Multinationals’ effects: a nearly unexplored aspect of Brexit

Claudia Fernández-Pacheco Theurer (Universidad Autonoma de Madrid Facultad de Derecho, Madrid, Spain)
Jose Luis López Ruiz (Universidad Complutense de Madrid Facultad de Estudios Estadisticos, Madrid, Comunidad de Madrid, Spain)
María C. Latorre (Universidad Complutense de Madrid, Madrid, Spain)

Journal of International Trade Law and Policy

ISSN: 1477-0024

Publication date: 1 April 2018



The purpose of this paper is to review the economic studies on Brexit, highlighting that they have focused mainly on its negative impact on trade. The economic intuition behind these outcomes is provided, explaining why they are asymmetric with the UK being much more harmed than EU-27.


The importance of foreign multinationals in the UK and of UK’s multinationals abroad is shown using a non-standard quantification, which may be preferable than conventional methodologies. In addition, EU trade and investment legislative regimes are explained. Particular attention is paid to the change after the 2009 Lisbon Treaty which transfers foreign investment to the exclusive competence of the EU as opposed to EU states.


The data show that EU-27 is a much less important investment than trade partner for UK.


Although modelling the economy-wide impact of multinationals is challenging, the data and EU legislative framework analyzed suggest it is very much worthwhile. Other considerations about UK’s diminished leveraging power to negotiate after its EU’s withdrawal are also considered.



Fernández-Pacheco Theurer, C., López Ruiz, J. and Latorre, M. (2018), "Multinationals’ effects: a nearly unexplored aspect of Brexit", Journal of International Trade Law and Policy, Vol. 17 No. 1/2, pp. 2-18.

Download as .RIS



Emerald Group Publishing Limited

Copyright © 2018, Emerald Publishing Limited

1. Introduction

Several unexpected events in the past recent years seem to be challenging the process of globalization that has dominated the world economy for decades (Subramanian and Kessler, 2013). USA withdrawal from the Trans-Pacific Partnership (Ortiz and Latorre, 2016), the pause of the Transatlantic Trade and Investment Partnership negotiations (Latorre and Yonezawa, 2018) and other Trump’s protectionist measures, together with Brexit are changing the landscape of international relationships. This paper analyzes a nearly unexplored aspect of the multifaceted process of Brexit.

Much has been written about the impact of Brexit on foreign trade. In fact, most of the papers that analyze that historical decision deal with trade (Busch and Matthes, 2016; Latorre et al., 2018a; for reviews). The majority of them find that the reduction in trade resulting from Brexit will be harmful for UK. They also find that it will be harmful for the rest of the European Union (EU-27, henceforth), but UK will be much more negatively affected than EU-27.

Properly modelling some aspects of trade (such as non-tariff barriers) is not exempt from difficulties; however, investment remains a much more difficult area of modelling. Investment is volatile, subject to sudden changes in expectations and to a great extent its performance is more difficult to be grasped than trade. Of course, this applies not only to domestic investment but also to foreign investment. As a result, less studies estimate the impact of Brexit on foreign direct investment (FDI) and on the operations of multinationals.

This paper analyses the role of UK multinationals abroad and of foreign multinationals within the UK economy. It provides a rather unusual approach to capture their quantitative importance, discussing why it may be more appropriate than other more standard measures. The study also covers the current legislative regime for investments of multinationals in the EU and the consequences Brexit may have for it. The focus is on the operations of multinationals because they tend to be more directly related to productive investment, economic growth and the creation or destruction of jobs, than other type of investments, such as financial investments[1]. The data presented show that the UK is much less related to the EU in terms of multinationals than in trade. The EU-27 is by far the most important trading partner for the UK. By contrast, the EU is not the main destination of UK multinationals. In addition, the importance of EU multinationals’ operations in UK is also smaller than the role of imports coming from EU-27 in total UK imports. Interestingly, the weight of foreign multinationals in UK is well above the average of the one in EU-27. This indicates that multinationals are particularly important players in the UK economy. What does this imply for the studies that obtain bad outcomes from Brexit analyzing only trade? Would Brexit imply that UK would be free to establish new investment agreements, once it is outside the EU and heavily benefit from the activities of its multinationals abroad? Would reductions in the operations of foreign multinationals in the UK prevail after Brexit?

To address these questions, the paper first begins challenging the conventional wisdom that there are no Brexit precedents and comments the Brexit pre-agreement reached on December 8, 2017. Section 3 provides intuitive explanations for the economic impact of Brexit derived in a group of studies. Section 4 addresses the difficulties in modelling multinationals’ operations, while Section 5 presents data measuring the role of multinationals in the UK, contrasting them with trade data. Section 6 describes the legislative framework for multinationals before Brexit and the change it may imply. A final section offers some concluding remarks.

2. Aren’t there any Brexit precedents?

Looking back at European history, it is fascinating to see how many different countries decided to create a joint project (Baldwin, 2016). After World War II, much of the continent was left devastated and there was a widespread desire for lasting peace. To avoid another war, six countries (France, Germany, Italy, Belgium, Netherlands and Luxembourg) placed their coal and steel sectors under the control of a supranational authority. These two sectors were crucial for fighting by that time. This led to the creation of the “Economic community for steel and coal” (ECSC) in 1951, which made these nations begin to grow strongly. Thus, the six committed to form a customs union, the so called “European Economic Community” (EEC), 1957.

Great Britain had led to the creation of a different integration process called the “European Free Trade Area” (EFTA). But, except for Great Britain, the countries (i.e. Portugal, Norway, Sweden, Denmark, Switzerland, Austria and Finland) which made up this second area were small. When border barriers (mostly tariffs by that time) began to fall within the EEC and within EFTA (but not between the two blocks) discrimination appeared. The GDP of the EEC was more than twice that of the EFTA. The EEC was far more attractive to exporters. Because of the larger market, firms could attain economies of scale. UK realized this and applied for EEC membership in 1961. Charles De Gaulle stopped UK membership twice. Finally, Denmark, Ireland and UK joined the EEC in 1973, while Norwegians said “no” in a referendum (Baldwin, 2016).

Isn’t this story familiar? Around half of UK’s trade is with the EU, while for the EU UK implies only around 5-6per cent of its trade […] Couldn’t we expect that Brexit will imply a shrinking of UK markets which will harm its exporters’ performance? One could think that nowadays barriers related to borders between countries are smaller than in the past and with e-commerce even negligible. However, even though many trade barriers are indeed smaller, there are some types of non-tariff barriers (NTBs) that are related to differences in regulations across countries[2]. This implies that depending on whether Amazon sells a book in Europe, or whether it does it in Asia, it will have to meet different requirements at the border and behind the border. The label will have to contain different pieces of information; the packaging may also differ […] etc. It would be much easier for Amazon to be able to produce a more standard product and sell it all around the world. If we turn to a farm exporter, then the procedure is even more complicated. He will need certificates related to health and the environment to show that its production process meets certain standards. These certificates are also different across countries.

Being able to export is not an easy task, because foreign firms are initially disadvantaged against domestic producers. Many people think that all firms export, but that is far from the truth. Exporting is expensive and challenging and not all firms are able to do it. Legislation adds more hurdles, which may be some time justified but other times are just protectionist and inefficient.

Brexit, however, has other facets in addition to trade. Trade is very important and that may be the explanation why the European Commission wanted to leave trade for the final part of the negotiations, together with the regime for multinationals. In the first phase of the negotiations, for which an agreement was reached on December 8, 2017, three main points were on the table: Immigrants’ rights, the border between the Republic of Ireland and Northern Ireland and the financial settlement (the “bill”). As put by the Wall Street Journal (2017): “(the) deal was reached in large part because Britain acceded to many of the EU’s requirements. The UK agreed to pay the EU a net bill that British officials said would come to at least 40 billion euros ($47 billion) in the coming years – much more than London’s initial offer – and to go further than it originally intended to protect the rights of EU citizens living in the UK”. In addition, “the agreement includes a British guarantee that the UK will do what is necessary to avoid customs checks on the border between Northern Ireland and the south, but is ambiguous on specifics” (Wall Street Journal, 2017). Although to a great extent written in a language of “diplomatic ambiguity”, as happens with many international agreements, what seems clear is that this pre-agreement implies a significant change from threatening with making the UK a tax haven.

3. Review of the economic studies on Brexit

This section discusses the economic intuition behind 12 studies on Brexit, which appear in Figure 1. Deeper reviews, which go beyond the scope of this paper, are Busch and Matthes (2016) and Latorre et al. (2018a). Most of the studies have analyzed a soft and hard Brexit. Although their particular specifications differ, generally, a soft Brexit would imply the smallest possible barriers in foreign trade between UK and EU-27 (i.e. a Norway type of relationship). On the opposite extreme, a hard Brexit implies UK would become a normal World Trade organization (WTO) member, that is, UK would leave without any trade agreement with the EU. As a result, many tariffs and many non-tariff barriers[3] (NTBs) would emerge in their relationship.

It is worth noticing that the European Economic Area (i.e. the agreement that Norway, Island and Lichtenstein have with the EU) entails some small NTBs with the EU and even tariffs in agriculture and fisheries[4]. The intra-EU trade regime is something difficult to replicate outside the EU. It is a very peculiar trade regime with the tiniest possible barriers among different countries that exists on earth. By contrast, becoming a WTO member entails erecting the most sizeable barriers. Between the hard and soft Brexit fall the bespoken agreements such as the one of Switzerland or the Comprehensive Economic and Trade Agreement (CETA) with Canada, which have taken years to negotiate[5]. Other intermediate cases would also be the customs union the EU has with Turkey, as well as other free trade agreements or preferential trade agreements (PTAs) with different degrees of integration. Overall, the EU has 35 bilateral or regional trade agreements that grant preferential treatment to over 50 countries across the globe and is currently negotiating 67 more[6].

UK’s future situation with respect to this network of EU PTAs is unclear (Molinonuevo, 2017). This is of relevance because “about 60 percent and 64 percent of UK exports and imports respectively take place with countries that are part of a PTA with the EU or with the EU itself” (World Bank, 2016, p. 2). Since the treaty of Rome, EU members have delegated power on trade to EU’s institutions and the 2009 Lisbon Treaty increased power of the EU as opposed to EU members. In principle, if the particular PTA forms part of the small “old” group the EU used to sign years ago and only covers goods, then it will not be applicable to the UK after Brexit. This is because these PTAs fall within the exclusive competences of the EU and are concluded solely by the EU and the third country[7]. By contrast, if the PTA is more modern and comprehensive and deals with issues such as trade in services, regulatory disciplines and even FDI, then the UK and all other member states officially signed them as sovereign states. Therefore, they may still be applicable after Brexit, although probably some of the commitments may need a revision. UK will also probably have to renegotiate its obligations and rights as a member of the WTO, as they were negotiated as an EU member (Molinonuevo, 2017).

Most of the studies in Figure 1 derive a negative impact on UK’s GDP, while only a few do also cover the harmful effects for the EU-27. Whenever it is possible to compare, we see that the negative outcomes for the two regions are quite asymmetric. UK suffers much more than the EU does. The reason for this can be explained as follows. The emergence of barriers (tariffs and NTBs) to trade that will necessarily arise after Brexit contracts exports and imports between the UK and the EU-27[8]. Reductions in exports imply that firms diminish their sales, thus contracting output and GDP and probably reduce the number of jobs or, at least, make impossible their creation. The impact of the reduction of imports is less straightforward. On the one hand, it may result in a reduction of foreign competition that can make domestic firms expand their production. However, this will probably result in higher prices, which may in turn contract the demand for these more expensive products. If domestic firms expand only when imports face larger costs (because of the emergence of tariffs or NTBs), probably domestic firms are not as productive as the foreign firms producing the products that are imported. Otherwise, domestic firms would not need an increase in barriers (and costs) to the foreign producers that export their goods to thrive.

On the other hand, some of the products that countries import are complementary to their production structure. In other words, countries often import machinery or intermediate goods that are not available in the domestic economy[9]. Putting barriers to those products may harm and increase the costs of the domestic firms that need them. Similarly, imports may increase the number of products varieties which meet better the preferences of consumers or producers. Therefore, reducing the number of varieties by imposing trade barriers may decrease consumers’ welfare and increase producers’ costs, as limited competition tends to increase prices.

All in all, the impact of imports reduction is a priori unknown. What is clear, though, is that exports decreases diminish the sales of exporters. In the case of Brexit, this latter effect is much more sizeable for UK than for EU-27. After the emergence of trade barriers, reductions in exports in UK are much stronger than in EU-27, because the UK loses preferential access to the huge market of EU-27 to which it sends nearly half of its exports. By contrast, EU-27 loses preferential access to a much smaller market, namely, the UK. These differences in market sizes have the implications in terms of economies of scale we discussed above, when we pointed out that the UK realized it should join the EEC to give easy access to a big market for its exporters. But there is more, the EU-27 retains its access to the rest of the EU-27 and can compensate much of its lost trade with UK through a rise of intra-EU27 trade with virtually no barriers. Thus, these asymmetric impacts of trade explain that both EU-27 and the UK lose from Brexit but that the UK suffers most.

Most of the studies of Figure 1 have focused on its trade effects. Some exceptions in that table explain why the negative impact for the UK is markedly larger than in the rest of studies. For example, Jafari and Britz (2016) obtain a deeper negative impact in UK because they include migration effects, which the rest of studies do not analyze[10]. The same applies to Price Water House Coopers (2016), which also includes migration. In addition, this latter study introduces a treatment of unemployment rates, which usually leads to a larger impact from the policy analyzed. The most negative effects are derived by HM Treasury (2016a; 2016b). Their methodology differs from the rest of studies, because they do not model directly barriers to trade. Instead they estimate the impact of reductions of trade and FDI in productivity and introduce them in a macroeconomic model. They further include the impact of uncertainty, which is generally absent in the rest of studies, and explains to a large extent the sizeable negative impact they obtain[11].

Two studies obtain a positive outcome for UK after Brexit. Minford et al. (2016) derive a positive impact because they assume the UK will trade with the EU under WTO rules and unilaterally remove all import tariffs against all trading partners. However, in addition to that economic framework, they assume that with Brexit prices of all manufactures and agricultural goods will fall by 10 per cent and that trade responds dramatically to changes in trade costs. These assumptions have been heavily criticized by Sampson et al. (2016). Even though the elimination of import tariffs may reduce prices, simultaneously there is an increase in NTBs which may oppose this effect. Dhingra et al. (2017) and Ortiz and Latorre (2017) have also estimated the same scenario and find that the increase in trade because of the elimination of tariffs cannot compensate the losses from trading less with the EU-27.

The positive outcomes in Booth et al. (2015) rely heavily on savings because of further deregulation in UK after Brexit. In the scenario with positive results they assume that the UK reaches a free trade agreement not only with the EU but also with the rest of the world. However, the key element is deregulation. Behind the 0.6 per cent GDP increase they obtain lies a 0.75 per cent GDP increase because of deregulation, while under the 1.6 per cent GDP rise lies a 1.3 per cent GDP increase because of an extremely ambitious deregulation. Their savings due deregulation contrast with those estimated by Price Water House Coopers (2016) which are of 0.3 per cent of GDP. Also with the assessment of the OECD (2016) which highlights that not much benefit can be obtained from further deregulation in UK. In the same line, in a report derived from interviews to UK firms (Sands et al., 2017) points out that UK firms will still have to comply with all EU regulations to be able to export to the EU, while having to abide also new future UK regulations simultaneously. In other words, UK firms fear a larger regulatory burden after Brexit than before.

The negative outcomes that Booth et al. (2015) estimate come from the study of Ciuriak et al. (2015) from which they were requested. Interestingly, this latter study is one of the few that includes FDI and the operations of multinationals. However, Ciuriak et al. (2015), in Figure 5 of their paper, derive that the impact of FDI is close to zero. This contrasts with the analysis of Latorre et al. (2017) who estimate that around one third of the overall negative impact of Brexit shown in Figure 1 is because of larger barriers to the operations of multinationals. Where do these differences in results come from? Both studies use a similar methodology, a computable general equilibrium approach, and derive Brexit as an increase in the barriers that multinationals operating in services sectors face to do their operations in foreign countries. They are based on the same database, namely, Global Trade Analysis Project (GTAP), although the original data are projected to future years offering different methodologies. Interestingly, both studies include domestic and foreign multinationals operating within the same sector and also FDI flows. This latter point is important and will be explained in more detail below. One crucial issue is that the studies differ in the source from which they obtain the barriers to the operations of foreign multinationals. In Ciuriak et al. (2015), the reader is referred to a previous paper (Ciuriak and Xiao, 2014), in which it is explained how they use an FDI restrictiveness index “constructed from UNCTAD and OECD” (p. 45), whose exact values are to the best of our knowledge not available. Latorre et al. (2017) include a table with the exact costs increases for multinationals, which are based on a publicly available database from the World Bank (Jafari and Tarr, 2014). As stated above, the differences in barriers are important for the results. In addition, the model of Ciuriak et al. (2015) is a dynamic one within a framework of perfect competition, while Latorre et al. (2017) use a Melitz (2003) setting in which it is possible to take into account differences in firms’ productivity and economies of scale. This latter framework tends to grasp larger impacts for trade and multinationals’ operations.

4. On the modelling of multinationals and foreign direct investment (FDI)

The difficulty in modelling the economy-wide impact of FDI lies in how to grasp its adjustment after new requirements for UK and EU multinationals emerge with Brexit. As mentioned earlier, investment is volatile and not always rational. In reality, agents’ (consumers, producers, governments) decisions are not easy to model. However, the case of investment is particularly complex. For example, in the case of firms’ exporting and importing decisions, there is a lot of support for what has been called “the gravity law”. This implies that the bulk of trade flows take place among countries that are (geographically and culturally) close and the larger countries’ size are (in terms of GDP) the more they trade. That is why, to a large extent, EU countries trade so much among them. Even though there are exceptions to this gravity law, it predicts well much of foreign trade. By contrast, for FDI the patterns are much weaker.

There are two main approaches in the literature to try estimate economy-wide impacts of multinationals (see Latorre, 2009; and Tarr, 2013; for reviews). Some studies rely on the evolution of FDI flows to estimate the impact of multinationals’ operations. They do not need to predict the evolution of FDI, but just take its real data and introduce them in a model. This is the approach of recent studies such as Zhou and Latorre (2015, 2014a, 2014b), who differentiate the impact of FDI across sectors in the economy. In other words, investment data are available by sector and can be, therefore, modelled as more (or less) productive capital to be used in chemicals, motor vehicles or food sectors. Because these sectors differ in their production structures (e.g. some are more capital intensive than others or rely more on imported intermediates than other sectors) the impact of multinationals varies depending on the sector to which they accrue. This may look simple but there are other accomplished analyses that illuminate other aspects of multinationals using aggregates of manufacturing sectors (Arkolakis et al., 2015; Arita and Tanaka, 2014; Burstein and Monge-Naranjo, 2009; McGrattan and Prescott, 2009; Ramondo, 2014; Ramondo and Rogríguez-Clare, 2013).

A step forward is to differentiate between the technology of multinationals versus that of domestic firms within the same sector[12] (Balistreri et al., 2015; Olekseyuk, 2016; Latorre and Hosoe, 2016; Latorre, 2016). This approach is very demanding in terms of data and it may become hard to solve the model. In addition, detailed data are only available in the EU (Eurostat, 2017) or for Japanese multinationals. However, in the case of Brexit, no series on the evolution of FDI are available. The approach has turned to model possible changes in costs for multinationals’ affiliates when operating in the other Brexit partner. The idea turns out to be the contrary to liberalization processes in which barriers were reduced. This was the case of the Transatlantic Trade and Investment Partnership (TTIP) before Trump stopped it (Latorre and Yonezawa, 2018).

It is also the idea behind the current Chinese policy of attracting investment in its services sectors (Latorre et al., 2018b). In this latter paper, particular attention is paid to the impact of this policy on the UK versus that experienced by EU-27. Because of the important UK’s services specialization, it benefits from the lowering of barriers to the operations of multinationals’ affiliates more than EU-27 does. Although the difference between both regions is of interest, it should be noted that the gains in terms of GDP are really limited and seem far to compensate the losses because of forgone trade with the EU-27 after Brexit. However, as data of UK’s affiliates in China have been made available from 2013 onwards by Eurostat (2017)[13], they have probably increased from the values used in the model of Latorre et al. (2018b), which are based on Fukui and Lakatos (2012). If UK’s affiliates operations have become larger, then the impact for the UK would be more positive than what Latorre et al. (2018b) capture. This is a point that merits attention in future research.

5. Multinationals versus trade in the UK

In this section, data on the activities of foreign affiliates (AFAs) of multinationals are analyzed. This contrasts with the standard approach of using the evolution of FDI stocks and flows to quantify the importance of foreign multinationals. AFAs refer to their sales, employment, value added generation and are, therefore, related to their impact on real variables of an economy. As noted above, this information is less readily available for different economies across the globe. By contrast, data on FDI are taken from the balance of payments and it is easier to have long series for them.

Markusen and Venables (1998, 2000), among others, have illustrated the importance of analyzing multinationals’ effects through data on AFAs, rather than on FDI. For example, in the past World Investment Report (2017, Table I. 4, p. 26), FDI flows have decreased, while foreign affiliates’ sales have increased (in the period 2015-2016 and for the world as a whole). Once the foreign plant has been established, it may expand without any need for further FDI. If FDI is coming; however, this may indicate more operations and signal an expansion. But it may also reflect other operations, such as M&As, that may not be related to an expansion of production capabilities in the host economy. Because data on FDI may be not always related to real variables, as discussed in Gómez-Plana and Latorre (2014), it seems preferable to rely more on data of AFAs if they are available.

That is why we use foreign affiliates’ sales and contrasts them with trade data. Figure 2 presents the evolution of the shares of UK foreign affiliates’ sales in EU-27 (over total UK’s affiliates sales abroad) and the share of total UK exports going to EU-27. Both concepts reflect two different ways for the provision of UK’s products in foreign markets. EU-27 has lost importance as an investment destination for UK (with a negative trend since 2011) and represents less than 25 per cent of total turnover in 2014, which is the last official data available from Eurostat (2017)[14]. This contrasts heavily with the importance of EU-27 for UK’s exports. The latter are well beyond 40 per cent in all years considered.

Figure 3 shows that EU-27 foreign affiliates’ sales operating in UK are also more relevant than imports from EU-27 (53 per cent versus 39 per cent in 2014). While the differences between multinationals’ operations and trade are smaller than in the previous figure, it is still notorious that trade links between EU-27 and UK are more important than those of foreign affiliates. Figure 4 shows that foreign (non EU-27 and EU-27) affiliates play a quite important role in UK. They account for a much larger share in total sales (37.4 per cent) than in the average of the EU-28 (28.6 per cent) in 2014. The share of foreign affiliates in UK also stands out versus other large economies, such as Germany (22.7 per cent), France (20.4 per cent), Italy (18.1 per cent) and Spain (27.2 per cent).

Figure 5 displays foreign affiliates’ sales of UK’s top investment partners. On its left the sales are for foreign affiliates operating in the UK, while on its right, they are for UK’s foreign affiliates abroad. The most remarkable facts are:

  • EU-27 is more important as an investor in UK (with 38.8 per cent of total affiliates’ sales in 2014) than as a destination of UK’s multinational sales (24.2 per cent of UK’s sales abroad). Thus, European countries such as France, Germany, Netherlands or Spain are among the main home economies for foreign affiliates operating in the UK. By contrast, other countries such as Australia, Singapore, Hong Kong or South Africa account for a large share of UK’s affiliates outward sales.

  • The top 15 investment partners (including Offshore Financial Centers, OFC) explain about 90 per cent of total inward and outward affiliates’ sales.

  • The USA is clearly the most important investment partner for the UK. It accounts for 26.5 per cent of inward sales of foreign affiliates in the UK, although EU-27 accounts for 38.8 per cent. Additionally, 30.3 per cent of outward sales of the UK’s foreign affiliates abroad are in the USA, which surpasses the 24.2 per cent in EU-27.

  • Offshore Financial Centers have played an important role, particularly since 2012, becoming the second most relevant destination in outward operations (13.6 per cent) and the third as origin of foreign affiliates (11.4 per cent).

  • The volume of overall sales of foreign (non EU-27 and EU-27) affiliates in UK (row “foreign firms” on the left bottom of Figure 5) is broadly comparable with sales of the UK’s affiliates abroad (row “total” on the right bottom of Figure 5). Although, foreign affiliates sales in the UK (1,555,303 million euros) have become somewhat larger than those of the UK’s affiliates abroad (1,136,740 million euros) in 2014.

Figure 6 offers the importance of the UK’s main trading partners:

  • EU-27 (and Europe) is much more relevant for these activities (57.3 and 43.1 per cent in the UK’s Imports and Exports, respectively) in 2016, than in the case of affiliates operations. This fact can be related to the “gravity law” alluded to above.

  • Trade is more diversified than foreign affiliates’ operations. The top 15 countries explain 77.7 per cent of Imports and 68.5 per cent Exports in 2016, well below the shares explained by investors.

  • The USA represents “only” 11.9 per cent (Imports) and 18.2 per cent (Exports) in 2016, although it has slightly increased its shares in the past years in both flows.

  • Asia has gained some importance during last years, reaching 20.0 per cent of imports and 18.0 per cent of exports. By contrast, Africa has been reducing its weight in the UK’s trade.

6. International investment agreements

Until the entry into force of the 2009 Treaty of Lisbon, FDI agreements belonged to the individual member states exclusive competence. The EU member states have concluded around 1400 bilateral investment treaties (BITs), which amount to half of the world’s BITs. BITs are liberal instruments strongly protective of investor interests (Titi, 2015). The UK has signed over 1000 BITs since 1975, the last one with Colombia in March 2010. This was the latest BIT concluded by the EU or its member states (Molinonuevo, 2017). Interestingly, the EU is currently negotiating an investment agreement with China. This is an issue to which we will come back later on.

In principle, BITs concluded by the UK with third countries will remain valid after Brexit (Molinonuevo, 2017). As the UK negotiated and signed them in their own capacity and independently of the EU, Britain’s separation from the EU should not have any direct legal effect on these treaties. However, Brexit will entail that UK-based firms, including foreign-owned firms, will no longer benefit from the freedom of establishment in the EU – and vice versa (i.e. they will no longer be able to do business in other EU member states with the benefits derived from the EU Single Market). In this new situation, third countries may consider that Brexit has diminished the value of their negotiated commitments and could wish to revise the terms of the investment treaty that links them to the UK. Third countries may seek some form of compensation in sectoral commitments or changes in the text of the agreements. A detailed understanding of the terms and conditions of the specific investment agreements is essential for considering potential amendments. In any case, Amendments to BITs would be possible even if those treaties do not expressly address this possibility by invoking the rebus sic stantibus doctrine of international law. This doctrine allows for a termination on an international because of a fundamental change of circumstances[15] (Molinonuevo, 2017).

After the 2009 Lisbon Treaty, FDI has come under exclusive European competence and part of the EU’s common commercial policy[16]. Nevertheless, the exact scope and content of exclusive competence in investment remains subject to controversy. Some interpret that the European Commission (EC) has understood its power as a comprehensive and exclusive one, as if the EU member state model BITs should only have a marginal role to play in EU negotiations. But the regulation of December 12, 2012 underlines that “bilateral investment agreements that specify and guarantee the conditions of investment should be maintained in force and progressively replaced by investment agreements of the Union”[17]. This means that EU member states’ BITs that existed before the entry into force of the Lisbon Treaty are maintained in their application and allows member states to amend an existing BIT or conclude a new one with third countries if terms, conditions and procedures set out in the regulation are respected (Art.1.1). In addition, to open negotiations or to sign a BIT, member states must obtain authorization from the EC (Art.12).

Interestingly, the EC considered in 2012 that the principles that inspired EU Free Trade Agreements should also inspire the new EU investment policy and safeguard sovereign states’ right to regulate its investment treaties[18]. According to Article 205 of the TFEU[19], in the field of the common commercial policy, the EU has a “constitutional obligation” to comply with the principles that guide its external action[20]. These principles include democracy, human rights, sustainable development, the preservation and improvement of the environment, sustainable management of natural global resources and the guiding principles of the Charter of the United Nations. The European Parliament expressed itself along the same lines, as well as the Council (Titi, 2015). The mentioned standards have to be taken into account in the EU’s future investment policy. Investor protection “must remain the first priority” of future EU investment agreements never forgetting to address the right of each state to protect the public capacity to regulate”[21]. Thus, the Parliament considers necessary to achieve a balance between investor protection and the protection of the right to regulate. That is why, the Resolution of April 6, 2011[22] called on the Commission to include the right to regulate for EU Member States governments in all future investment agreements.

To sum up. In the past, EU members could regulate their investment in third markets (i.e. outside the EU) as they wished through BITs. Maybe this is the reason why UK is more related to non-EU economies in FDI than in trade, although other factors may be playing a role in this regard. However, with the Treaty of Lisbon, this capacity will be under the control of a supranational authority, namely, the EC, as happens with foreign trade agreements of the EU. This new framework has not been fully implemented and the BITs regime will last for a period. Simultaneously, national governments may still retain some scope for sovereignty in matters related to “public policy objectives”. The scope of this latter concept, however, may also be the matter of controversy. This is of relevance for UK FDI policies after Brexit.

One final interesting case is the investment agreement that the EU begun to negotiate in 2013 with China. According to Latorre et al. (2018b), UK multinationals have the potential to obtain more benefits than EU firms in services sectors of China. However, we must also consider what the leveraging power of UK alone (versus that of the EU-27) could be. One of the objectives of the Transatlantic Trade and Investment Partnership (TTIP) was to set the rules for FDI around the world. If the USA and the EU agreed on such rules, then chances existed that they could have made China abide those rules. The UK alone may have more difficulties to make China offer interesting conditions for UK multinationals, compared to the power of the EU-27 when negotiating with China (Subramanian and Kessler, 2013).

7. Concluding remarks

Most economic studies derive that Brexit will be much more harmful for the UK than for the EU-27. This is because they are focused on its trade effects and, thus, capture UK loses preferential access to its most important trade partner, heavily reducing UK’s exports. However, very few studies have analyzed the impact of multinationals’ operations. Modelling the economy-wide impact of FDI and multinationals is a particularly complex task. But, the EU-27 plays a much smaller role as an investment partner for the UK than in the case of trade. Additionally, EU trade and FDI regimes have differed considerably for a long time. While trade was since the beginnings the exclusive competence of the European Commission, FDI was completely in the hands of EU sovereign states. Nevertheless, since the 2009 Lisbon Treaty, FDI is also going to be transferred to the European Commission. The implementation of this new regime will take some time, but it implies that in the future the UK will be able to continue with its own FDI policies after Brexit, contrary to the situation for the other EU member states. The UK government may continue to exploit this special regime, but it will also have to deal with the fact that UK’s negotiation leverage is much more reduced than that of the EU-27.


Brexit impact on GDP (in percentage)

Figure 1.

Brexit impact on GDP (in percentage)

UK’s foreign affiliates sales in EU-27 over total UK’s foreign affiliates abroad and UK exports to EU-27 over total UK exports (in percentage)

Figure 2.

UK’s foreign affiliates sales in EU-27 over total UK’s foreign affiliates abroad and UK exports to EU-27 over total UK exports (in percentage)

EU-27 foreign affiliates’ sales in UK over total foreign affiliates sales in the UK and UK imports from EU-27 over total the UK imports (in percentage)

Figure 3.

EU-27 foreign affiliates’ sales in UK over total foreign affiliates sales in the UK and UK imports from EU-27 over total the UK imports (in percentage)

Shares of national firms and of foreign affiliates in total sales by country (in per cent)

Figure 4.

Shares of national firms and of foreign affiliates in total sales by country (in per cent)

Foreign affiliates sales for the UK’s top investment partners (2008-2014, in percentage and absolute values)

Figure 5.

Foreign affiliates sales for the UK’s top investment partners (2008-2014, in percentage and absolute values)

The UK’s main trading partners (2008-2016, in percentage and absolute values)

Figure 6.

The UK’s main trading partners (2008-2016, in percentage and absolute values)



Greenfield investments create plants for production abroad and increase value added, foreign trade and employment. By contrast, when FDI is related to Mergers and Acquisitions (M&As) its impact on real variables is much weaker. Moreover, after M&As (i.e. brownfield invetsments), there are usually reductions in employment. M&As imply buying more than 10 per cent of the social capital of a foreign firm. Its concept is, therefore, closer to a financial investment. For more details, see Gómez-Plana and Latorre (2014).


Non-tariff barriers are all non-price restrictions on trade in goods, services and investment, at federal and state level. This includes border measures (customs procedures, etc.) as well as behind-the-border measures flowing from domestic laws, regulations and practices.


In contrast with tariffs, it is very difficult to estimate the costs involved in overcoming non-tariff barriers. It is hard to translate legislation into costs for exporting firms.


If the UK ends up having a Norway-type of relationship, then it “would have access to 26 EFTA Free Trade Agreements (FTAs) but not to other EU FTAs […]. EU rules on free movement of people would apply, Britain would make budgetary contributions and goods would face trade costs at customs checkpoints” (World Bank, 2016, p. 16).


Decades in the case of Switzerland and six years for CETA.


The map of the EU’s trade relations worldwide can be found in:, particularly enlightening analyzes of UK alternatives can be found in HM treasury (2016a) and in World Bank (2016).


Examples of these PTAs are the EU customs union agreements with Turkey, San Marino and Andorra and the set of agreements with EFTA countries (Norway, Iceland and Switzerland) of 1973, the EC-Syria Cooperation Agreement of 1978 and the Interim Partnership Agreement with Fiji and Papua New Guinea of 2009 (Molinonuevo, 2017).


The size of barriers will depend on the final agreement about the future trade relationship. Some of them, such as customs checks, will be immediate. Others will appear as regulations in the UK and the EU drift apart, since currently UK abides EU regulation.


For example, “60 percent of UK imports of intermediates come from countries with whom the EU has a PTA in force. In addition, 56 percent of UK exports of intermediates go to other EU PTA members” (World Bank, 2016, p. 2).


In addition, they asume larger NTBs arising from Brexit compared to the studies of Dhingra et al. (2017), Latorre et al. (2017), Ortiz and Latorre (2016), which also increases the negative impact.


Uncertainty is also included in Price Water House Coopers (2016) and found to be quite harmful but only for the initial period after Brexit. It is not included in the results displayed in Table 1. So far the impact of uncertainty has not materialized in UK aggregates. UK has been growing below the EU average in the last quarters, but it is still growing (Oxford Economics, 2017).


For example, Latorre (2012, 2013) display comprehensive comparisons of production structures across sectors of the Czech Republic for which particulary detailed data exist. Multinatinals’ affiliates are more capital intensive and rely more on imported intermediates than their domestic counterparts within the same sector.


Moreover, these data are available with a delay. In 2017, the latest data are for 2014, only a few countries not including the UK have data for 2015.


Eurostat (2017) series cannot be extended because of methodological changes.


This principle is part of the Vienna Convention on the Law of Treaties (VCLT), which recognizes the possibility of unilaterally terminating the agreements if there is a “fundamental change of circumstances” that was “essential” for the conclusion of the agreement and that it “radically [. . .] transform[s] the extent of [its] obligations” (Art. 62 VCLT).


By virtue of article 207 of the Treaty of Functioning of the European Union (TFEU) replaced by the Treaty of Lisbon in the same articles linked to the article 2.1 of the same treaty. (Treaty of Lisbon amending the Treaty on European Union and the Treaty Establishing the European Community 2007, OJ C306, at 1; Treaty on the Functioning of the European Union, as adopted by the Treaty of Lisbon (TFEU) 2010, OJ C83/49, Arts 206-207).


European Parliament and the European Council, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, Regulation, (EU) No 1215/2012, 12 December 2012, Arts 1.1; 12.


EU Commission, 7 July 2010, supra note 2.


TFEU, supra note 1.


Treaty of Lisbon, art. 205, supra note 1.


Regulation, 12 December 2012, supra note 3.


Regulation, 12 December 2012, supra note 3.


Arita, S. and Tanaka, K. (2014), “Heterogeneous multinational firms and productivity gains from falling FDI barriers”, Review of World Economics, Vol. 150, pp. 83-113.

Arkolakis, C., Ramondo, N., Rodríguez-Clare, A. and Yeaple, S. (2015), “Innovation and production in the global economy”, NBER working paper series 18972.

Baldwin, R.E. (Ed.) (2016), “‘Introduction’ in Brexit Beckons: thinking ahead by leading economists”, CEPR Press, available at:

Balistreri, E.J., Tarr, D.G. and Yonezawa, H. (2015), “Deep integration in Eastern and Southern Africa: what are the stakes?”, Journal of African Economies, Vol. 24 No. 5, pp. 677-706.

Booth, S., Howarth, C.P., Mats Ruparel, R. and Swidlicki, P. (2015), “What if? The Consequences, challenges and opportunities facing Britain outside EU”, Open Europe.

Burstein, A. and Monge-Naranjo, A. (2009), “Foreign know-how, firm control, and the income of developing countries”, Quarterly Journal of Economics, Vol. 124, pp. 149-195.

Busch, B. and Matthes, J. (2016), “Brexit – the economic impact a meta-analysis”, IW Report 10/2016, Cologne Institute for Economic Research.

Jafari, Y. and Britz, W. (2016), “Brexit – an economy-wide impact assessment looking into trade, immigration, and Foreign Direct Investment”, Paper presented at the 20th Annual Conference on Global Economic Analysis, West Lafayette, Indiana, 7-9 June.

Ciuriak, D. and Xiao, J. (2014) “The trans-pacific partnership: evaluating the ‘Landing Zone’ for negotiations”, working paper Ciuriak consulting, 21 September.

Ciuriak, D., Xiao, J., Ciuriak, N., Dadkhah, A., Lysenko, D. and Narayanan, G.B. (2015), “The trade-related impact of a UK exit from the EU single market”, Ciuriak Consulting, Toronto, April.

Dhingra, S., Huang, H., Ottaviano, G., Pessoa, J.P., Sampson, T. and Van Reenen, J. (2017), “The costs and benefits of leaving the EU: trade effects”, CEP Discussion Paper No 1478, April.

Eurostat (2017), “Foreign controlled EU enterprises - inward FATS (fats)”, available at:

Fukui, T. and Lakatos, C. (2012), “A global database of foreign affiliate sales”, GTAP research memoranda 4009, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University, Purdue.

Gómez-Plana, A.G. and Latorre, M.C. (2014), “When multinationals leave: a CGE analysis of divestments”, Economics-The Open Access Open-Assessment E-Journal, Vol. 8, pp. 1-41.

HM Treasury (2016a), “HM Treasury analysis: the long-term economic impact of EU membership and the alternatives Discussion paper”, April.

HM Treasury (2016b) “HM Treasury analysis: the immediate economic impact of leaving the EU”, Discussion paper, May.

Jafari, Y. and Tarr, D.G. (2014), “Estimates of Ad valorem equivalents of barriers against foreign suppliers of services in eleven services sectors and 103 countries”, World Bank Policy Research Working Paper 7096.

Latorre, M.C. (2009), “The economic analysis of multinationals and foreign direct investment: a review”, Hacienda Pública Española/Revista de Economía Pública, Vol. 191, pp. 97-126.

Latorre, M.C. (2012), “Industry restructuring in transition after the arrival of multinationals: a general equilibrium analysis with firm-type costs’ differences”, Post-communist Economies, Vol. 24, pp. 441-463.

Latorre, M.C. (2013), “On the differential behaviour of national and multinational firms: a within and across sectors approach”, The World Economy, Vol. 36, pp. 1245-1372.

Latorre, M.C. (2016), “A CGE analysis of the impact of foreign direct investment and tariff reform on female and male workers”, World Development, Vol. 77, pp. 346-366.

Latorre, M.C. and Hosoe, N. (2016), “The role of Japanese FDI in China”, Journal of Policy Modeling, Vol. 38 No. 2, pp. 226-241.

Latorre, M.C. and Yonezawa, H. (2018), “Stopped TTIP? Its potential impact on the world and the role of neglected FDI”, forthcoming in Economic Modelling, available at:

Latorre, M.C., Olekseyuk, Z. and Yonezawa, H. (2017), “Trade and FDI-related impacts of Brexit: a world-wide perspective”, paper presented at the 20th Annual Conference on Global Economic Analysis, West Lafayette, Indiana, 7-9 June.

Latorre, M.C., Yonezawa, H. and Zhou, J. (2018b), “A general equilibrium analysis of FDI growth in Chinese services’ sectors”, China Economic Review, Vol. 47, pp. 172-188.

Latorre, M.C., Olekseyuk, Z., Yonezawa, H. and Robinson, S. (2018a), “Brexit: everyone loses, but Britain loses the most”, forthcoming as a Peterson Institute for International Economics (PIIE) Policy Brief.

McGrattan, E. and Prescott, E. (2009), “Openness, technology capital, and development”, Journal of Economic Theory, Vol. 144 No. 6, pp. 2454-2476.

Markusen, J.R. and Venables, A.J. (1998), “Multinational firms and the new trade theory”, Journal of International Economics, Vol. 46 No. 2, pp. 183-203.

Markusen, J.R. and Venables, A.J. (2000), “The theory of endowment, intra-industry trade and multinational trade”, Journal of International Economics, Vol. 52 No. 2, pp. 209-234.

Melitz, M.J. (2003), “The impact of trade on intra-industry reallocations and aggregate industry productivity”, Econometrica, Vol. 71 No. 6, pp. 1695-1725.

Minford, P., Gupta, S., Le, V., Mahambare, V. and Xu, Y. (2016), Schould Britain Leave the EU? an Economic Analysis of a Troubled Relationship, Second edition, IEA, Paris.

Molinonuevo, M. (2017), “Trade governance and legal implications for third countries”, Policy Research Working Paper No. 8010, Trade and Competitiveness Global Practice Group, March.

OECD (2016), “The economic consequences of Brexit: a taxing decision”, OECD Economic Policy Paper No. 16.

Office of National Statistics (ONS) (2017), “The Pink Book: 09 geographical breakdown of the current account”, available at:

Olekseyuk, Z. (2016), “Modeling of FDI in business services: additional effects in case of Ukraine’s European integration”, The Journal of International Trade & Economic Development, Vol. 25 No. 7, pp. 1010-1043.

Ortiz, G. and Latorre, M.C. (2016), “No trans-pacific partnership? Good or bad for Mexico?”, Journal of International Trade Law and Policy, Vol. 16 No. 2, pp. 106-123.

Ortiz, G. and Latorre, M.C. (2017), “A first quantitative approach to a hard and soft Brexit, paper presented at the 20th Annual Conference on Global Economic Analysis, West Lafayette, Indiana, 7-9 June.

Oxford Economics (2017), “Country economic forecast: UK”, 29 August.

Price Water House Coopers (2016), “Leaving the EU: implications for the UK economy”, March.

Ramondo, N. (2014), “A quantitative approach to multinational production”, Journal of International Economics, Vol. 93, pp. 108-122.

Ramondo, N. and Rodríguez-Clare, A. (2013), “Trade, multinational production, and the gains from openness”, Journal of Political Economy, Vol. 121, pp. 273-322.

Sampson, T., Dhingra, S., Ottaviano, G. and Van Reenen, J. (2016), “How ‘Economists for Brexit’ manage to defy the laws of gravity”, VOXeu, available at:

Sands, P., Balls, E., Leape, S. and Weinberg, N. (2017), “Making Brexit work for British business: business: key execution priorities”, M-RCBG Associate Working Paper Series No. 77, Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School, June.

Subramanian, A. and Kessler, M. (2013), “The hyperglobalization of trade and its future”, Working Paper 13-6, Peterson Institute for International Economics, Washington, DC, July.

Tarr, D.G. (2013), “Putting services and foreign direct investments with endogenous productivity effects in computable general equilibrium models”, in Dixon, P.B. and Jorgenson, D.W. (Eds), Handbook of Computable General Equilibrium Modeling, Elsevier, Amsterdam, Vol. 1, Chapter 6, Part A, pp. 303-377.

Titi, C. (2015), “International investment law and the European union: towards a new generation of international investment agreements”, The European Journal of International Law, Vol. 26 No. 3, pp. 639-661.

Wall Street Journal (2017), “World news: EU, UK Approach trade talks”, Wall Street Journal, (9 December).

World Bank (2016), “Trade and investment implications of Brexit: note prepared by the World Bank Group Trade & Competiveness Global Practice”, 11 July.

Zhou, J. and Latorre, M.C. (2015), “FDI in China and global production networks: assessing the role of and impact on big world players (East Asia, Japan, EU28 and US)”, MPRA Paper 62297, University Library of Munich, Munich.

Zhou, J. and Latorre, M.C. (2014a), “How does FDI influence the triangular trade pattern among China, East Asia and the US? a CGE analysis of the sector of electronics in China”, Economic Modelling, Vol. 44, pp. S77-S88.

Zhou, J. and Latorre, M.C. (2014b), “The impact of FDI on the production networks between China and East Asia and the role of the US and ROW as final markets”, Global Economic Review: Perspectives on East Asian Economies and Industries, Vol. 43 No. 3, pp. 285-314.

Supplementary materials

9781787568907.pdf (22.8 MB)
JITLP_17_1-2.pdf (22.9 MB)

Corresponding author

María C. Latorre can be contacted at: