Hard Brexit, trade, and the border

Today’s announcement by the Prime Minister Theresa May that Article 50 of the Treaty of Lisbon will be triggered in March 2017 has brought into sharp focus the potential impact that a hard Brexit could have on the Northern Ireland economy. Should the UK leave the European Union without any form of free trade deal with the EU, then trade across the Irish border could be subject to tariffs in line with World Trade Organization rules.

A hard border between Northern Ireland and the Republic of Ireland could curtail trade and have adverse economic impacts both north and south of the border. However, in terms of the overall economy, the effects would be felt much more in Northern Ireland. A third of Northern Ireland’s exports in 2015 (£2.1bn of £6.3bn) were to the Republic (trade with Great Britain is not considered an export), whilst only 1.6% of the Republic of Ireland’s exports of €111bn were to Northern Ireland (€1.73bn).

A major risk to the Northern Ireland economy from a hard Brexit is the fact that, under WTO rules, dairy and other agricultural products are the products that incur the highest tariffs. Food and live animals accounted for 16.3% of Northern Ireland exports in 2015, the majority of which is trade with the Republic. In Great Britain, only 3.9% of exports came under this category.

Tariffs on dairy produce can be as high as 42% under WTO rules. Such a high tariff would have a disastrous effect on cross-border dairy trade. Meat and animal products attract high tariffs of 20% or more. This is before taking into account non-tariff barriers and the withdrawal of EU farming subsidies, all of which could have severe consequences for Northern Ireland’s agricultural sector, which is already under pressure due to issues such as the collapse in milk prices.

The chart below shows how the sectoral breakdown of Northern Ireland exports have changed over the last 20 years (2016 data refers only to Q1 & Q2).

The total share of Northern Ireland’s exports in 2015 to the EU (including Ireland) was 51.3%, compared to 47.7% for the UK as a whole. In 1996, 40% of Northern Ireland exports were across the border, whilst the wider EU accounted for 70.4% of Northern Ireland exports, so whilst the EU is still the destination for a majority of NI exports, its share has dropped considerably over the last 20 years.

A noticeable uptick can be seen in the above charts can be seen for pharmaceutical exports and exports to the United States. These are both due to the rapid increase in pharmaceutical exports to the United States, which has boomed in recent years. Historically, trade in agricultural products to the Republic was Northern Ireland’s most valuable export by destination and commodity, but this has now been overtaken by pharmaceutical exports to the United States.

Despite the fact that non-EU exports are growing strongly, the fact remains that agricultural exports to Ireland and the wider EU remain a vital part of the Northern Ireland economy. The argument for a hard Brexit being in the wider benefit of the UK economy is that the UK’s exports attract low tariffs under WTO rules and therefore the adverse impact of WTO tariffs on exports will be mitigated.

Whether you agree with this argument will largely depend on your views on Brexit and which way you voted in the referendum, but it seems clear that Northern Ireland, and in particular rural border areas dependent on the agricultural economy, will be amongst those who will lose out the most. In addition, these areas are amongst the poorest in the UK, and they also voted to remain in the EU by a significant margin.

Whilst it is encouraging that Northern Ireland’s exports to outside the EU have increased in recent years, the risks to Northern Ireland’s economy seem pretty clear, whilst the potential benefits in terms of easier access to external markets are vague and badly defined. It is absolutely essential that Northern Ireland’s interests are represented during the Brexit negotiations, as a hard border and punitive tariffs on Northern Ireland agricultural exports would be disastrous for the local economy.