Northern Ireland's economy has a lot more to lose from a hard Brexit than the Republic'sBrian Lucey, Trinity College Dublin
As the Brexit end game approaches, the intractability of the problems around the Irish border are thrown into sharp relief. On the one hand there is a stated desire by all parties in Northern Ireland to avoid a “hard” border (generally seen as involving customs posts and assorted paraphernalia long vanished from Europe). On the other, there is a stated intent from the British government to take the UK as a whole out of the single market, customs union and free trade areas that combine to form the structure of the EU. These are logically incompatible.
A harder border of any kind will have an effect on the economies of both north and south. It is inescapable that Brexit will bring some economic pain to Ireland. But the general consensus is that this will be concentrated in a few sectors. And a closer look at the nature of trade across the Irish border indicates that the economic losses will be significantly greater on the northern than on the southern side.
Although nobody expects a complete cession, there will be greater friction to trade than is the case at present, if barriers are put in place. A rich literature in international integration supports the notion that lowering barriers to trade results in increased trade.
So, any Brexit that takes Northern Ireland out of the customs union will have a significant impact. There will be no increased trade, in the short to medium term, with the rest of the UK, where economic growth forecasts have been constantly downgraded since the Brexit vote. Meanwhile increased barriers will be created with the EU.
Northern Ireland is not a globally linked economy. Of all sales, a mere 15% of goods are exported and 8.5% of services. In 2015 total exports amounted to £9 billion or €13 billion, of which €10.8 billion was goods. On a per capita basis this is a quarter of the export footprint of Ireland and on a services basis 20 times less.
Cross border trade flows, more specifically, are also heavily weighted against Northern Ireland. The Republic of Ireland accounts for 33% of all Northern Ireland goods exports as of 2015 and 40% of all its services exports, some 36% of total exports. In contrast Northern Ireland is a destination for just 1.7% of all Irish exports.
So any slowing of trade between the two will be of far greater importance to the Northern Irish economy.
When you examine the distribution of this trade across sectors it becomes clear that it is highly concentrated on a few. North to south trade in goods is concentrated 52% in food and drink, and in services 63% in wholesale and retail services. South to north trade in goods is 66% in food, drink and chemicals.
At first blush, then, trade between the two parts of the island revolves around integrated supply chains in Irish agribusiness, with a seasoning of warehousing services. The trade surplus which Northern Ireland enjoys with the Republic of Ireland is nearly entirely made up of food and drink exports.
This would be severely affected by a hard Brexit, which would see the UK crash into a trading regime of World Trade Organisation rules. Under WTO rules, food and related exports would face tariffs in the 30-40% range. Even with sterling declining in value this would almost certainly render Northern Ireland’s surplus moot overnight.
Even a Norway-style Brexit (where Norway pays for membership of the European Economic Area) would leave agriculture outside the free trade rules, again making this vulnerable. Add to this the fact that Northern Ireland’s agribusiness sector lags in productivity compared to other EU regions and that a hard Brexit may also see UK agriculture facing significant price pressure from cheaper world production.
Although agriculture directly does not make up a large part of either economy (less than 3% of gross value added), significant processing and manufacturing of agriculture and related products also takes place. The agri-food sector accounts for roughly 8% of total employment in both states. So the impact of any hard Brexit will be magnified. But, at least the Republic’s economy can fall back on the fact that far more of its exports go to the EU and it is much more diverse than Northern Ireland’s, making it less vulnerable to the shock of a hard Brexit.