In Hot Water: Clarifying the Price Effects of Brexit

Abstract

Non-trade-policy barriers remain key in explaining patterns of trade and their presence motivates many deep trade agreements. Their nature and welfare effects, however, remain poorly understood. We quantify how non-trade-policy barriers between the EU-UK changed following the introduction of the Trade and Cooperation Agreement (TCA). Focusing on the bottled water industry, which was not subject to changing trade policy barriers, we find that UK consumer prices of imported bottled water rose by 17% relative to consumer prices of the same products in continental Europe. We attribute this to rising transport costs as freight rates on UK-bound routes also rose by 30% relative to non-UK routes. Finally, we leverage a partial equilibrium model of the bottled water industry to quantify the contribution of the rise of freight rates to the rise in the final consumer prices of bottled water. Our findings explain how changes in a complementary market facilitating goods trade can lead to market fragmentation in the absence of changes in trade-policy barriers.