Quantifying the Impact of Potential Brexit Scenarios Utilising a Double-Logarithmic Gravity Equation

Abstract: Purpose. The purpose of this research report was to project if the Brexit would negatively impact the export quantities of passenger cars from Germany to the UK. The automotive industry is highly interconnected and barriers could severely impact the supply chain networks of automotive manufacturers. The topic was of particular interest due to the estimated implications of the Brexit and the substantial passenger car quantities that Germany exports. Methodology. The authors studied the current market structure through the use of a double-logarithmic gravity equation. The gravity model provided the foundation for a quantitative forecasting model which projected future trade quantities under different Brexit scenarios. The model was based on a sample representing 98 per cent of Germany’s total export quantity of passenger cars. Diagnostic tests suggest that the model was robust and efficient in estimating trade quantities. Findings. All Brexit scenarios were estimated to negatively impact the export quantities of passenger cars from Germany to the UK. Lower tariffs were projected to benefit export quantities of passenger cars from Germany, nevertheless, a weaker economy in the UK due to the Brexit is estimated to reduce demand for passenger cars and offset the benefits of trading with low tariffs. The most pessimistic scenario in 2030 forecasts a reduction of 15,4 per cent in exported cars compared to a scenario in the absence of the Brexit. Originality. By being the first to project the impact of the Brexit on German export quantities of passenger cars, the results provide valuable insights for automakers as well as supply chain planners and other professionals. Research limitations. The authors have narrowed their focus to the export of complete cars and do not take into account interactions between countries and industries before or after complete cars are exported.