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How would businesses respond to a British exit?  Lessons from Ireland’s past

By Frank Barry, Professor of International Business and Economic Development at Trinity Business School, Trinity College Dublin

 

There were very few foreign multinationals in Ireland at independence.  Henry Ford’s tractor plant in Cork, which started production in 1919, was by far the biggest.  The Irish biscuit producer Jacobs employed more in its Liverpool factory in 1922 than any British manufacturer employed in the new Irish Free State. 

 

By the late 1920s, the situation had changed.  Moderate trade barriers had been erected between Britain and Ireland and two of the largest factories in the Free State were now owned and operated by British firms that had set up here to avoid having to pay import taxes. 

 

Three British tobacco factories had opened in 1923 when excise duties began to be payable on tobacco trade.  By the end of the decade, Players-Wills were employing 1,500 workers in Dublin.  Moderate import taxes on some processed foods led to UK firm Crosse and Blackwell acquiring a long-established Dublin firm. By the late 1920s it was another of the ten biggest factories in the country, employing 1,000. 

 

Nor was all the movement in the one direction.  Carrolls, the Dundalk cigarette company, had responded in kind, opening a factory in Liverpool the same year that Players-Wills began producing in Ireland. 

 

The implications for how businesses might respond to a British exit from the EU should be obvious, but have been ignored by most of the analyses published on the topic.  

 

When Fianna Fáil first came to power in 1932 it raised trade barriers substantially.  Though they also introduced legislation to inhibit foreign ownership, they rapidly came to realise that this would stymy employment creation.  Though the legislation remained on the statute books for decades it was effectively ignored. 

 

Foreign firms arrived in droves.  Rowntree had come in 1926 in response to the moderate duties imposed by the previous government – Cumann na nGaedheal, forerunner of today’s Fine Gael.  Cadbury began producing in Ireland in 1932 to avoid Fianna Fáil’s much higher import taxes. The Belgian company General Textiles set up in Athlone, its Irish operations managed by the progenitor of the Lenihan political dynasty.  Montague Burton, grandfather of the Burton clothing stores, made shirts here to sell behind Irish tariff barriers.  Dunlop established in Cork.  Shoe manufacturers Halliday and Rawson built factories in Dundalk.

 

By the end of the protectionist era, these ‘tariff-jumping’ foreign firms employed up to one-third of the Irish manufacturing workforce. Many were among the largest manufacturing employers of the 1960s. Cadburys employed 2,000 at the time, Dunlop and Rowntree over 1,000 each. 

 

Irish policy changed dramatically from the mid-1950s when we stumbled on the strategy of low corporation tax.  We began to attract export-oriented foreign industry rather than multinationals who just sold in the Irish market.  But again protectionist barriers – in this case British – played a role.  Ireland had negotiated a special dispensation to export duty-free into the UK, an advantage that few other countries enjoyed.  This featured heavily in the IDA’s early promotional campaigns directed towards Continental, American and even UK firms.

 

Sony’s investment in Shannon in the early 1960s was one of the first cases of a Japanese multinational opening up in Europe.  Its output was directed towards the British market from which it would otherwise have been excluded.  British newspapers of the time complained that it could sell its transistor radios in the UK with the label “made in Ireland”.

 

If the UK votes to leave the EU, Europe is unlikely to offer it as benign a trade deal as the ‘leave’ camp in the referendum campaign supposes.  Fear of contagion will dominate.  If Britain is allowed to exit cost-free, the union could unravel. 

 

The foreign multinationals on which we rely sell mainly into continental Europe.  They sell almost as much back into the US as they do to Britain.  The UK however remains  the most important market for indigenous exporting firms, which are much more cost-sensitive and employment-intensive than the multinationals.  Trade barriers with Britain represent a nightmare scenario for them.

 

One of the strategies they would employ would be to set up operations in Britain, as Carrolls did in 1923 and Guinness did in the 1930s when most of the world turned protectionist. 

 

Trade barriers would make life much harder for them. But life would also be harder for the  far larger number of British firms that export into Europe.  British firms would find Ireland an attractive export platform.  This is something that most studies on the implications of Brexit for Ireland have ignored. 

 

Brexit would certainly be very costly for us.  And jumping tariff barriers is far more costly to firms than not having them to deal with them in the first place.  But businesses, like people, find ways around their difficulties.  When governments erect barriers, firms jump over them.