UK EU Brexit could cut Irish trade by 20% or maybe not
A report commissioned by the Department of Finance on the impact of the UK exiting from the EU after a referendum, says Irish trade with Britain could be reduced by 20% or more. However, this week George Osborne, UK chancellor of the exchequer, spoke in Germany to the main business lobby. We say "maybe not" as Germany has a big trade surplus with the UK, and it would be in the interest of all sides to maintain trade. The UK is far more significant than Switzerland or Norway.
Without Brexit, changes in international tax rules may reduce exports by 20% or more — for example about one third of Irish services exports to the UK of €16bn in 2013 related to €5bn of Google UK sales being booked in Dublin.
The report, Scoping the Possible Economic Implications of Brexit on Ireland, by Alan Barrett, Adele Bergin, John FitzGerald, Derek Lambert, Daire McCoy, Edgar Morgenroth, Iulia Siedschlag and Zuzanna Studnicka, of the Economic and Social Research Institute (ESRI), is published Thursday and the research was conducted under the joint Department of Finance and ESRI Research Programme on The Macro-economy and Taxation.
The economists say that the UK government is committed to holding a referendum on EU membership following negotiations between the UK and the EU on key issues of concern to the UK government. If the UK voted to leave the EU (Brexit), the resulting changed relationship between the UK and the EU could potentially have far-reaching consequences for Ireland. The "major new study" has the following aims:
1) to describe and quantify the key economic linkages which have developed over time between Ireland and the UK in the context of EU membership, and
2) arising from the above, to make an initial assessment of the risks and opportunities related to these economic linkages in the context a UK exit from the EU.
The analysis in the report is conducted across four areas — trade, foreign direct investment, energy and migration. Taken together the evidence provided by this analysis suggests that Ireland’s interests will be best served by the UK remaining within the EU.
What is presented in the report is a worst-case scenario. “It is more likely some other solution will be found, that would have less impact (for Ireland),” Edgar Morgenroth, one of the authors, said on Wednesday.
The report suggests the UK will be worse off following Brexit, while Ireland will bear the biggest impact, in terms of neighbouring states.
“The evidence provided by this analysis suggests that Ireland’s interests will be best served by the UK remaining within the EU. Ireland benefits from an economically strong UK and the UK will benefit from continued membership of the EU,” the report says.
George Osborne said on Monday in Berlin:
Since the economic crash 7 years ago, our two economies each expanded by the same 13%. The rest of Europe has grown by just 4%. We have together provided two-thirds of all the economic growth in Europe. And while we have together created over 3m jobs, jobs have been lost across the rest of the European continent.
The detailed findings include the following:
- Estimates from the literature suggest that a Brexit could reduce bilateral trade flows between Ireland and the UK by 20% or more.
- While the 20% estimate is an average figure, the impact would differ significantly across sectors, products and firm types as merchandise trade in particular is heavily concentrated in some sectors and products and indigenous firms are more dependent on the UK as an export market.
- For merchandise trade in particular, trade is very concentrated in a few product types implying that increased trade barriers for these would have a more pronounced impact on trade volumes.
- The UK is more important as a source of imports to Ireland than it is as a destination for Irish exports, and any barriers to trade would increase prices of UK imports to Ireland.
- In relation to trade between Ireland and Northern the expected impact of Brexit is likely to be more significant for Northern Irish exporters to Ireland.
Foreign Direct Investment
- The UK outside the EU would be less attractive to FDI because of its reduced access to the EU Single Market. Less FDI is likely to result in slower economic growth in the UK, which would impact negatively on Ireland’s economic growth.
- While it might be thought that a reduction of FDI into the UK would result in an economic boost for Ireland through additional FDI projects relocating from the UK, the analysis in this report shows that the expected additional attractiveness of Ireland to new FDI projects is likely to be small.
- This anticipated small effect arises in part from the fact that Ireland’s attractiveness to FDI is already high, relative to its economic size and geographical position in Europe. The analysis suggests that larger EU member states, such as Germany, France, Italy, Spain and Poland, would benefit more from the redirection of new FDI away from the UK.
- An all-island electricity market has existed since 2007, and interconnection between Ireland and Northern Ireland is particularly important for Northern Ireland, which relies on electricity imports from Ireland to make up for insufficient local electricity generation capacity.
- If the electricity market in Britain remains independent of the rest of the EU, interconnection with Britain only would leave Ireland vulnerable to any problems in the British market. Under these circumstances enhanced interconnection between Ireland and the rest of the EU could provide a useful but costly diversification, reducing risk for Irish consumers.
- If the UK left the EU, it would no longer be subject to EU rules on climate change policy and renewables, which would reduce the chance that the UK would reopen discussions on trade in renewables.
- A UK exit from the EU opens up the possibility of restrictions on the free movement of people between Ireland and the UK for the purposes of work. As the UK remains an important destination for Irish emigrants especially at times of high unemployment, such restrictions could have implications for the Irish labour market.
- More broadly, the imposition of passport controls at the border with Northern Ireland would be at best inconvenient and at worst a worryingly regressive step in terms of facilitating cooperation between both parts of the island.
- A significant number of Irish born people are resident in the UK and likewise a substantial number of UK born people are resident in the Republic of Ireland. While many of these people will have passports which relate to their current residencies as opposed to their places of birth, many others could find themselves post-Brexit being resident in a country where their right to residency might come into question in the event of a Brexit.