After the Brexit vote, the debate in the UK was all about whether it would be a "soft Brexit" or a hard one.
Now the “soft” option is long off the table and the choice is between a hard, but agreed, departure for the UK from the EU trading bloc or a crash out with no trade deal.
For the Irish economy, a deal is better – much better – but this is going to hurt and be disruptive either way. And businesses which trade with the UK face significant new obligations as, whatever happens, the UK is leaving the EU customs union and single market.
1. The overall impact:
Failure to reach a trade deal will cost the Irish economy almost three percentage points of GDP next year, according to an analysis by the Department of Finance, published with the budget.
GDP growth next year was forecast to be 1.75 per cent, assuming there is no trade deal. Of course the forecasts were also drawn up on the basis of no vaccine being generally available in 2021. And the dramatic news over the past few weeks looks set to change that, even if the precise timing remains unclear.
However the no-trade- deal Brexit threat remains, as the talks run to the wire. The main overall impact of a no-deal would be on exports, which would be 4 per cent lower.
This is largely because tariffs, or special import duties, would apply in the case of a deal not being reached, as trade reverts to the lowest-common-denominator of World Trade Organisation rules.
This would be particularly damaging for the food sector and particularly beef, where heavy tariffs would apply, effectively pricing product out of the market. Some more traditional manufacturing sectors would also suffer.
No trade deal also means higher prices in the shops and this will have an impact on consumption. And the Department predicted that this would hit investment spending by businesses.
Brexit was always going to cost the Irish economy – the point of the UK exiting with no trade deal is that it brings these costs forward in time and increases them.
Previous analysis had suggested that the costs compared to no Brexit would be in the four to five per cent of GDP range over five to seven years. A no-deal means we take more of the hit up front.
And economically adjusting to a sudden hit is more costly .
2. The impact on business
With the UK leaving the EU customs union and single market, new bureaucracy is on the way whether there is a deal or not.
From the EU point of view, the UK becomes a “ third country” – we just don’t know whether it will be one where a trade deal is in place, or not.
Irish companies trading with the UK face a significant challenge in terms of new paperwork for customs procedures. Many have never exported outside the EU before so this is new and potentially expensive in terms of time and resources.
Carol Lynch, partner with BDO which has established customs company Declaron with Fexco, said that the core issue is the need to lodge customs declarations and associated documentation on goods entering or leaving Ireland for the UK.
Companies need to decide whether to do this themselves or via a broker or agent. EU single market rules must also be followed, for example when importing food products which require separate documentation and procedures to ensure food safety rules are adhered to.
If a trade agreement is reached, then companies will need to understand how it works for their sector, particularly in relation to requirement on so-called rules or origin – how products with inputs from other third countries are dealt with. If there is no trade agreement, there will be an obligation to pay tariffs in some cases and further costs and paperwork.
Dr Anna Jerzewksa, of Trade and Borders,a trade and customs consultancy, said that Irish businesses will face significant additional costs whether they decide to take on the customs work themselves or engage a broker or agent.
This would price Irish beef out of the market and has led to the sector warning a massive Government support programme would be needed.
Exporters who have not already done so need to engage with their UK customers in addressing the new requirements and agree who is to undertake the necessary paperwork and specifically who will act as “importer” into the UK. Some Irish companies were finding it difficult to get UK customers to engage on this vital issue, she said, with time now running short.
Lynch says that if Irish companies want to sell goods to UK customers on a “ delivered” basis this means they need to be VAT registered in the UK or may have to look to have a company established in the market there.
Economic research has shown that these trade bureaucracy costs can carry a significant economic price – often as much or more as import duties, though of course this varies from sector to sector.
3. No trade deal
The main difference if there is no trade deal is that in addition to the customs procedures there will be tariffs, or import duties, applied on trade in both directions.
These are set under World Trade Organisation rules – the basic idea is that they must be applied to ensure the same treatment is applied to all countries with which you don’t have a trade deal. ( There is some flexibility in places).
These tariffs must be paid by the importer – but in the case of Irish exporters they must decide whether to pass them on, or try to absorb them via lower profit margins.
This dilemma is particularly acute for food products, where tariffs are highest for historical reasons. Around 40 per cent of food exports go to the UK market. In particular the €1.75 billion meat exports to the UK would be in danger, facing tariffs estimated by the sector at over €900 million, the bulk related to beef exports.
This would price Irish beef out of the market and has led to the sector warning a massive Government support programme would be needed.
Previous work by economists Martina Lawless and Edgar Morgenroth published by the ESRI estimated that Irish exports to the UK could fall by as much as 30 per cent and imports from the UK drop by 27 per cent if WTO tariffs were applied.
Government supports or policy moves on either side might reduce this, but there is at lot at stake.
Meanwhile the same authors in a separate paper estimates that if the costs of tariffs and other Brexit costs were passed on to Irish consumers, then it would cost a typical household between €900 and €1350 a year, with the main increases in grocery products.
Of course consumers could decide to buy other products instead, but again there is a lot on the line and lower income households are most at risk as they spend proportionately more of their income on goods with higher tariffs.
4. Brexit headwrecks
As the end of the transition approaches, a host of other potential headwrecks come into focus.
Some of these relate to cross-border trade and the deal which has left Northern Ireland in the UK customs union but still following EU single market rules for goods in many areas. How exactly this will work has still to be spelled out.
Dr Jerzewska said that particular uncertainties remained in relation to trade between Britain and Northern Ireland, with little communication in relation to the practical application of the Northern Ireland protocol, particularly on how products entering Northern Ireland will be checked to ensure they meet the required EU rules and duties, if they are to be applied, are paid.
This is essential as with no Irish land border they can then move into the EU single market without further checks.
This has led to fears of disruption in supermarket supply chains into Northern Ireland and possible disruption to food supply.
There is also no clarity on how rules will apply on products with supply chains which cross the Irish Border, with some of these supply chains also crossing to Britain.
And particular uncertainty relates again here to food, subject to specific and exacting rules.
A trade deal between the EU and UK would help with many of these issues, but not solve them all by any means.
Meanwhile Irish companies are nervous of disruption to the landbridge carrying Irish products through the UK to Continental EU markets.
Without a deal the chaos at ports would be worse.
It carries around 40 per cent of Irish exports to Continental markets.
In some cases direct shipping routes can substitute but they tend to take longer to reach the market – of around 40 hours at least versus 20 for the landbridge – and this is a big issues in many parts of the food sector in particular.
Without a deal the chaos at ports would be worse. But even with a deal there are severe doubts about the logistical preparedness of the UK in particular. Some kind of a phasing in of new rules might be agreed in a deal, but we just don’t know yet.
