only when the manufacturer’s bargaining power is within an admissible range which shrinks as transaction costs increase. Third, the domestic consumer will only purchase the foreign product if the importer’s goodwill in the domestic market is sufficiently large to signal quality. The paper contributes to the literature on exchange relationships between foreign manufacturers and importers.