Brexit and Pound's International Trade Competitiveness: A Counterfactual Analysis

ABSTRACT We explore the impact of the 2016 Brexit referendum on the pound's international trade competitiveness using a panel data method proposed by Hsiao et al. (Journal of Applied Econometrics, 27 , 2012, 705). We construct the counterfactual values of the United Kingdom's (UK) real effective exchange rates (REER, CPI‐based), assuming that the referendum had not happened. By comparing the actual and counterfactual values of the UK's REER, we find that the 2016 Brexit referendum decreased the UK's REER by 9.86%, which was driven by a 3.58% depreciation in the nominal effective exchange rate and a 6.28% increase in the Consumer Price Index (CPI). The pound became stronger and gained international trade competitiveness. The REER of European Union was hardly affected by the 2016 Brexit referendum. Further research indicates that, in contrast to the significant impact of the 2016 Brexit referendum on the UK's REER, the implementation of the 2021 Trade and Cooperation Agreement (TCA) triggered a 9.37% increase in the UK's REER, due to the increased exports barriers. The 2020 Withdrawal Agreement and the 2023 Windsor Framework exerted relatively small effects on the UK's REER.