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Brexit trade and elections - the downside

On the day the DUP ends up propping up a minority Conservative government to deliver Brexit, it is worth taking a look at a new report from Intertrade Ireland, an organisation that supports SMEs on both sides of the border to boost trade opportunities.  

It looks at the impact of a very hard Brexit – the so called WTO scenario, in which "no deal" is agreed between Westminster and Brussels, and the WTO rules – and their associated tariffs – that would govern trade between the UK and the EU.

The good news is that almost a third of Irish exports to the UK would face no tariff whatsoever.

The bad news is those products (and this report is all about products) are almost entirely produced by the foreign multinational sector – in particular, the pharmaceutical industry.

More good news – of the 3,000 product categories surveyed, only 51 fall into the highest tariff category (35% and above).

But the bad news is they are almost all agri-food products from Irish-owned, predominantly rural-based industries, notably beef and dairy.

The bad news is even more pronounced in the pattern of trade between Northern Ireland and the Republic.

It is agriculture-centric, so the application of WTO rules would hit Ireland-Northern Ireland trade much harder than the Ireland-UK trade as a whole.

The report – carried out for Intertrade by ESRI economists – says applying the WTO trade schedule to 2016 trade levels is estimated to have an effect of reducing cross-border trade by 9%.

If non-tariff barriers are taken into account, the impact is greater – a 16% reduction in cross border trade.

They also factor in a 10% exchange rate impact, and find that it reduces exports from Ireland to both NI and GB, but a cheaper pound boosts imports from both the North and Britain.

In the case of Northern Ireland, it reduces the impact of the fall in trade from tariff and non-tariff barriers from 19% to 11%.


Dr Martina Lawless from the ESRI, one of the authors of the report, on potential post-Brexit tariffs:


Amongst all the statistics, one stands out – the biggest contributor to the drop in trade from Northern Ireland to the Republic would be in dairy, which would account for 56% of the trade change.

The likely impact of Brexit on those employment intensive, rural, traditional industries has prompted calls for Government assistance.

But other work by the ESRI suggests that the macroeconomic impact of Brexit could constrain further the Government’s ability to spend.

This is because Brexit will reduce the potential growth rate of the economy (through lower trade with the UK, lower employment as a result, and a generally slower growth rate in the UK causing slower growth here).

Indeed earlier work by the ESRI and the NIESR (its UK equivalent) suggests the impact of Brexit on long-term growth potential will be worse here than in the UK.

Potential output growth is the metric used to calculate the Expenditure Benchmark – the fiscal rule that limits rises in government spending to below the potential growth rate of the economy (the theory is to avoid unsustainable spending increases that lead to austerity in a downturn).


Dr Kieran McQuinn from the ESRI assessing the possible Brexit effect on growth metrics:


In an infelicitous conjunction, it would appear Brexit will limit the amount of fiscal space available to future governments to cope with the effects of, er, ... Brexit.

PS - here is what the OECD said about the UK's economic prospects earlier this week (they assume WTO rules - "most favoured nation" - will govern EU-UK trade):

"GDP growth is set to weaken slightly to 1.6% in 2017 and then more significantly to 1% in 2018. This projection critically assumes that ‘most favoured nation’ treatment will govern UK trade after the United Kingdom leaves the European Union in 2019.

"Private consumption growth is projected to slow, as higher inflation holds back real earnings, but a weaker growth outlook should mitigate the extent of price pressures in the economy.

"Also, households are expected to continue to support their consumption by further reducing their saving rate.

"Business investment is projected to contract amid the large uncertainty and because of lower corporate margins.

"Weaker growth could push the unemployment rate above 5%. The major risk for the economy is the uncertainty surrounding the exit process from the European Union.

"Higher uncertainty could hamper domestic and foreign investment more than projected, but swift progress in negotiations and an outcome that retains strong trade linkages with the European Union would lead to better outcomes than projected.

"Export growth could be weaker if export prices rise more than projected, reducing competiveness gains from the past exchange rate depreciation."