BREXIT: The Swedish Perspective : A Gravity Model Approach

The subject of trade negotiations has been a highly publicised debate in the context of Brexit. The term ‘no deal’ has come to represent the United Kingdom leaving with no specific or comprehensive preferential trade agreement, whereas the potentially most far-reaching deal would resemble something along the lines of an EFTA membership. By using bilateral trade data between 2005 and 2017 for Sweden and their top 60 trading partners, an elaborated gravity model for trade suggests a significant long-run decline in the magnitude of trade between Sweden and the United Kingdom. For trade in goods, the results suggest an impact between 21.4%-25.7% in reduced bilateral trade between the UK and Sweden, if the UK leave under WTO terms. The findings also indicate that the impact on trade in services, for which the United Kingdom is Sweden’s second largest trading partner, will be significantly more pronounced between 45.7%-70.0% under a ‘no deal’ scenario. Whilst the model is such that no robust conclusions can be made about the EFTA-type deal for goods, they suggest that terms similar to EFTA would have a significant mitigating effect on any reduction in trade in services. However, a less comprehensive free trade agreement would do little to replace lost service trade when compared to the ‘no deal’ impact