What will a no-deal Brexit mean for the Irish economy and businesses?
Irish businesses have been crossing their fingers for months that a Brexit trade deal can be reached. The UK’s exit from the EU single market and customs union is going to hurt one way or another, but a no deal would lead to a much higher level of disruption, cost and risk. .
Now, faced with what could be a final deadline, the two sides say they are staying away from each other. So what are the stakes for the economy, businesses and employment?
Discussions immediately following the UK’s vote in 2016 on reaching an agreement to maintain “frictionless” trade with the EU have long been forgotten. What is at stake now, as talks end on the wire, is whether there will be a hard Brexit or, worse yet, catastrophic chaos.
And such are the costs involved that some trade sources are quietly asking if it is possible to find a way to avoid this and extend the talks until 2021. It would be a surprise if Brussels had not tried to define this – and an even bigger surprise if the mandarins of the bloc admitted it at this point.
But this is legally complex as there is no clear way to extend the existing transition period and the UK has insisted that talks end this year. So far all we have from Brussels are basic measures to keep planes in the air and trucks moving and proposals on access to fisheries which the UK may or may not adhere to.
If a deal is made, it will be a basic deal at best avoiding tariffs – or import duties – and quotas on trade, but even a basic deal will mean a new customs regime that will come at costs for businesses. and will cause initial delays.
This is a major problem for Irish food producers and farmers. But there is also a larger question. Would the UK’s exit without a trade deal lead to long recriminations as a blame game sets in? Would this lead to permanent disruptions and a deterioration of future cooperation, while threatening a longer term rift between Ireland and one of our major trading partners?
Some say the UK will quickly return to the table to seek a deal next year. But many people in Ireland who are close to the negotiating process believe that the post-no-deal policy would be so toxic that it just wouldn’t happen. The truth is, we just don’t know.
The flip side is that in the longer term there would be some benefit, with the likelihood of an increase in foreign direct investment here, as the UK loses free access to EU markets. We’ve seen some of this in banking and financial services before, and there may be more to come.
A finance ministry analysis estimated this was likely to happen, but would slowly become evident, over two or three years. In contrast, most of the costs will be upfront, especially if there is no trade deal.
Calculating the economic cost of this non-trade agreement is not straightforward. “There really had been nothing like it before,” says Marina Lawless, research professor at the Institute for Economic and Social Research.
Normally, calculations of the impact of trade changes on economies are for countries entering into new deals, she says, or joining organizations such as the EU. Going the other way is almost unprecedented and calculating the impact of disrupted supply chains makes it very difficult, as well as the inability to predict what delays will occur or how long they will last.
The long-term cost to the Irish economy of a no-trade Brexit could be around 6%, according to Lawless, who spoke on the issue as a member of the Irish Fiscal Advisory Council at a committee meeting. Oireachtas this week. . This represents around 21 billion euros in terms of cash.
According to forecasts from the Ministry of Finance, in the event of a no-deal, the blow to growth next year alone could be three percentage points of GDP. In other words, a no-deal result means that the hit is not only bigger than if there was a deal, but also comes faster.
If there is an agreement, there will also be costs, as economic research suggests that the costs of so-called non-tariff barriers – the customs procedures, bureaucracy and delays that will apply even if there is an agreement. – can cost as much or more as fares.
The long-term cost if there is a deal could be around 4 percent of GDP, but the costs in the first year would be much less.
The key point of a no-deal outcome is that it would incur additional costs for two reasons. One is about tariffs, which we can calculate. The second is the reasonable expectation of more delays and disruption of supply chains for a period. It’s almost impossible to quantify, but it could be very significant, certainly in the first half of 2021.
A key issue for Ireland is the land bridge across the UK to and from EU markets, through which 150,000 trucks travel each year. Significant delays are now expected, particularly passing through UK ports to the mainland, threatening major disruption to supply chains and businesses and possibly some products on Irish shelves.
The greater costs of Brexit, even with a deal, are already being felt in the many sectors that trade with the UK as they prepare for the imposition of customs requirements.
As the UK exits the single market and customs union, it becomes a third country, which means new customs rules and detailed food and animal safety regulations, bureaucracy and controls. Many small businesses have struggled to get UK suppliers and customers to even engage on these issues, Irish Customs experts say.
A non-agreement results in tariffs – or import duties – that both parties should apply under the terms of the World Trade Organization (WTO).
In most non-food industries, as Lawless explains, these tariffs are low, usually zero, or in single numbers low, with a few exceptions like certain types of clothing and footwear which are a bit higher.
But by far the biggest tariffs are in the food sector, covering a range of products from processed foods to cheese, but with the heaviest load on meat and especially beef. The Irish beef sector exports 90 percent of its production and almost half of those exports go to the UK market, including everything from prime cuts to burgers used by fast food chains.
Tariffs on meat range from 20 percent for pork to 34 percent for poultry and over 70 percent for beef. This risks completely pushing a large part of the Irish meat trade out of the UK market.
Many of the big players – such as ABP and Dawn Meats – have invested in British factories, but these process British cattle. As tariffs would apply to unprocessed exports, there is no possibility of processing Irish beef at UK facilities. So if the tariff regime comes into effect, the sector has an immediate and very significant problem, as do the 80,000 farmers who supply it.
The dairy sector will also be affected. Although it has been more successful in diversifying markets, traditional exports in areas such as cheddar would be threatened. Processed food companies would also face great challenges. just like the mushroom sector
But if there is one key point for Ireland in a no-trade Brexit, it is the beef sector with its 1 billion euros of exports to the United Kingdom which should face a tariff wall. of more than 700 million euros.
The government is examining the support measures it could put in place for the sectors most affected in a no-deal scenario.
An extension of the wage subsidy scheme, which applies to companies affected by Covid-19 is expected, perhaps modified to take into account companies which must put their employees on short-time work due to a decline in trade. Employer groups such as Ibec have also pushed for a reinstatement of export credit guarantees to help businesses diversify into new markets.
Cormac Healy of Meat Industry Ireland, the body representing the industry, said some sort of special support mechanism would be needed to allow companies to stay in the UK market. It is not clear whether this could be done under WTO or EU state aid rules, although some special temporary supports for the sector are likely to be considered.
Farmers are also asking for special help, with their representative body, the IFA, calling for a support program and also for the EU to ban beef imports from third countries in order to create new markets for beef member countries like Ireland.
The tariffs also mean that food will be the main area of import affected into Ireland from the UK, with price increases likely in shops for a range of items from grains to meat to processed foods and all kinds of confectionery.
If there is no progress by this weekend, and a no-deal UK exit from the EU is on the table, expect requests for help from businesses. and most affected farmers become even stronger.
A real issue in the longer term is what this will mean for trade between Ireland and Britain. Integrated supply chains are already being re-examined, the land bridge will be partially bypassed, and the business calculations behind thousands of decisions about where to invest, buy and sell are changing.
It is difficult to calculate what this will mean in the years to come, but it is a seismic change.