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Tom Ferris is a Consultant Economist specialising in Better Regulation. He lectures on a number of PAI courses and contributes blogs regularly to PAI. He was formerly the Department of Transport’s Senior Economist.

Should we worry about the extra costs that Ireland’s foreign trade will face following Brexit? No precise answer can be given at this stage, although estimates have started to be made, since the UK Prime Minister declared that “Brexit means Brexit…”[i].

One thing is certain, there will be additional costs both here and in the UK unless Brexit happens under a “soft” scenario. Box 1 shows that there three possible scenarios; a “Soft Brexit”, a “Medium Brexit” and a “Hard Brexit”. With full EU membership, Ireland has been enjoying the “Four Freedoms” of the European Union, benefitting especially from the free movement of goods. This could change – particularly if there is a Hard Brexit where costs, such as tariffs (border taxes) and customs checks, would impact on Irish trade moving through the United Kingdom.

Box 1: Three Possible Scenarios for Brexit

1.       Soft Brexit: This European Economic Area (EEA) Scenario is a Norwegian-type solution whereby the UK would become a member of the European Economic Area (EEA), with free trade and movement of workers;

2.      Medium Brexit: This Free Trade Agreement (FTA) Scenario is based on the UK agreeing a bilateral trade agreement with the EU along the lines of the EU/Swiss trade agreements, where trade in services is not free, and

3.      Hard Brexit: This World Trade Organisation (WTO) Scenario is based on the UK and the EU failing to conclude a bilateral trade agreement. Instead, the UK would exercise its rights under the Most Favoured Nation (MFN) clause of the World Trade Organisation.

Source Material: “Modelling the Medium to Long Term Potential Macroeconomic Impact of Brexit on Ireland”, Working Paper No. 548, ESRI, November 2016

 

Impact of Different Scenarios

The different Brexit scenarios would have differing implications for Ireland’s foreign trade. If the UK agreed to go for the Soft Brexit, it would enjoy near-full membership of the Single Market, but that would mean accepting EU regulations and free movement of people, as well as making a budgetary contribution to the EU. However, for the UK to maintain membership of the Single Market without meeting the foregoing conditions would be unprecedented. While the UK Government is not yet showing its hand, statements to date by the UK Prime Minister Teresa May and her Ministers do not suggest that the foregoing conditions would be accepted in negotiations with the EU. A recent statement from the UK’s Department for Exiting the European Union would confirm that interpretation

“Our vision for Britain outside the EU is clear: a fully independent, sovereign country. We are not looking for an ‘off the shelf’ deal for our future relationship – a Norwegian model or a Swiss model – it’s going to be an agreement between an independent, sovereign UK and the EU. We want that relationship to reflect the kind of mature, cooperative relationship that close friends and allies enjoy”. [ii]

Of course, a Soft Brexit would be the preferable from the perspective of Ireland’s foreign trade. On the other hand, the other two scenarios (a Hard or Medium Brexit) would involve extra costs for Ireland. In this regard, the UK’s Institute for Fiscal Studies produced an interesting analysis, in its publication ‘The EU Single Market: The Value of Membership versus Access to the UK’[iii], which is relevant to Ireland. The analysis shows the kind of additional costs that would apply to goods moving in to and out of the UK, if the Soft Brexit does not materialise. Box 2 illustrates the different types of trade costs and barriers for goods.

 Box 2: Increased Costs for Goods moving between EU and Non-EU Countries
 
Trade BarrierCosts within EU Costs for Non-EU Countries Specific Examples
 
Tariffs and Quotas   
 
Taxes on ImportsNoneTrade deals reduce most to zero except on agriculture. Without a trade deal, goods imports to the EU face an average 5.3% but the figure varies significantly between products.

Chemicals, clothingand cars would face

4.6%, 11.5% and 10%

Quantity limitson importsNoneQuotas place a limit onimports in some products

EU limits thequantities of milk and

sugar it imports

Borders and customs   
 

checks ensuringgoods are allowed

to enter

None

Estimated to add some 2.3%and 3.3% to the cost of

trade in goods

Time and compliancecosts of customs

Clearance and

documentation

Transport costs    
 
Cost of movinggoodsYes addition of border checks

Cost of air, train orsea transport to

the EU

    
 Source Material : ‘The EU Single Market: The Value of Membership versus Access to the UK’, The Institute for Fiscal Studies, London, August 2016

The Institute for Fiscal Studies acknowledges that even with the Soft Brexit there are trade barriers such as language and transport costs that would continue to exist. However, under Hard and Medium scenarios there would be a combination of tariffs and border checks that would increase the cost of goods. Under such scenarios, Ireland would be affected to a much greater extent than other EU Member States, given the flows of Irish traffic through the UK. The harder forms of Brexit would involve increased costs and time delays unless old-style border posts are avoided and more imaginative administrative arrangements are introduced to handle customs and tariff requirements.

ESRI’s Estimates

The Economic and Social Research Institute (ESRI) recently published an analysis of the likely negative impacts of a WTO ‘Hard Brexit’ on trade between the UK and the EU[iv]. The authors of the ESRI report, Martina Lawless and Edgar Morgenroth, took the 5,200 products listed in the EU external tariff schedule and applied them symmetrically to EU-UK trade. The results of their analysis suggest that

“The EU’s exports to the UK would fall by 30% representing a 2% reduction in its total world trade. Ireland and Belgium would be the most exposed, losing 4% and 3.1% of their total exports respectively…The UK’s exports to the EU would fall by 22% but as these reductions apply to 27 trading partners, the aggregate effect is larger than that of the EU with the UK facing a fall in its total trade of 9.8%. Trade in some specific sectors, such as food and textiles would be close to wiped out while others would be almost unaffected”.

EU’s Union Custom Code

The EU are now implementing new rules and procedures, called the Union Customs Code, designed to streamline the implementation of tariff and other measures in connection with trade between the EU and other countries. While planning of this new code started well before the Brexit Referendum, it happens to be very relevant to Brexit to the extent that it focuses not only on EU Member States but also embraces non-Member States (Third Countries). The UCC was adopted on 9 October 2013, with implementation commencing at the end of April 2016. As far as Ireland is concerned, the introduction is being handled by the Revenue Commissioners[v]. They have been making individual contact with the holders of certain approvals and authorisations who face significant changes in existing practices. The UCC involves the introduction of a number of new concepts and the modernisation of many existing procedures. Some of these changes will require the development of new IT systems and enhancements to existing systems, which will be introduced on a phased basis between now and 31 December 2020.

 

Need for More Analysis and Research

The analyses by the ESRI and the UK Institute for Fiscal Studies certainly provide some very useful pointers as to how different components of Ireland’s foreign trade might be affected by Brexit. But such analyses are only the start of the process. Much more work is required across the economy, not just in the area of foreign trade. That work has started in Ireland, that is evident from outputs from the different Government Departments (being overseen by the Department of the Taoiseach), from employers organisations such as IBEC, from trade unions (being overseen by the Irish Congress of Trade Unions), and from research institutes such as the ESRI. But there is much more work, in terms of analysis and research, that needs to be done if Ireland is to be fully-prepared for Brexit when it does actually happen.

Notes


[i] Article in Independent regarding statement.

[ii] FAQ Section, UK Gov website.

[iii] The EU Single Market: The Value of Membership versus Access to the UK’

[iv] ESRI Report on impact of Brexit

[v] Union Customs Code

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