Post-Brexit losses unlikely to be on scale envisaged by Copenhagen study
There is no doubt Brexit will be bad for Irish trade with UK but it’s uncertain as to just how bad it will be
'We are unsure what type of Brexit the UK wants and, depending on the final EU-UK relationship, we are unsure as to how the Irish economy will react.'
Over nearly 30 years, with colleagues in the ESRI, we published regular assessments of Ireland’s economic prospects in the medium term. A continuing problem in presenting our results was the difficulty of communicating the uncertainty that inevitably surrounded such an exercise.
In some cases we published two scenarios for the future but many journalists wanted to take the average of the two. Then we published three scenarios and the coverage inevitably centred on the middle one.
Some economists, such as the Irish Fiscal Advisory Council, now use “fan charts” where they show 100 different scenarios reflecting uncertainty. However, the wider public finds it hard to comprehend so many possible outcomes, and prefers to zone in on a single number.
While it is impossible to forecast the future of the economy with certainty, these exercises are essential in developing policy. They allow policymakers to consider a range of different possible challenges and a range of different corrective measures. Any set of policies should be robust in the face of unexpected events. The best analysis of future economic growth may prove wrong precisely because they influence policy to ameliorate risks.
Brexit brings with it a double helping of uncertainty. We are unsure what type of Brexit the UK wants and, depending on the final EU-UK relationship, we are unsure as to how the Irish economy will react. However, extensive research has been done in Ireland to try and understand how different types of Brexit will affect Ireland’s economic welfare.
This week, a study by Copenhagen Economics was published, undertaken for the Department of Business, Enterprise and Innovation. It analysed the effects of Brexit through trade on the economy.
Depending on type of Brexit, it suggested that the Irish economy could be worse off by between 3 and 7 per cent of GDP. This is a bit higher than the ESRI’s 2016 estimates of 2 to 4 per cent.
Having a second look at the issue can be useful, as it highlights the uncertainty that underpins all such exercises. In summary, Brexit will be bad for Irish trade with the UK: we are just unsure as to how bad.
However, two aspects of the Copenhagen study seem implausible – their estimates of the effect on pharmaceutical exports and how the food sector will react to the challenges it faces.
In its worst case scenario, the Copenhagen study assumes that over a third of Ireland’s losses will be in pharmaceuticals. However, all the firms in pharmaceuticals are foreign multinationals, so any loss of profits will affect their US parent companies, not Irish incomes.
Adaptability of sectors
Post-Brexit losses in any event are unlikely to be on the scale envisaged in the study. In what is largely a sellers’ market, if the NHS want the drugs made here, they will generally pay the going price, along with any new tariffs.
Ireland's losses from disruption of supply chains could approach the scale of losses anticipated due to exports
The study also assumes that the food industry is transfixed by the juggernaut heading its way. The initial effects of Brexit will be very serious for food and agriculture. However, over time, it is reasonable to expect the sector will adapt, offsetting some of its losses. For example, it is likely eventually to shift from producing cheddar for the UK to producing Camembert or some other cheeses for the wider EU market. The transition will take years and will be costly, but it will happen.
A major disappointment with the department is that, to date, it has failed to examine the implications of the likely major disruption to the Irish supply chain from Brexit. This will raise costs in retailing, and is likely to lead to reduced retail competition, to the detriment of Irish consumers.
While the department is responsible for competition, it appears to take the narrow view that only potential damage to exporters matters, ignoring how disruption to Irish imports could affect our wider economy. Indeed, the losses to Ireland from disruption of supply chains could possibly approach the scale of losses anticipated due to exports. This should be a priority area for the department’s attention.
Finally, the department’s study was not tasked with studying the implications of Brexit for foreign direct investment in any detail, though the authors acknowledge the importance of this issue. Work published by the ESRI in 2016 suggests that, over the next 15 years, many foreign multinationals will choose Ireland over the UK, offsetting some of the costs of Brexit for Ireland. The Japanese ambassador in London last week reflected the wider concern of foreign multinationals in the UK: they need the UK to remain in the customs union.