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With the election success of the Conservative Party in the UK in the recent general election, the new UK government is committed to holding a referendum on EU membership following negotiations between the UK and the EU on key issues of concern to the UK government. While the outcome of these negotiations and the possible referendum are uncertain, a number of scenarios for the future relationship between the UK and the EU can be identified. These include situations in which the UK remains in a reformed EU and situations where it leaves. In the latter case, further sets of possibilities exist which differ in terms of the extent to which current arrangements with respect to free trade, for example, are maintained or dismantled.
A changed relationship between the UK and the EU could potentially have farreaching consequences for Ireland especially if there were changes in areas such as trade and migration. Given this, the goals of this study are as follows:
• to describe and quantify the key economic linkages which have developed over time between Ireland and the UK in the context of EU membership, and
• arising from the above, to make an initial assessment of the risks and opportunities to these economic linkages in the context of potential future developments at EU-level, in particular a UK exit from the EU. The following areas are covered in the analysis: trade, foreign direct investment, energy and migration. While the focus of the analysis in the report is within those four areas, a broader macroeconomic view is included. As most analyses suggest that a Brexit will have negative implications for the UK economy, a simulation is included which shows how reduced GDP in the UK leads to reduced demand for Irish exports and hence reduced GDP in Ireland.
The main findings are as follows:
Trade
• Estimates from the literature suggest that a Brexit is likely to significantly reduce bilateral trade flows between Ireland and the UK. The impact could be 20 per cent or more.
• While the 20 per cent estimate is an average figure, the impact would differ significantly across sectors and products. For merchandise trade in particular, trade is very concentrated in a few product types, which implies that increased trade barriers for the most important products would have a particularly significant impact on total trade volumes.
• Some sectors such as Chemicals and Pharmaceuticals account for a large share of exports to the UK; however sectors such as Agriculture, Food and Beverages and Basic Metals are relatively more dependent on exports to the UK and so the impacts on them would be more severe.
• Trade between Ireland and Northern Ireland has been declining as a share and the overall volume is below the level expected for two trading partners located on an island. Overall Ireland is more important to Northern Irish exporters than Northern Ireland is for Irish exporters so, again, there would be differing impacts of a Brexit. Foreign Direct Investment
• The UK outside the EU would be less attractive to FDI because of uncertainty and reduced access to the EU Single Market. Less FDI in the UK would be likely to translate into a lower potential growth in the UK with negative consequences on Ireland’s economic growth.
• It might be thought that this negative effect could be counterbalanced by a positive boost for Ireland through additional FDI projects relocating from the UK. However, on the basis of patterns of the location choice of new FDI projects in Europe over the past ten years, the expected additional attractiveness of Ireland to new FDI projects is likely to be small.
• Corporate tax reforms in the UK are likely to increase the attractiveness of the UK to FDI while the magnitude of their negative impact on Ireland’s attractiveness is expected to be small.
• These effects arise in part from the fact that Ireland’s attractiveness to FDI is already high, relative to its size and geographical position in Europe. Relative to Ireland, the UK has a number of attractiveness advantages due to its larger market size and better performance with respect to financial market development, technological and innovation capacity, macroeconomic environment, and labour market efficiency. These advantages are likely to continue to attract FDI to the UK even outside the EU. Ireland’s advantage relative to the UK’s attractiveness to FDI is its more competitive corporate taxation.
Energy
• The first point that needs to be noted is the fact that an all-island electricity market has existed since 2007. Interconnection between Ireland and Northern Ireland is particularly important for Northern Ireland which relies on electricity imports from Ireland to make up for insufficient local electricity generation capacity.
• If the electricity market in Britain remains independent of the rest of the EU, enhanced interconnection with Britain would leave Ireland vulnerable to any problems in the British market. Under these circumstances enhanced interconnection by Ireland with the rest of the EU, most probably to France, could provide useful diversification, reducing risk for Irish consumers. However, this would require a large infrastructural investment.
• If the UK left the EU, it would no longer be subject to EU rules on climate change policy and renewables. Outside the EU, there would be a lower chance that they would reopen discussions on trade in renewables.
• If the UK left the EU it would no longer be subject to EU regulatory measures to deal with a possible crisis situation in the case of a gas or oil shortage. Ireland would then have to consider how best to provide protection from very unlikely, but potentially catastrophic outcomes.
Migration
• A UK exit from the EU opens up the possibility of restrictions on the free movement of people between Ireland and the UK for the purposes of work. As the UK remains an important destination for Irish emigrants especially at times of high unemployment, such restrictions could have implications for the Irish labour market.
• More broadly, the imposition of passport controls at the border with Northern Ireland would be at best inconvenient and at worst a worryingly regressive step in terms of facilitating cooperation between both parts of the island. This is possibly the strongest reason which can be advanced when arguing in favour of the maintenance of the CTA.
• Finally, almost 400,000 people who were born in the Republic of Ireland were resident in the UK in 2011. Similarly almost 230,000 British-born people were resident in Ireland in 2011. While many of these people in both jurisdictions will have passports which relate to their current residencies as opposed to their places of birth, many others could find themselves post-Brexit being resident in a country where their right to residency has come into question.
This report is a scoping study and is aimed at identifying issues and providing quantifications to the extent that this is possible. However, more detailed impact assessments would require additional new research. For example, in relation to trade, the possibility exists that Irish firms could capture market share within the EU from UK firms. Alternatively, they could lose market share in the UK market to third-country firms. These issues are not considered here. While it is likely that the incidence of trade barriers following a Brexit is likely to be greater for smaller Irish firms, an assessment of the scale of the impact would require further research. In relation to FDI, further research is needed to assess whether Brexit would impact on the sectoral composition of FDI to Ireland, how changed FDI might impact on trade and whether there might be a switch from Greenfield FDI to more merger and acquisition activity.