Copenhagen report highlights Brexit impact and options

Updated / Wednesday, 14 Feb 2018 12:27

Ireland will lose under all four of the possible Brexit scenarios

Yes, Brexit is going to be bad for the Irish economy. But is there anything we can do to lessen its malign impact? Copenhagen Economics - which bills itself as the Nordic Regions leading economics consultancy - suggests some strategic and tactical ways to mitigate some of the worst Britain’s departure can throw at us in a report commissioned by the Department of Business, Enterprise and Industry.

First, the bad news. Copenhagen Economics examines four possible Brexit scenarios, and finds that Ireland loses under all of them. The best case is for Britain to stay in the European Economic Area – the so called Norway option. This would reduce Irish output by 2030 by 2.8% of GDP (when set against a no-Brexit scenario for the same year). In 2015 money terms, this is a cost of €7 billion. In terms of exports, it is a negative hit of 3.3%, and a reduction in imports (mainly from the UK) of 3.5%. That is the least worst scenario.

The UK forming a customs union with the EU would result in Irish GDP being 4.3% lower than the baseline, as would a Free Trade Agreement (FTA).

The worst case scenario is a trade relationship governed by World Trade Organisation rules only. This would reduce GDP below the no-Brexit baseline by 7%. Exports would be 7.7% lower and imports 8.2% lower. In terms of 2015 money, the GDP hit would be €18bn.

In all scenarios Irish imports suffer more than exports because of the higher exposure to the UK for imports.

And it gets worse. Brexit will negatively impact wages for all skill groups. In the WTO "worst case" scenario, real wages for low skilled workers would be 8.7% below the baseline. For skilled workers the WTO wage hit is 6.5%. Even in the "best case" EEA scenario (the Norway deal) the wage hit is 2.6% for high-skilled and 3.5% for low skilled workers.

As the difference between the best case and worst case scenarios is €11bn (in 2015 terms), it is well worth trying to avoid the WTO scenario. However the Copenhagen Economics report points out that the December 2017 joint report by the Brexit negotiators from the European Commission "points at an FTA as the likely outcome of the EU-UK trade negotiations".

So it follows that the closer this FTA comes to resemble EEA membership, the lower the economic cost to Ireland. (The consultants also have a hypothetical improvement on the best case scenario, in which regulatory divergence for goods and services would be avoided, just leaving tariffs and border costs: this reduces the EEA cost further to 1% of GDP, or €3bn – about the annual cost of the original Anglo/Nationwide promissory note, though that was only due to run for ten years: Brexit is forever).

So, the "minimum unavoidable loss" is going to be in the range of €3-7bn a year in the best case. And as things stand, we are unlikely to get the best case. So it is likely to cost more.  The authors also admit "it will be challenging to avoid any degree of regulatory divergence", which will add to the costs.

The "first best" policy response to Brexit is to minimise the loss via best outcomes in the EU-UK trade negotiationsMinimising economic loss to Ireland would mean an agreement that has "an acceptable balance" of rights and obligations for all parties with the following main elements:

*No tariffs: Avoid imposition of any tariffs on future EU-UK trade – duty free for all products.

 - Large quotas: If some tariffs have to remain on agriculture products, sufficiently large tariff quotas should be pursued to cater for expected future trade levels.

 - Low border costs: EU-UK border costs on both sides should be minimised by using state-of-the art technology and procedures, including use of authorised economic operators as much as possible to minimize border costs.

 - Landbridge transit: Arrangements should be made to ensure undisturbed transit to/from Ireland via the UK landbridge.

 - Low regulatory divergence: Mechanisms should be put in place between the EU and the UK to avoid and minimize regulatory divergence and protect against emerging divergence as the EU or the UK develops their technical regulation further. Such mechanisms and the related dispute resolution mechanisms should apply to all areas currently covered by common EU regulation and rules (the harmonised area). For Ireland, this is important generally and would, in particular, be important for:

 - Low barriers for service trade: As for goods, similar mechanisms would be need for services to avoid regulatory divergences and excessive trade costs. This would be important for all Irish service sectors, and notably for:

While the EU negotiating mandate specifies "no cherry picking", the authors say these priorities are simply a list of area in which the Irish authorities should be particularly mindful about ensuring the overall package yields a best possible outcome.

It also sets out some domestic policy responses as well – there is no point in just sitting back and waiting for something to happen.  First there is improving trade promotion policies, which the authors acknowledge is neither quick no simple. Indeed they say diversifying trade into new markets "is a long and demanding process that can take years".

Under trade promotion it groups the following:

Much of this we have heard before. Many times, over many decades. Indeed the list of Irish organisations consulted by the report’s compilers have been saying much of this for a very long time.  Still, having paid foreign consultants to repeat this advice may yield some results.....

The same goes for advice on enterprise policies such as "improving general enterprise policies and investment incentives", or introducing "Financing options for SME’s and firms adapting to Brexit transition".  They even threw in the hoary old chestnut "improving incentives to improve R&D" (if only I had a fiver for every time I heard that one...).

The skills policy suggestions are more attuned to the specific findings of the report, notably the (somewhat obvious, though nonetheless worth stating) suggestion that skills policy actions should address the same objectives as trade promotion and enterprise policies. In other words "investing in skills which help to improve competitiveness on international markets and hence support the diversification of the export base". If you think you’ve heard all that before, you have: it’s called common sense.

Still the consultants have identified a few opportunities that might help to take a little of the sting out of Brexit (but not much). They fall in to three camps - trade, talent and investment.

They point out that just as Irish exporters will face new barriers to selling into the UK, so too will British exporters trying to sell into the much bigger EU market. This implies UK products and services will be more expensive in the EU market, so EU customers might be looking for lower cost alternatives, opening up potential new markets for Irish firms. Copenhagen economics has already factored in some of this trade upside into its scenarios. But there is room for some improvement, depending on how well Irish firms respond.

There are also talent opportunities arising from Brexit, with Ireland potentially positioning itself as a new home for talent deciding to leave the UK, notably those with skills in IT, research and financial services.

It says the biggest opportunity lies in investment, with Ireland well placed to attract entire companies or parts of multinationals wishing to be located in the EU and in an English speaking common law country.

Financial services is, it says, the most promising sector for gaining in all three categories, but good opportunities also exist in chemicals, pharmaceuticals, IT technology and digital media, where it says the "obstructions to trade and reduced access to the EU market will alter the relative attractiveness of the UK versus other locations".