Ireland will pay price of Britain leaving customs union

While the British prime minister clarified her government's approach to Brexit on Tuesday, clarity does not bring reassurance for Ireland.

In one key dimension, trade, it is clear that the UK’s approach will be particularly bad for Ireland, as well as maximising the potential damage to the UK economy.

Nonetheless, for the Irish Government, the most pressing priority is protecting the relationship with Northern Ireland. In that regard, Theresa May’s speech was important in that it recognised the UK’s responsibility to its citizens in the North, acknowledging the need to protect the freedom of movement on these islands. This is an important commitment, as the main potential obstacles to freedom of movement are within the UK’s remit, and not subject to wider EU regulations or interests.

However, the decision to leave the customs union is about as bad as it gets in terms of the economic impact on Ireland. It makes the implementation of a customs border between the North and the Republic inevitable.

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Even if there were a free-trade agreement, allowing free movement of goods between the UK and the EU, this will not apply to imports from countries outside the EU. Thus border controls will be essential to ensure that imports from third countries, such as China or India, comply with EU regulations.

Major increase in cost

This will have huge implications for the retail sector, much of which currently operates on a British Isles basis. Goods travel from warehouses in the UK to the Republic without problem. After Brexit, this will require new bureaucracy and customs duties, entailing a major increase in cost.

That could raise prices significantly for Irish consumers, posing serious competitiveness problems for the wider economy. Because of the small size of the Irish retail market, going it alone is a high-cost option.

To counter this threat, the Department of Jobs, Enterprise and Innovation and IDA Ireland need to attract new entrants to the retail sector from other EU countries. While major work has been carried out for other sectors of the economy, identifying the way forward after Brexit, little action appears to have been taken by the authorities to help the retail sector adapt.

Attracting new retailers headquartered in the EU could replace the economies of scale of UK multiples, but without the tariff barriers that would make UK grocers uneconomic in a post-Brexit world. Attracting such EU retailers is not about financial inducements; rather what will be required is a simplification or adaptation of domestic regulations to allow new entrants to acquire sites for stores.

Customs barriers will also greatly complicate importing goods from the rest of the EU via the UK. The UK outside the EU could facilitate this trade by allowing lorries to be sealed and transit the UK subject to cursory border controls. However, it would be important for us that the EU succeeds in making this a condition of the UK exit (with reciprocal rights for the UK in the EU).

Additional UK tariff barriers

Also, as with Austria before EU membership, the UK could charge non-UK lorries additional sums to use their roads, placing a heavy burden on the transit trade to Ireland. However, the negotiations with the EU on exit can also seek to avert this possibility.

If the UK had chosen to remain inside the customs union, food exports would have enjoyed very similar conditions to today. Instead, Irish food exporters will not only have to compete against advantaged third country imports on the UK market, but they could face additional (high) UK tariff barriers.

If Ireland were negotiating these issues with the UK on its own, there would be little chance of getting a satisfactory agreement. However, with the UK in the position of mendicant, the EU should be able to ensure that the Republic and the rest of the EU gets a good deal on UK exit. We need to see our concerns in these areas form part of the EU’s negotiating stance.

Finally, there remains an outside chance that the Republic could turn Brexit to its advantage. In opting to leave the customs union, the UK forgoes a major advantage that it currently has in attracting foreign investment – free access to the EU market. In addition, with the UK opting for a hard Brexit, there will be a significant exodus of financial sector firms to the EU, many of them possibly choosing Ireland as their preferred EU location.

The UK’s loss could become Ireland’s opportunity, even if the opportunity only partly compensates for the other costs.