Cover of EconPol Policy Brief 32

EU27 and the UK: Product Dependencies and the Implications of Brexit

Lisandra Flach (EconPol Europe, LMU Munich and ifo Institute), Feodora Teti (EconPol Europe, LMU Munich and ifo Institute), Lena Wiest (EconPol Europe, University of Tübingen and ifo Institute) and Margherita Atzei (EconPol Europe, University of St. Gallen and ifo Institute)

The decision of the UK to leave the EU imposes a key challenge for trade relations and, depending on the outcome of the ongoing Brexit negotiations, will cause severe increases in bilateral trade costs. The experience from former crises has shown that disruptions caused by negative shocks are more severe in case of highly dependent goods, which are sourced from few suppliers. This report provides an overview on product dependencies between EU27 and the UK and uncovers several stylized facts. It shows that, whereas for most of the EU27 countries less than 10% of the highly dependent goods are sourced from the UK, the majority of UK’s imports of highly dependent goods are sourced from countries in the EU27. However, for both, the UK and the EU27, Brexit imposes challenges for supply chains, as in both cases most of these goods are classified as intermediate goods, which are used as input for final production in the destination country. For those goods, uncertainty and rising costs due to Brexit may cause an additional distress on supply chains.

Abstract

The current COVID-19 crisis has shown the importance of supply chain diversification to mitigate the negative effect of unexpected supply shocks. The decision of the United Kingdom to leave the European Union poses additional challenges to foreign trade: Irrespective of the outcome of the Brexit negotiation, trade costs between the UK and the EU will increase as a response to Brexit and cause disruptions in trade relations. Trade shocks hitting one bilateral country pair might be more severe for goods that are highly dependent on few suppliers, as they cause an increase in costs and, in the worst case, supply chain disruptions. This report takes a detailed look at goods that are dependent on few suppliers and shows that few products are imported solely from the UK, representing a negligible share of imports.

Citation

Lisandra Flach, Feodora Teti, Lena Wiest, Margherita Atzei: EU27 and the UK: Product Dependencies and the Implications of Brexit, EconPol Policy Brief 32, October 2020