Abstract

Barriers to trade in services are not well understood. This paper investigates how regulatory barriers affect cross-border lending and deposit-taking. We build a theoretical framework of banking across borders to model how trade costs shape trade in banking services. We test the predictions of the model using changes in regulations due to the UK’s withdrawal from the European Union. Using bilateral data from the Bank for International Settlements and confidential bank-level data from the Bank of England, we find that UK-resident banks substantially reduced lending to and deposit-taking from EEA countries after Brexit, with some effects observed after the 2016 referendum itself. The decline in intermediated stocks was especially large (45%) for banks that lost the ability to provide services to all of EEA without additional authorisation, relative to those that did not have such authorisation when UK was a part of EU , or for banks that had a higher share of their activity with the EEA before the referendum. We find limited evidence of multinational banks successfully circumventing the new barriers by using foreign affiliates. These results demonstrate the critical role of regulatory access in shaping the pattern of banking across borders.

Abstract

Deglobalisation policies promote the vision that pulling back from economic integration can help correct international imbalances and reposition national economies for renewed prosperity. A core vision of Brexit was to transform the UK to a new Global Britain - a sovereign trading nation free from EU constraints, and capable of reinvigourating its historical comparative advantage in the world economy. Central to this was the idea of "taking back control" of regulations, particularly in high-value-added services where EU rules were seen as limiting the UK's longstanding global competitiveness. We develop granular and comprehensive measures of UK's departure from regulatory alignment with the EU, and find that they have introduced significant new bilateral trading frictions that have not been offset by increased competitiveness in markets beyond the EU. UK exports to the EU in services that have got these new Brexit barriers have declined by 16 percent relative to other bilateral trade flows. Overall, UK services exports are estimated to be 4 to 5 percent lower, indicating that five years on, Brexit has fallen short of delivering its vision of Global Britain. 

Abstract

Brexit led to the biggest reversal of deep international economic integration in the modern era, with the Trade and Cooperation Agreement (TCA) introducing new non-tariff barriers to trade and investment in services between the United Kingdom (UK) and the European Union (EU). This paper quantifies the impact of these non-tariff barriers on trade, investment and productivity of service-exporting firms in the UK, by using novel measure of non-tariff barriers in the TCA developed in our previous work (Bhalotia, Dhingra and Arnold, 2025) and firm-level data. We build a model that incorporates reservations as non-tariff barriers in a Melitz framework, requiring firms to satisfy “production standards” to export to EU countries, to understand firms’ investment and trade decisions. We calibrate the model using estimates from our empirical analysis and quantify the aggregate economic implications for productivity.

Abstract

Firms in technologically less developed countries largely rely on adopting existing technology developed in advanced countries, However, developing countries have been contributing to innovation especially since their trade liberalisation. This paper studies how import competition affects firms’ decision to upgrade technology in countries far from the technology frontier, to determine the effects on productivity and growth. I use firm-level data from India to estimate changes in firms’ adoption and innovation activities following the trade liberalisation in 1991. Then, I develop an endogenous growth model in which firms can improve their technology by either adopting technology developed abroad or developing new ones. A fall in trade cost on output increases import competition and changes incentives to improve technology through the two processes for domestic firms, where the processes differ in their cost, productivity gain and advantage of backwardness. The framework assesses the role of import competition in accounting for adoption, innovation and growth, and studies the counterfactual of a reduction in trade cost.