1. Introduction
For over four decades, the EU handled most elements of international trade policy on Britain's behalf. Following the decision to leave the EU, the UK has been defining its trade policy and negotiating trade relationships with partner countries. Scholars have long pointed out that Brexit will have implications for the African, Caribbean, and Pacific (ACP) countries (Kennan, Reference Kennan, Mendez-Parra, te Velde and Winters2016; Razzaque and Vickers, Reference Razzaque and Vickers2016). In this paper, we ask how much they have to fear from the EU–UK Trade and Cooperation Agreement (TCA), which entered into force on 1 May 2021. While the TCA is a tariff-free trade deal, customs formalities and new paperwork entail costs for firms that are likely to impact trade. Recent estimates suggest that the TCA has reduced UK exports to the EU by 15% and imports by 32% (Ayele et al., Reference Ayele, Larbalestier and Tamberi2021).
ACP countries are likely to face a loss of sales in the UK if the negative consequences of Brexit for UK incomes are sustained. However, there are also potentially ‘indirect effects’ if increased trade frictions between the UK and the EU disrupt value chains that ACP countries are part of. Before the TCA entered into force, the UK–ACP trade relations have been governed by the Economic Partnership Agreements (EPAs) negotiated by the EU. These are reciprocal regional trade agreements organized into seven regional groups of countries and grant ACP countries duty-free and quota-free (DFQF) market access into the EU for all goods except arms and ammunition.Footnote 1 They also grant flexible rules of origin, permitting ACP exporters to source from elsewhere the inputs they need to make their final products without losing tariff-free access to the EU. Furthermore, ACP countries can keep their market closed to imports from the EU on ‘sensitive products’. The UK is seeking to replicate these agreements, a task that has yet to be completed.Footnote 2 However, TCA precludes diagonal cumulation. This means that some existing UK–EU trade will now face tariffs and that related imports of inputs may quite possibly disappear as firms reconfigure their supply chains (Fusacchia et al., Reference Fusacchia, Salvatici and Winters2022), in addition to documentary compliance and border delays (Byrne and Rice, Reference Byrne and Rice2018; Bennett and Vines, Reference Bennett and Vines2022).
In this paper we analyse these so-called ‘indirect effects’ of Brexit on ACP exports that use the UK as a platform to access the EU market, and the EU as a platform to access the UK market.Footnote 3 To this end, we employ trade in value added data to provide information on the origin of the value-added in UK–EU trade and thus the possibility that ACP countries could pay, indirectly, some of the costs of Brexit. The recent availability of Multi-Region Input–Output (MRIO) tables combined with bilateral trade statistics allows us to allocate the value-added embedded in trade flows to the countries and sectors of origin and destination. Specifically, we use the EORA26 database that provides a balanced global MRIO for 186 countries and 26 harmonized sectors to provide a first assessment of the ACP trade in value added embedded in the UK–EU bilateral trade. In this first exercise, we use a method devised by Borin and Mancini (Reference Borin and Mancini2019) to decompose ACP countries’ gross exports into domestic and foreign components. Our empirical results show that, while ‘indirect effects’ on ACP countries’ exports may exist, their economic effects will be very small in aggregate. Although the ACP domestic content embedded in UK exports to the EU is never zero and there is some degree of heterogeneity across countries and industries, there is little effect in aggregate because the ACP countries supply only small amounts of inputs into the products involved in UK–EU trade.
These findings are confirmed by a simulation exercise in which we use the GTAP-VA Model (Antimiani et al., Reference Antimiani, Fusacchia and Salvatici2018) to exploit the more granular GTAP dataset spanning 121 countries and 65 products. This exercise confirms that the indirect economic effects of Brexit are, overall, limited for ACP countries. Larger impacts are possible for some sensitive products (e.g., sugar). Thus, there may be specific industries in specific ACP countries for which ‘indirect effects’ are substantial, but overall they should not be a major concern for policymakers in either the ACP countries or the UK. The simulation results also highlight that these ‘indirect effects’ are likely compensated for by an increase in the overall ACP domestic content in the post-Brexit exports towards the EU and mainly the UK. A natural implication for policymaking is that it is not worth spending much time or effort on preserving or protecting the ACP countries’ indirect links to the EU.
The rest of the paper is organized as follows. Section 2 presents the data and the decomposition method. Section 3 provides some descriptive statistics on ACP trade in value added. Section 4 computes the ‘indirect effects’ of Brexit on ACP countries’ trade. Section 5 proposes a simulation exercise based on the TCA scenario. Section 6 concludes.
2. Data and Decomposition Method
We combine Multi-Region Input–Output (MRIO) tables with bilateral trade statistics to allocate the value-added embedded in trade flows to countries and sectors of origin and destination.Footnote 4 Specifically, we use the EORA26 database that provides a balanced global MRIO (Lenzen et al., Reference Lenzen, Moran, Kanemoto and Geschke2013), where all countries are aggregated to a common 26-sector harmonized classification (International Standard Industrial Classification – ISIC Rev. 3), and the supply-use tables have been converted to symmetric product-by-product IO tables. Notwithstanding certain limitations,Footnote 5 EORA data have been widely used in research because they provide data on GVC participation for many developing countries, including most of ACP countries.Footnote 6
To disentangle the ACP countries’ trade in value-added components, we use a method devised by Borin and Mancini (Reference Borin and Mancini2019), who decompose countries’ gross exports into domestic and foreign components. The domestic content of exports is the sum of the domestic value-added (value-added in the ACP country that is then exported in final or intermediate goods); the foreign content is the sum of the foreign value-added (value-added embedded in intermediate inputs that the ACP country imports from abroad and then exports in the form of final or intermediate goods).Footnote 7 Borin and Mancini's approach allows us to decompose ACP gross exports, disentangling the share of domestic content embedded in exports directly absorbed by the UK (or EU) from that which is embedded in exports that are then exported to third or final markets (Figure 1).Footnote 8 Although the domestic content includes the value added of services, we focus our analysis on the primary and secondary sectors.
ACP–UK/EU Trade relationships in value-added
3. Do ACP Countries’ Incomes Depend Significantly on UK–EU Trade?
Whether the additional frictions on UK–EU trade matter significantly to ACP countries depends ultimately on the economic importance of the ACP value added embedded in UK–EU trade. In this section, we use linked Input–Output Tables for 55 countries from the EORA databaseFootnote 9 to identify the ACP value-added in UK exports to the EU and EU exports to the UK.
Table 1 shows that the UK market is important for ACP countries, whereas this is not the case vice versa. Although there is significant variation across regional groups, EORA data reveals that the UK takes about 9% of all exports of the East African Community and about 8% of exports of the Eastern and Southern Africa grouping. Conversely, the ACP shares of UK imports are always below 1%. Table 1 also shows that the value-added embodied in ACP gross exports to the UK is primarily domestic: the share is generally above 80% and above 90% in the case of West and Central Africa. Trade flows to the UK are more important in economic terms for SADC (1.24% of overall GDP) and for Eastern and Southern Africa (1.85%); much less so for Central Africa (0.12%) and the Caribbean (0.15%).
ACP gross exports and domestic content to UK (2015)
Source: Authors’ elaboration on EORA data.
The regional data hide a good deal of heterogeneity. From EORA data, we can see, for example, that 0.05% of Angola's exports go to the UK, compared to 9.4% for Kenya (although the latter is not an EPA member). Except for Lesotho, the percentage of domestic content embedded in exports directed to the UK market is never below 75% for any ACP country. Moreover, in some cases, the domestic value-added exported to the UK is quite important in economic terms (about 1% of the overall GDP in Malawi and Kenya and 0.5% for Madagascar). Table A2 in the online Appendix reports the domestic content of ACP exports to the UK by sector. It ranges from a minimum of 37% (‘Other Manufacturing’ in ESA) to a maximum of 97% (‘Agriculture’ in West Africa). On average, the largest domestic content (over 86%) is registered in West Africa and the smallest in Eastern and Southern Africa (60%). The range is even greater at the country level. This heterogeneity is likely attributable to structural differences in the economic characteristics of these countries.
4. The ‘Indirect’ Trade between ACP Countries, the UK, and the EU
To assess the vulnerability of ACP countries to ‘indirect effects’ of Brexit (here expressed as ACP exports that use the UK as a platform to access the EU market and the EU as a platform to access the UK market), we examine the trade in value added data to track the ACP domestic content embedded in the bilateral trade flows between the UK and EU. This provides information on the origin of the value-added embodied in the UK–EU trade and thus the possibility that ACP countries could pay, indirectly, some of the cost of Brexit.
For each EPA group of ACP countries, Table 2 shows the domestic content embedded in their exports towards the UK that is then further re-exported to the EU market, expressed as a percentage of the ACP sectoral gross exports to the UK. For instance, ACP domestic value-added in the amount of 11.21% of agricultural exports from SADC to the UK will eventually be re-exported from the UK to the EU. These percentages are of course low in comparison with those of the ACP domestic content exported to the UK (see Table 1), though they are not negligible. However, the fact that they are never higher than 23% shows that the bulk of the ACP–UK trade is primarily oriented towards the UK market rather than using it as a platform to reach the larger EU market. As before, we acknowledge the presence of some degree of heterogeneity by sector and EPA group. The highest percentages of domestic content entering the EU market indirectly via the UK pertain to raw materials such as: ‘Metal products’, ‘Mining and Quarrying’, ‘Petroleum, Chemicals and Mineral Products’, followed by ‘Fishing’ and ‘Wood and Paper’.
Domestic Content of ACP exports towards the EU via the UK, by sector (% of their sectoral gross export to the UK), 2015
Source: Authors’ elaboration on EORA data.
Further information can be derived by looking at the converse indirect channel, i.e., the EU as a platform for supplying the UK market. Online Appendix Table A3 reports these figures by sector showing that the UK final absorption of ACP domestic content through the EU market is low as well. The highest contribution of ACP countries to EU–UK bilateral trade flows is 7% in the case of Agriculture from the East African Community. The average contribution is below 4%.
Table 3 summarizes the exposure of each ACP group to the indirect costs of Brexit by computing the sum of the domestic content embedded in the bilateral export flows to the UK, and the EU further re-exported to them as a percentage of their sectoral value added. The final row (Average) shows that only between 0.002% and 0.008% of GDP in the ACP groups is generated by the flows of goods between the UK and the EU. Even if this was all lost to Brexit, these ‘indirect costs’ appear to be distinctly bearable.
ACP Domestic Content in overall exports towards the EU via the UK and the UK through the EU, by sector (% of sectoral value added), 2015
Source: Authors’ elaboration on EORA data.
A caveat to this preliminary analysis concerns the high level of aggregation of the EORA sectors. While the overall effect on the proportion of ACP exports impacted by Brexit will be small, there could be significant and disproportionate consequences for specific sectors that are heavily reliant on the UK market (Mendez-Parra et al., Reference Mendez-Parra, te Velde and Winters2016) or on exports to the EU via the UK. To explore this important issue, in the next section we take advantage of the higher level of disaggregation of the GTAP database to carry out a simulation exercise.
5. The Simulation Exercise
In this section, we simulate the effects of the EU–UK TCA using a standard computable general equilibrium (CGE) model of the world economy from the Global Trade Analysis Project (GTAP) Consortium.Footnote 10 Specifically, to assess trade policy effects in a value-added metric, we use the GTAP-VA module (Antimiani et al., Reference Antimiani, Fusacchia and Salvatici2018), enabling the attribution of impacts to the various segments of value-added traded up to the final market, both directly and indirectly through other countries. The data are drawn from the MRIO version of the GTAP database, which provides information on consumption, production, and bilateral trade flows for 65 sectors, 121 countries, and 20 regions (Aguiar et al., Reference Aguiar, Chepeliev, Corong, McDougall and van der Mensbrugghe2019; Carrico et al., Reference Carrico, Corong and van der Mensbrugghe2020).Footnote 11
To simulate the effects of TCA implementation relative to the 2019 baseline,Footnote 12 we follow Fusacchia et al. (Reference Fusacchia, Salvatici and Winters2022) and introduce trade frictions due to Brexit, reflecting border formalities, rules of origin, and other non-tariff measures, all pertaining to goods, and non-tariff measures on services.Footnote 13 Table 4 summarizes the simulated scenario: the average increase of bilateral trade costs for both goods and services is roughly 14%.Footnote 14
Changes in the costs of conducting UK–EU trade
Note: All other flows and barriers do not change. We do not introduce tariff changes as TCA involves no tariffs on UK–EU trade.
Table 5 simulates the indirect costs of Brexit for each ACP group, by looking at the cumulated effects on the ACP domestic content embedded in indirect trade both to the EU via the UK and to the UK through the EU. To get a measure of relative magnitudes, we relate these changes to sectoral value added. To compare these outcomes with those in Table 3, we aggregate the products available in the GTAP database to the sectors as in Table 3 using the concordance reported in Online Appendix Table A4.
Two key features can be drawn from our simulation exercise (Table 5). Due to the increase in trade costs because of Brexit, ACP countries will actually experience a substantive reduction in their domestic content embedded in the bilateral UK–EU trade flows. However, as anticipated in Table 3, these ‘indirect effects’ are estimated to be very low in economic terms. For most sectors, they are less than 0.005% of the sectoral value added, except for ‘Mining and Quarrying’ and ‘Metal Products’ but even there the decline does not exceed 0.01%.Footnote 15 Although we find a low impact on ACP domestic content indirectly exported in ‘Agriculture’ and ‘Food’, the more granular sectoral coverage of the GTAP database, reveals that for some specific sensitive products, such as ‘sugar’, likely impacts are larger. The UK represents the biggest export market for sugar, both as a final consumer and as a platform to reach other markets. As a result, the increase in trade costs between the UK and the EU reduces the Pacific group's value added in sugar exported towards the EU via the UK by 4% of the total value added of that sector. Caribbean value-added originated in ‘Sugar cane’, ‘sugar beet’ is also affected by the increased trade frictions between UK and EU (Tables A5 and A6 in the online appendix).
Change in the Domestic Content in ACP indirect trade towards the EU via the UK and the UK through the EU, by sector (shares of sectoral value added), TCA scenario
Source: Authors’ simulations using the GTAP-VA model.
Table 6 reports the simulated effects of Brexit on ACP domestic content in exports towards the UK and EU. This includes the above ‘indirect effects’ and the possible substitution effect by ACP of the likely contraction of bilateral trade between the UK and EU due to Brexit, net of the effect of post-Brexit demand contraction in the UK. The results show that some ACP groups will likely register an increase in their domestic content in exports, mainly towards the UK, compensating for the above indirect trade costs.Footnote 16 As usual, there is a significant degree of heterogeneity across ACP groups (as well as within each group) with overall increases ranging from 0.9% for West and Central African regions to 8.3% for the Caribbean.Footnote 17
Domestic content in exports of goods from ACP countries to the UK, EU, and total (% change to the baseline, extra-regional only), TCA scenario
Source: Authors’ simulations using the GTAP-VA model.
Table 7 reports the simulated effects in terms of welfare. As expected, we register the biggest welfare reduction in the UK (–US$ 49.4 billion) and the EU27 (–US$16.6 billion). Conversely, we find small but positive effects on welfare in ACP countries (between 0.1 and 0.3 percentage points regarding consumption). The total effect is a combination of allocative efficiency losses (e.g., the change in the allocation of resources due to the distortions, or, in other words, the deadweight loss associated with them), and losses in the terms of trade (relative change in the price of exports relative to that of imports).Footnote 18
Welfare changes (US$ billion, relative to 2019 baseline values, 2014 prices) and as percentage of private consumption
Source: Authors’ simulations using the GTAP model.
6. Conclusion
This paper analyses the ‘indirect effects’ of Brexit on ACP countries’ exports that use the UK as a platform to access the EU market, and exports to the EU as a platform to access the UK market. We carried out two empirical exercises: a descriptive analysis of trade in value added flows using MRIO data and a simulation scenario using GTAP-VA module. Both exercises suggest that ACP countries will not suffer seriously from an ‘indirect’ loss of trade because these economies supply only small amounts of inputs into the products traded between the UK and the EU. While the simulation exercise using more granular input–output data shows that there may be products for which ‘indirect effects’ can be substantial and these products may be important to individual ACP countries, overall our analysis suggests that ‘indirect effects’ should not be a major concern for policymakers either in ACP countries or in the UK. Furthermore, our simulations suggest that these effects can be compensated by an increase of the domestic content of ACP exports due to TCA frictions. Any losses from Brexit for developing countries are undesirable, but if – as it seems – these are light enough to be bearable, developing country negotiators and UK policy makers should devote their attention to other matters, at least until very specific cases of potential harm are brought to their attention.
Supplementary Materials
To view supplementary material for this article, please visit https://doi.org/10.1017/S1474745623000137.
Acknowledgments
This work draws on Montalbano, P., Nenci, S., Tamberi N., and Winters L.A. (2020), The ‘bearable lightness’ of Brexit on the ACP countries’ trade: global value chains and rules of origin, UKTPO Briefing Paper 48, September 2020. We thank participants at the ‘Economic Policy, Openness and Development’ Conference in honour of L. Alan Winters, held at the European University Institute, September 6–7, 2022 for their helpful comments. Special thanks to L. Alan Winters for his invaluable support and insightful comments on previous versions of the work and to Ingo Borchert and Bernard Hoekman for their suggestions which greatly improved the quality of this work.
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