By Matthew St. Lawrence
The story of Brexit has been one of immense political pressure, strong opposition and a full re-evaluation of the UK’s role not just in Europe but globally. With the approval of the UK-EU trade deal in the final hours of the transition period, many of the questions about what Brexit will really look like were answered. Much of the discussion about the economic impacts by business and political leaders, however, have been centred around the potential benefits and drawbacks to the UK economy. What is less discussed in the UK in this sense is the way in which this trade deal will impact the economies of the UK’s closest neighbours, as the implications of this split has spread far beyond the borders of the UK.
The Republic of Ireland is by far the closest, and therefore most affected, European Union member state to the UK. Data from 2019 show that there is a significant linkage between UK and Irish firms with UK exports to Ireland worth £38.3 billion, and imports from Ireland worth £24.4 billion. It is important to note the trade deficit here for Ireland. The Irish economy is therefore somewhat dependent on the free flow of goods and services between the two islands, as well as across the open border between the Republic and the region of Northern Ireland. It is this linkage of economies that has made Ireland very vulnerable to a hard form of Brexit. Whilst the trade deal allowed for tariff and quota free trading, it did bring in new layers of red tape that adds costs and time to producers who wish to ship across the border.
What will become evident in the months and years to come is whether Brexit will undermine or bluster the Irish economy within the European Union. One of the early signs that large changes are being made at the firm level is the way in which goods are transported between Ireland and continental Europe. For years, the route of choice for hauliers was the UK land bridge, which allowed for faster transit times via the ferry route from Dublin to Holyhead in Wales and via the Channel Tunnel in Folkstone in England. Multiple ferry companies have now implemented direct ferries from Rosslaire Europort to multiple continental ports. Whilst these routes take longer to transit, it avoids the countless barriers in place at either Holyhead or Dover, and thus the need for paperwork and custom checks to be made. Already, demand on these new routes far outstrips supply and crossing frequencies are being increased. On top of this, demand for crossings at Holyhead had slumped to one third of previous levels.
Overall, the impact of this move will affect both economies. For Irish firms, the longer transit times combined with the higher cost of the single crossing may be enough to significantly eat into profits and lead to prices rises on high-value and perishable goods from the continent. At the same time, there is an opportunity for Ireland to explore an export market beyond the UK which would allow for greater independence from the economic and political decisions made in Westminster. In fact, Enterpride Ireland, a government agency, has been working closely with businesses to tap into this potential market. In the years to come, exports from Ireland to the EU will become comparatively cheaper than those from the UK. Ireland may see a possible resurgence of its economy reminiscent of the ‘Celtic Tiger’ years that came to an end at the 2008 financial crisis. Exports have a real potential to drive growth in the coming years as the results of diversification come to fruition and infrastructure is put into place to support this.
For the UK, the reduction in hauliers travelling cross country will inevitably be detrimental for many companies and jobs that are central to the transport of goods. Only time will tell if these numbers stick in the long term, or as companies come to understand and streamline the paperwork needed then many hauliers will move back to using the Land Bridge. This will all be down to how the UK government can respond to issues raised by businesses in the early days of Brexit.
Many Irish firms are now using these new trading conditions to diversity their export market. For one company, 90% of their export market in 2016 was the UK, now it exports just 60%. Whilst this may seem like a significant loss to Irish GDP, many of the goods that previously were headed to the UK are now destined for growing markets in continental Europe. Many other firms will be looking to undertake these same tactics in order to reduce the risk of stock being stuck in ports or being rejected at customs checkpoints. To add to the increased uncertainty for businesses, the fall in value of the pound sterling since 2016 has led to Irish exports to the UK to be comparatively less competitive than domestic UK firms. All of this is likely to bolster the idea that Ireland needs to become less reliant on the UK in terms of trade and look to single market nations as new trading partners. The new ferry routes will allow for, and perhaps persuade, many firms to look further afield to markets currently underserved by Irish exports.
Another sector under pressure in the UK due to the trade deal is financial services. As the UK government were unable to keep allowing UK based firms access to European passporting rights, the EU passporting system for financial service companies and banks allow firms to trade freely across the entirety of the single market. As a consequence, firms are now looking or have already moved their business out of the UK and into the EU. From a report from Bloomberg, roughly 7500 jobs and $1.6 trillion had moved out of London by October 2020. This is not insignificant, and as a consequence, many of these jobs and assets shifted to Dublin, Luxemburg and Frankfurt. For many in London, these changes in regulations have not been seen in such a scale since the big bang deregulation of the 1980s. That is now not possible for firms operating out of the UK and many have moved business back into the bloc. This is, potentially, an opportunity for Dublin to strengthen its position in the European Equities market. They have already enacted legislation to lure investment managers across the Irish sea. These new rules essentially allow for greater flexibility with investment decisions and enable Ireland to remain competitive.
A further area which looks set to bolster Irelands position not just within Europe, but globally, is the fact that it is now the only majority English speaking nation within the single market. Countries such as the United States have always looked to the UK as its entry into the EU, for either economic or political purposes. A new administration led by President-elect Biden will undoubtably look at increasing economic and political ties with Ireland. There has always been an inseparable link between the US and Ireland, with more American citizens who claim to have historical links with Ireland than there are citizens currently abiding in Ireland. Ireland has always attracted large sums of foreign direct investment from US firms, most notably Apple and Dell who already support thousands of jobs across the country.
What cannot also be underestimated is the recent addition of Ireland to the UN Security Council. By increasing diplomatic ties with key global institutions and countries, Ireland is securing its position as a global power. Many firms who may be looking to invest in the future may be wise to look to Ireland as a safe bet. With a skilled workforce and free trade with the continent, it may prove to be highly lucrative.
Ireland has an opportunity in the coming years to fill the void the UK will undoubtably leave, not just in the European Union, but across the globe. With a wider export market, highly skilled workforce and a hub for direct investment, many firms looking to access the large EU market of over 400 million people will be keen to invest in this outward-looking economy. There are still challenges to be faced. Many UK firms who invest in Ireland may choose to withdraw if the barriers in place are too restrictive. Trade in financial services between London and Dublin will also suffer as a result of Brexit, with many UK based funds managers unable to trade in Ireland. Even with diversification, the UK is still a large export market for an export driven economy. The changes made will undoubtable be an immense hurdle for Irish exporters to overcome. A difficult balancing act now must take place. Understanding the immense ties that are in place between the UK and Ireland countries, whilst also looking to the continent for new partners and a wider market for Irish exports, are essential for the future success of the Irish economy.
“The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.”