Brexit and Trade on the Island of Ireland DATE 10th April 2019 VENUE Whitaker Research Day, NUIG AUTHOR Martina Lawless

Outline Levels of economic integration Potential impact on Ireland of “no-deal” outcome Cross-border trade and integration Current state of play

Layers of integration - memberships Source: LGIM www.macromatters.lgim.com/

Layers of integration: trade-offs EU EEA EFTA Customs Union Free Trade Agreement WTO (Norway) (Switzerland) (Turkey) (Canada) Free trade in goods Yes Yes (except agriculture) Yes (for most goods) Mostly No Free trade in services Partial Common external tariff Ability to have own trade deals No for goods, yes for services Votes on EU regulations Under ECJ jurisdiction Indirectly Pay into EU budget Free movement of people

Red lines Source: Slide presented by Michel Barnier to the Heads of State and Government at the European Council (Article 50) on 15 December 2017

Brexit trilemma Source: Automatic Earth

Estimating the impact: known unknowns Political Uncertainty Political impasse in UK means there are a range of possible outcomes Uncertainty on shape of final trade agreement. Economic Uncertainty No precedent of a country leaving a major trading block such as EU; most estimates based on impact of EU membership Most estimates apply to the long-run, uncertainty about adjustment path.

% Reduction in long-run GDP Estimates of economic impact Study Scenario % Reduction in long-run GDP Bergin et al. (2019) Deal -2.6 No deal -4.8 "Disorderly" no deal -5.0 Arriola et al. (2018) -2.3 Copenhagen Economics (2016) EEA (Norway deal) -2.8 FTA (Canada deal) -4.3 -7.0 Central Bank of Ireland (2019) -6.0 IMF (2018) -2.5 -4.0 Vandenbussche et al. (2019) -1.3 -5.7

EU Tariffs to 3rd countries (green=food) Source: Lawless and Morgenroth, 2019

Share of trade by potential WTO-level tariff level Source: CSO 2016 and InterTradeIreland 2018

Non-tariff barriers Non-tariff barriers are anything that is not a tariffs that acts to restrict or inhibit international trade flows such as: Quantity limits (quotas) Subsidies to domestic production Technical requirements - licensing, labelling, standards Sanitary and phyto-sanitary rules Also include customs inspections and documentation Effects of customs procedures have a large negative effect on export participation but relatively little on average trade values per firm larger impact on small firms (Lawless, 2010).

Tariffs and non-tariff barriers tend to hit the same sectors Source: Lawless, 2018

Estimated impact of WTO tariffs Source: Lawless & Morgenroth, 2019

Uneven impact at regional level

Uneven regional impact within Ireland Likely to reflect pattern of most impacted sector: Proxy by share of jobs in the agri-food sector. Source: Morgenroth, 2019

Potential off-setting increase in FDI? Ireland might attract additional FDI that might otherwise have been destined for UK Existing literature suggests that EU membership increases FDI from outside the EU by 27 per cent. ESRI Economic Outlook (2016) assumed leaving the EU has the opposite effect and Ireland attracts a share of diverted FDI. Estimates a reduction in negative impact of Brexit on Ireland but not nearly large enough to offset trade reductions. Plus…regional impact very different.

Northern Exposure

Share of NI in Irish Goods Trade with UK Source: CSO 2016 and InterTradeIreland 2018

Northern Ireland External Trade Structure Source: NISRA BESES 2018

Cross-Border Trade Structure Source: CSO 2016 and InterTradeIreland 2018

Who Exports? (NI firms) Source: CSO 2016 and InterTradeIreland 2018

Cross-border deliveries by firm size Source: NISRA 2018

Impact summary Cross-border trade between Northern Ireland and Ireland more like local trade than international export activity Almost all exporting firms in Northern Ireland include Ireland as one of their destination markets. Over 80% of the smallest firm size group that export from Northern Ireland have all of their export sales in Ireland. High degree of cross-border integration through supply chains. High frequency of deliveries and low value per delivery for NI traders across the border. Impacts of any changes in the cost of trading post-Brexit liable to be felt most particularly by very small firms trading across the border.

Technological solution? Source: Deirdre Heenan via Twitter

Promise of world trade deals? For UK as a whole: Unlikely to replace levels of trade in integrated EU market. Distance still matters to trade. Trade-offs part of any international deal – across sectors, standards, migration(?). Financial services and car industry most likely to be prioritised. For Northern Ireland: If trade-offs above mean opening UK up to world food imports, would pose major competitive challenges for NI. Services exports not (currently) a major feature of economy. Any deal involving changes in food standards very problematic for cross-border flows – technology unlikely to help if standards diverge.

What happens next? Source: BBC news website 8th April 2019

Is Ireland ready? Revenue Commissioners hiring 400 extra customs staff Expecting increase in number of customs forms from 1.7 million to potentially 20 million. Dublin port has spent €30m to prepare new customs checks But hard to mitigate risk of landbridge delays. Customs advice events and funding for businesses likely to be affected. Firms increasing holding of inventories against risk of supply disruptions (AIB purchasing manager index). Legislation passed to continue cross-border travel, student grants etc. But no (public) plans on NI border checks…