**“The value of an idea is demonstrated by its ability to rise from its defeats.”**

**Altiero Spinelli**

# 1. Introduction

What is the impact of undoing trade agreements on trade? In this paper, we try to address this question by focusing on the effect that EU membership had on trade of the UK, most notably with its European partners, and then use this information to assess the future of UK‐EU trade under different scenarios. While the EU is a complex institution, the outcome of a (still ongoing) project of economic and political integration which had its founding moment with the Schumann Declaration in the aftermath of World War II, in this paper we see it through the lenses of trade agreements. This allows us to anchor the analysis of Brexit, the exit of the United Kingdom (UK) from the European Union (EU), to a well‐established economic literature that studies the trade impact of Preferential Trade Agreements (PTAs).

The landscape of trade and trade agreements has radically changed in the last 25 years. First, we have seen a surge in the number of preferential arrangements: in 1990, only 51 PTAs were in force, while there were 279 agreements in force and notified to the WTO in 2015. In addition, modern PTAs are increasingly “deeper” in the sense that they cover many regulatory issues and policy areas that go beyond tariff reduction, such as services, investment, competition and intellectual property rights protection.<sup>3</sup> The nature of trade has also dramatically changed since the early 1990s, particularly as a result of the growing internationalization of production and the rise of Global Value Chains (GVCs). Deep provisions in PTAs may potentially influence trade relations among members either directly, as services commitments, or indirectly, as investment and competition provisions may make it easier to operate production activities that span multiple borders. The letter sent by the Japanese government to the UK and the EU in the aftermath of Brexit, outlining a number of requests by Japanese businesses operating in the UK on the content of a future UK‐EU PTA, illustrates the importance of a finer understanding of what Brexit entails, beyond a focus on changes in tariffs and gross goods trade flows.<sup>4</sup> The EU has been a precursor of deep integration. We use new information on the content of trade agreements from the World Bank (Hofmann, Osnago and Ruta, 2016) to build a measure of “depth” based on the number of provisions covered by the agreement.<sup>5</sup> The data indicate that the EU is the deepest PTA among the 279 currently in force. The relationship between the UK and the rest of the EU members before Brexit will actually happen is regulated by the European Community (EC) Treaty and the following enlargement agreements, which cover 44 policy areas ranging from standards to movements of capital, to labor mobility. Europe is also the region that has the largest share of intra‐regional trade. The UK economy is part of this intense network of trade relations. First, the EU is the most important trade partner of the UK, accounting for 52 percent of the UK’s exports of goods and services. Second, the UK is closely

> 3 The distinction between “deep” agreements and “shallow” agreements, where the latter focus on tariffs and other border measures, was first introduced by Lawrence (1996).

> 4 The letter by the Japanese government on Brexit to the UK and the EU can be accessed at: <u>http://www.mofa.go.jp/files/000185466.pdf</u>

> 5 The database is available on the World Bank website at http://data.worldbank.org/data‐catalog/deep‐trade‐ <u>agreements</u>

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