Negative Impact
The UK decision to withdraw from the EU has very significant consequences for the Republic of Ireland, Northern Ireland, North-South relations and the relationships between the United Kingdom and the Republic of Ireland. It has been described by the Irish government as possibly the greatest economic and social challenge for 50 years.
The Department of Finance in the Republic of Ireland is of the opinion that Brexit is likely to have a material negative impact on the Irish economy. It is likely to lead to many years of uncertainty on fundamental trading conditions. The agri-food and domestic manufacturing sectors and the SME businesses that work with them are likely to be worst affected in view of the reliance on UK exports.
It is acknowledged in the UK that the potential negative impact of Brexit is probably more significant for Ireland than any other member state. This is particularly so in the event of an economic downturn in the UK and/ or tariff or other barriers to trade being introduced.
Currency Fall Effect
The immediate effect of Brexit was a sharp fall in the value of Sterling against the Euro. The position deteriorated significantly through late 2016 but recovered somewhat in 2017. It weakened with announcements in 2017 that the UK would leave the Single Market and Customs Union but later rallied and regained some of its value thereafter It weakened again after the inconclusive outcome of the June 2017 General Election, In broad terms, sterling has decreased by over 10% against its previous path.
An immediate impact of the fall in the value of sterling was to make Irish goods and services significantly more expensive in Sterling terms. There was a noticeable fall in tourism from the UK with the weakening of sterling.
Particular Exposure
Even in the absence of any other factors, the UK Treasury predicts that Brexit will have a negative impact on UK national income and growth for some time, which itself will impact on Ireland. Many Irish sectors are highly reliant on UK trade. Approximately one-sixth of all Irish imports and exports are to and from the UK. A much higher percentage value applies in certain sectors, in particular, the indigenous manufacturing and agricultural sectors.
The Department of Finance has identified
- food and beverage,
- electrical equipment,
- materials manufacturing and
- traditional manufacturing as being highly exposed to trade with the United Kingdom. Over one-third of all exports are to the UK. The sectors are also very reliant on the UK as a source of intermediate goods.
Generally, the most exposed sectors, are those in the small to medium enterprise category with a high percentage of indigenous ownership. Most such businesses are subject to much lower profit levels than those in the large multinational foreign-owned sector. They are more closely integrated into the economy with higher multipliers and dependence of local suppliers etc.
Accordingly, the combination of low-profit margins and a higher degree of integration with other sectors means the shock of a loss of demand due to currency uncertainty or regulatory changes is very significant in itself. Most employment in these sectors is outside the Dublin area, and in particular in the border and other regions with higher rates of unemployment.
The domestic tourism and hospitality sector is also very exposed to the depreciation of sterling.
Agriculture
Agriculture is Ireland’s largest indigenous sector. Agri-food and drink account for 12.3 percent of exports and €10.8 billion, 8.6 percent of employment and 7.6 percent of gross added value. More than 40 percent of Irish agri-food and drink exports go to the United Kingdom, with 31 percent going to the rest of the EU. In some sectors, the UK share of exports is much higher including 50 percent for beef, 60 percent cheese and 90 percent for mushrooms.
There is a significant cross-border trade. In the event of a reversion to WTO terms, agricultural tariffs could be as much as 60 to 70 percent in some areas. Tariffs on beef under default position could reach 50 and 60 percent. Tariffs may be lower within certain quotas.
If the UK reduced tariffs on beef and dairy products from Latin America and New Zealand, it could have a highly adverse effect on the Irish agri-food sector.
The challenge for Irish exporters to diversify in the UK is particularly acute, given the difference in cultural legal system and language in Continental Europe.
Some Sectors May Benefit
In contrast, to the indigenous sectors, financial services and hi-tech multinational firms in Ireland may benefit from Brexit.
UK enterprises in these sectors may need to establish themselves within another EU state in order to continue providing services either from or exercising further rights for a secondary establishment in other EU states. Given the common language, legal system and culture Ireland may have a relative advantage in attracting some such businesses.
Economic Objectives & Trade Agreement
One of Ireland’s key objectives is to mitigate damage to the trade relationship with the UK. The best scenario for Ireland is likely to be a transitional arrangement that prolongs EU membership during which a comprehensive free trade agreement is entered.
The UK has indicated its wish to leave both the single market and the Customs Union. However, it wishes to have most of the benefits of the customs union and single market and customs through a comprehensive and unique trade agreement.
The UK prime minister, Theresa May, in her January 2017 Lancaster House speech indicated that the UK would leave both the single market and the customs union and seek to negotiate a new comprehensive free trade agreement with the EU.
The alternative of a default “no agreement” with the consequent World Trade Organisation trading terms is unlikely to be an attractive option relative for either the UK or the EU
The negotiation of almost all key aspects of the future trading relationship is within the exclusive competence of the EU. Ireland has no specific input beyond that provided for under the EU Treaties. If there is a mixed trade agreement (covering areas of EU and national competence) then it will require ratification by all states including Ireland.
The European Council’s negotiation guidelines expressly commit to upholding the Good Friday Agreement and note the need for creative and flexible solutions to Irish-UK issues. The UK has acknowledged these issues as having a significant priority. However, it is unlikely that there will be significant carve-outs and exemptions from basic European union law and principles, for the exclusive benefit of Ireland.
Creative solutions to customs control and protection of the trading relationship are more likely to entail flexible electronic customs control than the complete absence of customs control in the event that the UK leaves the customs union. Similarly, if the UK leaves substantially the single market, it will be difficult to avoid some degree of regulatory inspection and control.
The extent to which the agreed preservation of the Common Travel Area would protect the economic aspects of migration is unclear. A wholesale exemption from free movement of workers which arguably subsists under the Common Travel Area arrangement, may not be compatible with the UK being outside the single market.
Northern Ireland Issues
The maintenance of the open land border between Northern Ireland and reland may be difficult to square with free movement across the sea boundary with the rest of the UK. The maintenance of the Common Travel Areas right to free movement of UK and Irish citizens to move and work in each other’s jurisdictions and the rights to Irish and consequently EU citizenship for persons in Northern Ireland are key objectives in negotiations. It does not appear that these matters can be agreed bilaterally between Ireland and the UK, given that they each impact on the areas of EU competence.
The UK decision to withdraw from the EU has very significant consequences for the Republic of Ireland, Northern Ireland, North-South relations and the relationships between the United Kingdom and the Republic of Ireland. It has been described by the Irish government as possibly the greatest economic and social challenge for 50 years.
Northern Ireland receives a high volume of EU funding, both through agricultural payments and under other programs.
Key Findings (from Executive Summary)
With annual trade in exports of goods and services of around €39bn,1 or about 17 per cent of
total Irish exports in 2015, the UK is a very important trading partner for Ireland. That year the
UK was just marginally ahead of the United States of America (USA) as the largest overall
country destination for Irish exports, though its importance as an export trade destination for
Ireland has declined over time. For instance, in the early 1970’s the UK accounted for over 50
per cent of Irish exports.
Decomposing Ireland’s export trade into goods and services, it is found that the UK accounts
for just under €15.5bn, or 14 per cent, of Ireland’s goods exports in 2015, and €23.5bn, or 19
per cent, of Ireland’s services exports in 2015.
According to the trade statistics the top five commodity groups, in terms of share of total Irish
exports to the UK, taken in this paper as a measure of the ‘size exposure’ to the UK, are:
I. Computer Services
II. Food and Live Animals
III. Chemicals
IV. Insurance/Financial Services
V. Transport
Exports to the UK from these five groups alone account for just over 11 per cent of Ireland’s
total global exports in 2015. Exports to the UK from the remaining commodity groups account
for a further six per cent of global Irish exports.
However, the commodity groups with the highest shares of exports to the UK as a percentage
of their total exports, taken in this paper as a measure of the ‘proportional exposure’ to the UK,
are:
I. Transport Services
II. Minerals
III. Manufactured Goods
IV. Food and Live Animals
1 These figures are based on the External Trade Statistics and the Balance of Payments statistics for 2015. Merchandise, Merchandise exports and Merchandise sector are defined in this paper as Goods, Goods exports and Goods sector.
2 An additional category “Commodities not elsewhere stated” ranks first by proportional exposure but is omitted above as this is an extremely small sector and its size distorts the measure. Commodities not elsewhere stated includes unclassified postal packages, non-legal tender coin, gold (non-monetary), gold coin and monetary gold. A ranking including this micro category is contained in the main body of this paper.
The UK is also important to Ireland as a source of imports, with 26 per cent of merchandise
imports, and 14 per cent of overall imports originating from the UK. Significantly, in terms of
manufacturing, the UK is a major source of intermediate goods used in production by
exporters.
To account for the importance of a sector in total Irish exports to the UK (the size exposure)
and the importance of the UK in that sector’s overall exports (the proportional exposure), an
exposure index is constructed that equally weights both of these measures in one composite
measure. Four out of the top five sectors were found to be goods (manufacturing) sectors.
An in-depth analysis of the goods and services sectors was undertaken using the Census of
Industrial Production 2014 (CIP 2014) and the Annual Services Inquiry (ASI 2014). This change
of data source results in a change in sectoral categorisation. This is detailed extensively in the
text. As of the date of publication of this paper, the most recently available vintages of both of
these data sources are from 2014.
Using the exposure index methodology this in-depth sectoral analysis identified the most
exposed manufacturing sectors. The top five sectors, which collectively accounted for 75 per
cent of manufacturing GVA and 112,562 employees according to CIP 2014, were:
I. Food & Beverage
II. Traditional Manufacturing
III. Materials Manufacturing
IV. Pharmachem, and
V. Printing3
The economic importance of these sectors can be understood with reference to their overall economic
size, as measured by turnover and employment. The Pharmachem sector is the largest of the exposed
manufacturing sectors in turnover terms, with Food & Beverage the largest in terms of employment.4
Exposure Index versus Turnover for Manufacturing Subsectors
Source: CSO Census of Industrial Production 2014 data. Department of Finance Analysis.
In the original version of this paper, published with Budget 2017, Electrical Equipment was the fifth most exposed manufacturing sector based on data from the 2012 release of the Census of Industrial production. However based on the 2014 release it has now been marginal replaced by the Printing sector.
4 The same picture emerges if gross value added is used instead of turnover.
[Table omitted]
The capacity of a sector to absorb UK-related shocks can be assessed by analysing the share of
a sector’s turnover that is derived from UK exports. The top five exposedmanufacturing sectors
rely on the UK for between 9.5 and 20 per cent of total sectoral turnover (see table below).
Further, in the Traditional, Materials and Electrical Equipment manufacturing sectors over a
quarter of exports go to the UK, indicating the concentrated nature of these sectors’ export
markets.
A sector could also face shocks to the cost of inputs into its production process, for instance
through (tariff or non-tariff) trade barriers or customs procedures. The share of a sector’s
production inputs that is accounted for by UK-sourced imports is a measure of the exposure of
a sector to a UK-related input shock. The importance of the UK as a production input source
varies by sector, with Pharmachem showing a relatively low reliance. Others depend on the UK
for close to 20 per cent of their production inputs (Traditional Manufacturing, and Materials
Manufacturing). This shows a lack of diversity in input sourcing.
[Table omitted]
With the exception of the Pharmachem sector, each of the most exposed manufacturing
sectors has a high domestic ownership share (in terms of turnover) and a relatively high
domestic linkage in terms of output multipliers. Overall, spillover effects from a UK-related
shock or a change in trading relationships are, therefore, likely to be more pronounced in these
sectors.
[Table omitted]
In terms of regional impacts, the most exposed manufacturing sectors have a comparatively
large share of employment outside of Dublin. Almost 80 per cent of employment in Food and
Beverage is located outside Dublin. The highest share of total employment in the exposed
sectors in a particular region is found in the Border region.
[Table omitted]
On the services side, the sectors which show the highest overall exposure, based on the
exposure index approach, are Transport, Insurance/Financial Services and Computer Services.
While Tourism does not exhibit a high exposure under this measure, approximately 40 per cent
of trips to Ireland are undertaken by UK residents and this sector is sensitive to exchange rate
changes.
Utilising novel data provided on special request by the Revenue Commissioners, sectoral profit
levels are used as an indicator of a sector’s ability to withstand a shock. Even when adjusting
for firm size,the mainly indigenous exposed sectors in manufacturing show relatively low levels
of profits as does the service sector of tourism. Profits are dominated by the Pharmachem
sector on the goods side and the Financial Services and Communications and IT sectors on the
services side. These sectors also contribute the most in corporation tax, in line with their profit
levels. This is indicative of the potential for a first round fiscal impact arising from shocks to
these large sectors.
Overall, excluding the Pharmachem sector, the exposed sectors are mostly Irish owned,
regionally based, have relatively low profit levels and have a greater share of small and
medium- sized enterprises. In addition they have a relatively high multiplier and account for a
relatively high share of employment in regions which have experienced a slower labour market
recovery since the financial crisis period.
