Dr. Martina Lawless:

We thank the committee for its invitation to us to come here today to discuss some of the potential issues for the Irish economy of the Brexit decision. Even before the referendum on UK exit from the EU took place in June, the impact on Ireland of a possible "Out" vote was being analysed at the ESRI with an initial scoping study published in November of last year as part of a joint research programme with the Department of Finance. This covered the areas where the most significant economic implications would be expected - trade, foreign direct investment, energy markets and labour movement - and pointed to the important issues to be assessed in more detail.

In the aftermath of the result, these topics are being investigated in greater depth reflecting the very considerable risks that Brexit brings to the Irish economy. Given the focus of this committee on jobs and enterprise, I will concentrate my comments on the trade and foreign direct investment, FDI, effects.

It is important to emphasise before discussing any particular issues that there is considerable uncertainty about the path that a UK exit from the EU might take and the nature of the relationship between the UK and EU that will replace full membership. Projections about the impact on Ireland can have quite wide ranges depending on the assumptions made about the exit negotiations and subsequent agreements on trade and migration. Already, before negotiations have even begun, we are seeing a negative impact on Irish exporters to the UK due to exchange rate movements. Whether these are short-term reactions to the uncertainty generated by Brexit or a more permanent adjustment in currency levels is too early to call.

Access to the EU market for non-members can take a number of forms ranging from free trade deals like European Free Trade Association, EFTA, to an individually negotiated deal such as the one currently being finalised between the EU and Canada to a more complete form of exit resulting in the application of the tariff schedule that the EU applies to non-members without a specific trade agreement under the World Trade Organization, WTO, rules.

Of these three broad scenarios, the EFTA model, which exists between the EU and countries like Norway and Switzerland, would have the most modest effect on trade as it is the closest in form to full EU membership. However, as this comes with significant obligations in the form of contributions to the EU budget and freedom of movement, the political feasibility of this option in the UK is open to doubt. An individually negotiated Canadian-style deal may be the most likely in the longer run but will be extremely challenging to have completed by the exit date of March 2019. This leaves the fall-back position, at least temporarily, of WTO tariffs being implemented on EU-UK trade. These would have considerable negative impacts on EU-UK trade overall and this effect would be particularly large for Ireland.

On average, the WTO tariff rates may not appear particularly onerous but the variation is considerable and, as a result, a WTO arrangement would impact trade quite differently across the current EU member states and across different sectors within each country. More than 5,000 individual products are listed with the WTO and tariffs applied by the EU on non-members without a specific trade deal range from 0% to 80%. To give an example of particular relevance to Irish trade, the tariff on fresh or chilled boneless bovine meat is 12.8% of the value of the product plus €303 per 100 kg shipped.

Our estimates suggest that Brexit is likely to reduce bilateral trade flows between Ireland and the UK by 20% or more. A more detailed look at the differing WTO tariffs by product type shows how unevenly spread these negative effects would be. Given the current structure of trade between the UK and EU, an application of WTO tariff rates on exports from the EU to the UK would result in an average tariff of 5.7%. The tariff on Irish exports however would be almost double this at 11.7%. The reason for this is that the tariffs are consistently higher on agricultural and food exports, which account for a much higher share of Irish trade with the UK compared to the trade of other countries.

Sectors such as agriculture and food would be most severely affected, both because the tariff rates on these sectors are higher and because these sectors tend to be more reliant on the UK as a main export destination. To give another example, average tariffs on meat exports are close to 50% and this sector accounts for 8% of Irish trade with the UK compared to 1.6% of total EU trade with the UK. On the other hand, some sectors such as chemicals and pharmaceuticals, which make up a large share of Irish trade with the UK, would face relatively modest tariffs. This variation across sectors, and therefore EU member states, will be important in the negotiation of a new trade agreement as there will be significant divergence in the priority areas of the 27 remaining countries. Encouraging greater diversification across export markets will be critical in mitigating this risk to Irish exporters.

In addition to the impact on exports, there are important implications for imports. The share of merchandise imports to Ireland originating in the UK is greater than the share of Irish merchandise exports destined to the UK. This is due to the heavy reliance of Ireland on energy imports from the UK, mainly natural gas and fuels, and also retail products. Importantly, UK retailers have a very significant presence in the Irish market and many products in the Irish retail market are supplied through UK based wholesalers, as the Irish market is relatively small. Trade barriers could result in higher prices and thus have an inflationary impact.

On a somewhat more positive note, there is an opportunity for Ireland to build further on its favourable reputation as a location for FDI in the wake of Brexit. The UK is likely to be less attractive to FDI because of the uncertainty of the Brexit process and reduced access to the EU Single Market once the exit is complete. The activities of the financial sector have been raised as a major issue for post-Brexit negotiations with the EU as current passporting arrangements to give financial firms in any member state the right to do business in any other member state would be in question. The loss of, or restrictions on, these rights could result in some firms deciding to move operations out of the UK. Some of this FDI may be attracted to locate in Ireland if access to the EU market is an important consideration. This upside should not be overstated however. The size of the UK’s domestic market will still make it an attractive location for some FDI projects and, for those that do decide to go to a different European destination, Ireland will have to compete with a number of other potential locations. Continuing the Government's strategy of low corporate tax rates and the cultivation of a business friendly environment will be key to maximising this potential positive dimension of Brexit, as would addressing any infrastructural deficits that might constrain firms interested in locating or expanding in Ireland.

One final important issue to which to draw attention regarding comparing the negative trade effects of Brexit with the potential FDI gain is that, even in the fairly unlikely scenario that the aggregate effects of these two impacts balance out, the timing and distribution of the effects are likely to be very different. The trade fall will have an immediate impact with potentially large negative employment effects disproportionately affecting Irish-owned small and medium enterprise exporters. Given that food exports are particularly vulnerable, the impact is likely to be hardest felt in more rural areas. On the other hand, the benefits of an increase in FDI are likely to take much longer to become apparent - firms may start to divert some new investments but not to reduce their current UK plants or to wind them down only gradually. There is also the possibility that if a large share of the diverted FDI is in financial services, it will be drawn to locate in larger urban centres leading to increases in regional disparity.

I thank the members for their attention and we are happy to take any questions.