Events at the summit of European leaders in Salzburg have once again raised the spectre of a no-deal Brexit with the UK crashing out of the EU next March and trading under World Trade Organisation (WTO) rules.
It’s considered a nightmare scenario for Ireland so it may be opportune to consider some less toxic aspects. Are there any?
Firstly let us recognise that the UK is no longer our biggest market – it currently imports less than 13 per cent of our total merchandise exports, including food, lagging behind the US and Belgium as numbers one and two.
The second misconception is that World Trade Organisation (WTO) rules would require very high tariffs on our non-food exports to the UK if no agreement reached. The average duty on industrial goods, in fact, would be less than 5 per cent. There would, of course, be the inconvenience of making customs declarations – submitted electronically these days – and paying VAT at the point of importation; hopefully some arrangements could be put in place to defer these payments until later, so the traffic flow would be unimpeded.
The third misapprehension is that services exports are somehow less important than exports of goods. They are invisible, after all. In 2016 these were almost 1½ times the value of goods exported. The main items here are computer and financial services, which nowadays far exceed exports of traditional services such as tourism, transport, travel and insurance.
From an economic viewpoint, services are highly desirable. They provide 70 per cent of the employment in our economy, do not depend on imported components or raw materials – unlike manufacturing – and do not incur transport costs and customs inspections in their delivery.
If WTO rules come to be applied, it is to be hoped that our access to the UK, where we have a positive balance on services trade, would not be affected, even if we have to treat each other as “third countries” for export purposes. Why? International services trade is governed by mode of delivery rather than import duties, and the UK is at the liberal end of the restrictiveness spectrum.
There is a mistaken belief that our access to the wealthiest trading bloc in the world – the EU – has been followed by substantial increases in our exports there. The reality is otherwise. Forty-five years after our accession, the five strongest economies in the European Economic Community – France, Germany and Benelux – between them account for a little over a third of our total exports. More than half of those exports consist of organic chemicals, medical products and pharmaceuticals, the products of foreign direct investment in Ireland.
Clearly, there is an opportunity for Irish-owned industry to capture substantial European markets, but this may require new approaches: product modifications, stronger commercial representation and a greater integration with the diverse cultures of Europe, not to say the world. Bear in mind that membership of the EU has given us access to more than 40 countries worldwide through Preferential Trade Agreements.
However, there is no getting away from the fact that exports from the food, agriculture and fisheries category depend heavily on the UK, which imported 35 per cent of our 2016 exports. A no-deal Brexit therefore presupposes a new global focus for food exports.
All sides agree that a soft border should be sought between Northern Ireland and the Republic, and steps could still be taken in this direction in the context of a no-deal Brexit. The first would be the separation of trade transactions from customs inspections – let the merchandise flow, and fulfil the bureaucratic requirements post-factum, just as EU VAT reporting and payments are now carried out, quarterly or monthly in arrears. This would be known as free flow and would apply to goods whose imports and exports are unrestricted.
As to regulatory compliance questions, these can be solved by a combination of Authorised Economic Operators, a customs system already in operation for trusted traders; and physical inspections, which would be based on risk analysis.
This would allow exporters to do what they do best – manufacturing and marketing – rather than standing in line at customs posts.
Goods transiting the UK en route to Europe would most likely require transport in sealed containers as at present operated under the Transport Internationaux Routiers (TIR) arrangement. They could flow without inspection at the discretion of customs.
There is a danger that companies will pay less attention than they ought to their customers in the UK, but this would be to mistake an uncertain future for a present that they worked hard to achieve. Best advice would be to consider strategies to increase market share by supporting their strategic partners in the possibly difficult times that lie ahead.
- Colum MacDonnell is former head of the Irish Exporters' Association