One of the hottest issues related to Brexit is the need to find a solution concerning the border between the Republic of Ireland and Northern Ireland. The border issue has significant implications for the economy of Ireland. There is reasonable concern that Ireland’s economy is likely to be negatively impacted by Brexit because of heavy reliance on trade with the UK. Approximately 15% of Irish exports of goods and services are destined for the UK, a percentage that rises to 40% in sectors like Agri-food. The nature of the border will be a direct consequence of the results of ongoing negotiations between the UK and the EU on trade.
A recently released study, which was commissioned by the Department of Business, Enterprise & Innovation (DBEI) of Ireland and carried out by Copenhagen Economics, gives a complete picture of the situation. The study shows that the Irish economy will be negatively impacted by Brexit, regardless of the agreement reached by the UK and the EU, highlighting that the importance of finding a logical solution has little impact on trade.
The report analyses how different types of EU-UK trade scenarios could affect the Irish economy, reaching the conclusion that trade will be negatively affected under all scenarios. The report assesses the impact of Brexit on the Irish economy, analysing four long-term scenarios: a European Economic Area (EEA) scenario; a Customs Union (CU) scenario; a Free trade agreement (FTA) scenario; and a World Trade Organization Scenario (WTO).
Brexit and Trade
Ireland’s exposure to the UK in terms of trade is unique compared to the rest of the EU bloc. As already stated, the UK accounts for 15% of Irish exports; meanwhile, exports to the UK account for only 8-9% of the total when it comes to larger economies such as Germany or France. Again, Ireland is also the EU country that depends the most on imports from the UK. The reasons behind such an intense connection between the countries are plenty. Clearly, Ireland and the UK benefit from a common border and language, a long-standing common travel area, legal systems based on common law, and similar consumer tastes. Ireland, on the other hand, benefits greatly from using the UK as a land bridge for trade with the rest of the EU. To put things into perspective, two-thirds of Irish exports to the continent use the UK as a land bridge.
Trade might also suffer from major shifts in exchange rates. The fall in the pound sterling following the referendum vote has cut revenues for Irish exporters; on the other hand, Irish importers benefit from a weaker pound.
Concerning trade, Brexit is likely to disrupt Irish exports and imports in all the scenarios under consideration. In the EEA scenario, total exports of goods and services are expected to be 3.3 percent below the non-Brexit baseline level in 2030. The impact on total Irish exports could be up to -4.4 percent in the customs union scenario and -4.5 in the FTA scenario. In the WTO scenario, total Irish exports are predicted to be 7.7 percent below the non-Brexit baseline level in 2030. In percentage, imports to Ireland from the UK will be more impacted than exports because of higher exposure.
The Other Consequences of Brexit
The consequences of Brexit are not limited to trade. When trade flourishes, so does economic growth. Hence, limitations in trade will impact not only exporters but also suppliers to export-oriented firms. Meanwhile, Irish exports to the UK will lose their cost-advantage if tariffs are implemented. An increase in the price of imports from the UK, on the other hand, will impact the consumers’ buying power. All of this will most likely result in a contraction in the Gross Domestic Product.
According to Copenhagen Economics projections, Irish GDP will be 2.8 percent lower than the non-Brexit baseline level in 2030 in the EEA scenario and 4.3 percent lower in the customs union scenario or FTA scenario. Under the WTO scenario, GDP would be 7.0 percent lower than the non-Brexit baseline level of GDP in 2030 if UK regulation diverges to the full extent of non-FTA partners. Based on 2015 data, a 7% loss on GDP is equivalent to €18 billion.
Brexit will also impact the labour market of Ireland. Brexit might make working in some sectors less attractive, thus causing workers to change industries and wages to be readjusted. If an agreement that favours trade is not reached, then wages will decrease across different skill levels out of revenue losses. In the WTO scenario, results show an 8.7% plunge in real wages, relative to the 2030 non-Brexit baseline level, for low skilled workers, while the decline for high skilled workers will be 6.5 percent. In the EEA scenario, the impact will be contained and range between -2.6% for high skilled workers and -3.5% for low skilled workers.
What Happens Next?
The best scenario for the Irish economy, the study concludes, is the one in which the negative impact is minimized, i.e. the one in which the UK remains part of the European Economic Area. This is the only scenario, together with the Customs Union possibility, which would allow for a soft border between Ireland and Northern Ireland. However, at this point in the negotiations, the outcome that seems most likely is a free trade agreement, which will not rule out customs checks. In fact, although an agreement was previously struck, with May reassuring that regulatory equivalence will be maintained between Ireland and Northern Ireland, it is complicated to understand how such alignment can stand if the UK is to leave the customs union and the single market. Besides, the Democratic Union Party, which props up May’s government in Westminster, is against regulatory divergence between Northern Ireland and the rest of the UK.
There are concerns that on the UK’s part there is no agreement on this undoubtedly tricky issue: a few days ago, Foreign Secretary Boris Johnson did not mention the border in his speech, the first of a series which should give an idea of Downing Street’s Brexit roadmap. It is inevitable, though, that sooner or later Theresa May and the rest of the government will have to address this issue with clarity. Meanwhile, f, who insists that it is his priority to avoid a hard border at all costs, has agreed to cooperate with May to find a solution, while acknowledging the complexity of the task.
It is hard to imagine that a hard border will be avoided. Barnier himself has stated that if the UK leaves the single market and the customs union, customs checks will be unavoidable. However, it is likely that discussions will keep on going for a while, and it should not be ruled out that the Irish border might even derail the entire Brexit process. What is clear, on the other hand, is that Brexit is going to have a negative impact on the Irish economy regardless of the outcome. Irish companies will have to think ahead and plan new strategies in a bid to diversify their export base.
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