This study quantifies the effects of trade policy in the age of 'global value chains' by adopting a general equilibrium model that takes into account the production linkages among countries and sectors. The work compares the impact of an increase in international trade costs on countries' welfare in two scenarios that differ in the salience of the value chains; moreover, the analysis estimates the economic effects of Brexit on the United Kingdom and the EU.
Assuming that a free trade agreement is reached, Brexit would determine a decrease in exports for the EU and the UK of about 2 and 13 per cent respectively, and of about 3 and 19 per cent in the event of 'no deal'. Welfare losses would be limited for the EU (from 0.4 to 0.6 per cent) and higher for the UK (from 2.1 to 3.1 per cent respectively). Our estimates are larger than those obtained from previous models because they take into account the close integration of UK-EU production.
