Share this article: Facebooktwitterredditpinterestlinkedinmail

14 October 2019

Michael Gasiorek is Professor of Economics at the University of Sussex and a Fellow of the UK Trade Policy Observatory. 

With the current state of negotiations between the UK and the EU it is easy to see why attention is focussed on the politics of a possible agreement. The contentious issue is, of course, that of the Irish border. However, the focus on the politics means that there has been little discussion of the economic impacts and specifically of the vulnerability of the Northern Irish economy to the decisions being made.

Now, even prior to the 2016 referendum Boris Johnson made it clear that, from his perspective, the decision to leave the EU was all to do with politics, and he was repeatedly dismissive that there would be negative economic consequences. He argued that:

the economic advantages for Britain [of being in the EU] are either overstated or non-existent” and that “we will trade as much as ever before, if not more”. [1]

The logical corollary of this argument is that leaving the EU, by leaving the Customs Union and the Single Market, would have a negligible impact. I have just been to the island of Ireland and it is quite clear that businesses and stakeholders do not remotely buy into this story.

What many commentators have been saying for a long time is that there are only two solutions to the problem of maintaining no border and no customs checks between Northern Ireland and the Republic of Ireland. Either the UK remains in the Customs Union and Single Market; or Northern Ireland  only remains in the Customs Union and the Single Market. Worryingly it is still not clear how well this has been understood by those negotiating supposedly on behalf of the UK, who seemed to think a workable solution could be found with just Northern Ireland in the Single Market, but out of the Customs Union together with Great Britain. The latest ‘landing-zone’ for an agreement appears to be based on a fudge with Northern Ireland being both in a customs union with GB, but also in the EU Customs Union.

Worryingly too is the lack of discussion about the economic consequences for Northern Ireland of what is being discussed. ALL of the above outcomes will directly increase the costs of trade for firms in Northern Ireland – either with Ireland or with Great Britain or with both.[2] And if the negotiations fail, the costs of exporting to Ireland will rise even more, while at the same time Northern Irish firms will be exposed to considerably more competition from imports arising from the UK governments’ ‘no-deal’ tariffs.

The economic reasons (see box below for some key relevant statistics) underlying these substantial concerns derive from several factors:

  • A large share of Northern Ireland’s sales are either to Great Britain or the Republic of Ireland. This makes the Northern Ireland economy vulnerable to disruptions to those linkages.
  • A high proportion of those sales, in particular with the Republic of Ireland, are carried out by small enterprises. This means that the negative impacts of the likely disruptions will affect a wide range of businesses and their workers. The UK government’s proposals do suggest ‘special provision for small traders’ – but what these special provisions are, and how small firms are defined is unclear.
  • This is compounded by evidence which suggests that few firms, especially the smaller firms have started to prepare for Brexit. The latest All Island Business Monitor finds that only 11% of firms have made preparations for Brexit.[3] This is driven by a combination of two factors. First there is so much uncertainty about the form Brexit might take, that firms do not know quite what to prepare for. Second, many firms simply lack the human and financial resources to devote to that preparation in such an uncertain environment.
  • A high proportion of trade is carried out by firms with low profit margins and low sales growth, and potentially therefore ‘at risk’.[4]
  • The sectors which are highly traded (46% of Northern Ireland’s exports to Ireland are in food, drinks and tobacco, as are 36% of imports) are also sectors which are vulnerable to tariff change – be this from leaving the EU Custom Union, or in the event of a ‘no deal’. In the event of a deal the concern is that the application of EU tariffs would make Northern Ireland firms uncompetitive. And in the event of ‘no deal’ the highly liberalised tariff regime proposed by the UK government is likely to have a substantial impact on the competitiveness and viability of firms in Northern Ireland  notably in agriculture and foodstuffs, but in other sectors too.

These concerns are both immediate but also longer term. The immediate short run, (which in the event of ‘no deal’ is the very short run) impacts mean that the changes in the costs of selling and buying from the Republic of Ireland, from Great Britain, and from the rest of the world will make Northern Irish firms less competitive and less able to survive. For example, the Northern Ireland’s Department of the Economy analysis of a ‘No deal’ suggests a possible decrease in exports of between 11% to 19%, and up to 40,000 jobs being vulnerable.[5]  45% of firms surveyed in Ireland and Northern Ireland stated that Brexit was one of the top issues they are currently facing.[6]

But there are also serious longer term concerns. A key driver of prosperity and economic growth in any region or country is the underlying physical and human capital. With regard to the former the worry is a ‘brain-drain’ to the extent that economic opportunities diminish in Northern Ireland. Any increase in tensions, any rise in security issues, is likely to exacerbate this. With regard to the latter, there may be an overall decline in investment and/or there will clearly be an incentive for some firms to relocate into the Republic of Ireland to avoid the higher costs of trading from Northern Ireland. [7]

So while the politics matters, and nothing can be agreed unless the politics aligns, it is important not to forget the economic realities that will be faced by the firms and people in Northern Ireland. It is not the case that the impacts will be negligible or non-existent. The consequences will be real, and potentially very long-lasting. Yet, it does not seem that this is a high consideration or priority for the UK government because of the domination of the political imperatives.

Close economic ties with Great Britain and Ireland:
  • Great Britain accounts for a high share of external sales for Northern Irish firms – in 2017 over 17% of the total turnover of firms in Northern Ireland was sold to Great Britain, and over 30% of total purchases by Northern Irish firms came from Great Britain.[8] Any increase in the costs of trade between Northern Ireland and Great Britain – be this for regulatory reasons or customs checks will impact on Northern Irish firms’ ability to export to Great Britain, and on the cost of imports.
  • The relative importance of the Republic of Ireland for Northern Ireland is smaller. Nevertheless, the Republic of Ireland accounts for over 5% of total sales by Northern Irish firms; 34% of Northern Ireland’s exports and 37% of imports by Northern Irish
  • There is a high level of supply chain integration between the Republic of Ireland and Northern Ireland This can be seen in the share of two-way trade, and in the high proportion of trade in intermediate goods.
    • In 2015, 44% of Northern Ireland’s exports to the Republic of Ireland were classified as intermediates. If you add in dairy and beef (most of which are intermediates) the share rises to 83%.[1] The corresponding total share of Northern Ireland’s imports from Ireland suggest that intermediates could account for as much as 75%.
    • Two-way traders between Northern Ireland and the Republic of Ireland account for over 60% of exports and 70% of imports.

The importance of small firms:

  • More than 50% of the firms that export are micro-enterprises (less than 10 employees) and more than 75% of exporting firms export only to Ireland, and for small firms the figure is over 80%.[9] This is particularly important with respect to Northern Ireland’s exports to the Republic of Ireland, where micro and small businesses account for 47% of all exports.[10]
  • In contrast, on average, firms selling to Great Britain tend to be larger such that three-quarters of those sales are accounted for by medium to large firms, who are also more likely to be able to deal with any additional trade costs.[11]

Vulnerability:

  • 46% of Northern Ireland’s exports to Ireland are in food, drinks and tobacco, as are 36% of imports. EU Most Favoured Nation (MFN) tariffs in dairy are over 70%, and for preparations of meat close to 20%. The UK government’s ‘no deal’ tariffs retain protection only for a small number of products. Included in this list are meat products but the tariffs will be lower than the current applied EU tariffs.
  • Work undertaken for InterTrade Ireland suggest that over 60% of firms who export goods to Ireland are ‘at risk’, and over 25% of firms selling goods to Great Britain. For services firms the figures are even greater at 78% and 61% at risk respectively.[12]

Footnotes

[1] Boris Johnson speech on the EU referendum, 9th May 2016, https://www.conservativehome.com/parliament/2016/05/boris-johnsons-speech-on-the-eu-referendum-full-text.html

[2] The current proposals entail customs checks between Northern Ireland and the Republic of Ireland because the UK intends to leave the EU Customs Union, and regulatory checks between Great Britain and Northern Ireland because Great Britain will leave the EU’s Single Market

[3] https://intertradeireland.com/insights/business-monitor/

[4] “Shock Absorption Capacity of Firms in Ireland and Northern Ireland”, InterTradeIreland

[5] https://www.economy-ni.gov.uk/publications/northern-ireland-trade-and-investment-data-under-no-deal

[6] InterTradeIreland, Business Monitor, 2019 (Q2)

[7] InterTradeIreland, Business Monitor, 2018 (Q4) reports that ‘almost a third of large businesses have experienced a negative impact on their investment decisions because of Brexit’

[8] NISRA, Overview of Northern Ireland Trade, Factsheet, https://www.nisra.gov.uk/statistics/eu-exit-analysis/eu-exit-trade-analysis

[9] “Export Participation of firms on the Island of Ireland”, InterTradeIreland.

[10] Firms with less than 50 employees. NISRA, “Overview of Northern Ireland Trade”, Factsheet, https://www.nisra.gov.uk/statistics/eu-exit-analysis/eu-exit-trade-analysis

[11] Firms with more than 50 employees. Source: NISRA, Overview of Northern Ireland Trade, Factsheet, https://www.nisra.gov.uk/statistics/eu-exit-analysis/eu-exit-trade-analysis; and “Export Participation of firms on the Island of Ireland”, InterTradeIreland.

[12] “Shock Absorption Capacity of firms in Ireland and Northern Ireland”, IntertradeIreland.

Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.

October 14th, 2019

Posted In: UK- EU

Tags: , , , , ,

Leave a Comment

Share this article: Facebooktwitterredditpinterestlinkedinmail

1 April 2019

Dr Ingo Borchert is Senior Lecturer in Economics and Julia Magntorn Garrett is a Research Officer in Economics at the University of Sussex. Both are fellows of the UK Trade Policy Observatory. 

During the first round of the indicative voting process at Parliament, the motion that proposes a permanent customs union attracted the second highest number of Ayes and was rejected by the slimmest margin of all eight motions.  This result shows the prevailing preoccupation with trade in merchandise goods.  Amongst other things, a customs union alone does nothing for services trade.  In this blog, we set out why the continued neglect of services trade is a major concern for the UK economy.[1] A twin-jet aircraft with just one engine on would ordinarily be bound for an emergency landing rather than for a smooth journey ahead. (more…)

April 1st, 2019

Posted In: UK - Non EU, UK- EU

Tags: , , ,

Leave a Comment

Share this article: Facebooktwitterredditpinterestlinkedinmail

3 August 2018

Photo of Emily LydgateDr Emily Lydgate is a lecturer in Law, Dr Peter Holmes is a reader in Economics and Dr Michael Gasiorek is a Senior Lecturer in Economics at the University of Sussex.  They are all fellows of the UK Trade Policy Observatory.

 

In describing the future regulatory relationship between the EU and UK, the recent UK White Paper proposes the notion of ‘equivalence’ in some areas. This may seem like a mere technical requirement, but equivalence is a loaded word in trade policy circles, and the UK government’s reliance on it bears further scrutiny.

With respect to goods, ‘equivalence’ shows up in two main ways. First, the UK states that it will maintain equivalence (rather than exact harmonisation with EU regulation) for some food policy rules in the context of a (more…)

August 3rd, 2018

Posted In: UK- EU

Tags: , , , ,

7 Comments

Share this article: Facebooktwitterredditpinterestlinkedinmail

Image of Alan Winters23 July 2018

L. Alan Winters CB is Professor of Economics and Director of the Observatory and Julia Magntorn is Research Officer in Economics at the UKTPO.

There is much to digest in the White Paper on The future relationship between the United Kingdom and the European Union and much to clarify. This blog is devoted entirely to trying to understand the Facilitated Customs Arrangement (FCA) that aims to deliver frictionless trade in goods between the UK and the EU after Brexit.

The FCA matters because trade that is ‘as frictionless as possible’ with the EU is now accepted by nearly everyone as desirable and has been characterised by much of business as essential. It also matters in the short term, however, because it is the UK government’s offer to the EU on how to ensure that there is no border between Northern Ireland and the Republic. Without a solution to this latter problem there will be no Withdrawal Agreement and no transition. (more…)

July 23rd, 2018

Posted In: UK - Non EU

Tags: , , , , , , , ,

6 Comments

Share this article: Facebooktwitterredditpinterestlinkedinmail

11 January 2018

Dr Ingo Borchert is Lecturer in Economics and a fellow of the UK Trade Policy Observatory.  Nicolo Tamberi is a Research Assistant in Economics for the Observatory

The North East and West Midlands are the most reliant on the European market, sending around half of their services exports to the EU. Sources: Office for National Statistics (2017a); and authors’ calculations.

Two of the biggest Brexit-voting regions would be hit hardest by a potential fall in services exports upon leaving the EU, new analysis suggests.  (more…)

January 11th, 2018

Posted In: UK - Non EU, UK- EU

Tags: , , ,

4 Comments

Share this article: Facebooktwitterredditpinterestlinkedinmail

26 October 2017

 

Nicolo Tamberi is Research Assistant for the UKTPO and Charlotte Humma is the UKTPO’s business manager.

Leaving the Single Market and the Customs Union will require the implementation of new border controls between the UK and the EU that will surely increase transport time and therefore costs. However minimal they may be, these new procedures will negatively affect trade between the two parties.

According to a study by EY, Economic footprint of the Channel Tunnel fixed link, trade between Folkestone and Calais via the Eurotunnel was estimated to be £91.4 billion or 24.8% of trade with the EU in 2014. Goods transported through the Channel Tunnel are exported from and imported to every region of the UK.

Today, transporting things from one shore to the other requires minimal controls such as those that exist between Surrey and Somerset. Businesses on both sides of the channel increase their efficiency by integrating their supply chains and by relying on the prompt connection across the channel. So, what about Brexit? If one thing is clear in the impenetrable mist surrounding the future UK-EU relations, it is that exiting the Single Market and the Customs Union will require increased border controls. (more…)

October 26th, 2017

Posted In: UK- EU

Tags: , , , , , , , , , , ,

One Comment

Share this article: Facebooktwitterredditpinterestlinkedinmail

27 September 2017

Steve McGuire is Professor of Business and Public Policy and Head of the School of Business, Management and Economics at the University of Sussex. He is a Fellow of the UKTPO.

As Bombardier is bombarded with a 220% tariff increase on exports to the US, the UK needs to wise up. There are two key points from the Boeing-Bombardier dispute that have implications for Brexit. First, leaving the European Union will not affect the sovereignty that national governments already have to dish out state aid for key industries. This will not change. Second, and this is the critical point, trade is bound up in broader political calculations. (more…)

September 27th, 2017

Posted In: UK - Non EU, UK- EU

Tags: , , , , , ,

4 Comments

Share this article: Facebooktwitterredditpinterestlinkedinmail

 

Michael Gasiorek27 September 2017

Dr Peter Holmes Reader in Economics and Dr Michael Gasiorek is Senior Lecturer in Economics at the University of Sussex and Director and  Managing Director of InterAnalysis respectively. Both are Fellows of the UKTPO.

With respect to the post-Brexit period, the UK needs to sort out its trade relationships not just with the EU but also with non-EU countries. In regard to the EU, Mrs May’s stated objective is for an “implementation” period during which “access to one another’s markets should continue on current terms”,  such that “businesses and public services should only have to plan for one set of changes in the relationship between the UK and the EU”.  However, for this to be possible, the UK will also have to deal with the relationship with non-EU countries.  In this blog, we focus on an important aspect of Free Trade Agreements (FTA) which centres around something which is a bit technical and often not well understood – called “Rules of Origin” (RoOs).[1] (more…)

September 27th, 2017

Posted In: UK - Non EU, UK- EU

Tags: , , , , ,

14 Comments

Share this article: Facebooktwitterredditpinterestlinkedinmail

23 August 2017

Dr Peter Holmes Reader in Economics at the University of Sussex and Fellow of the UKTPO

The government’s new paper  “Continuity in the availability of goods for the EU and the UK – a position paper“ acknowledges the problems that will be created by a hard Brexit in which there is a disruption in the systems for verifying compliance with mandatory standards.

The problem is that its substantive proposals deal with only the most immediate disruptions in the sale of goods that are already in the supply chain at the moment of Brexit. The official description acknowledges this: “This paper outlines the UK’s position on continuity in the availability of goods in UK and EU markets at the point of EU exit” (my italics).

Yet, the key requirement for the British economy is that there needs to be a permanent system in place for ensuring that UK product inspection systems are recognised by the EU for goods made after Brexit. (more…)

August 23rd, 2017

Posted In: UK- EU

Tags: , , ,

3 Comments

Share this article: Facebooktwitterredditpinterestlinkedinmail

16 August 2017

Dr Peter Holmes Reader in Economics at the University of Sussex and Fellow of the UKTPO

The UK government has just issued its official position paper on the issue of the customs union and Brexit. It emphasises a desire for the “most frictionless trade possible in goods between the UK and the EU” and proposes two ways of achieving this in the long term, while making it clear that the UK will leave the EU’s customs union when it leaves the EU.

The first option it proposes is a “streamlined customs arrangement” which sounds like a form of free trade agreement (but there is no mention of this as an aim). It involves keeping in place a number of the existing customs arrangements and using (untested) electronic technology to ensure the smooth processing of all documentation. The stated aim is to keep border arrangements as close as possible to what they are now to maintain continuity for businesses. (more…)

August 16th, 2017

Posted In: UK- EU

Tags: , , , , , ,

2 Comments

Next Page »