Economic realities of Brexit for firms and people in Northern Ireland
About the Author: Nick Phipps
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.
- 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.
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