Mr. Jim Power:

I thank the members of the joint committee for giving me the opportunity to address the implications of Brexit for the Irish agrifood and fisheries sectors. It is important to point out that nobody knows how the Brexit process will proceed and end. We are entering a period of intense uncertainty that will be fraught with political difficulty. My advice to interested stakeholders in Ireland, be they at a policy or sectoral level, is that they should operate on the basis that Brexit will happen and that it will be a hard Brexit. We should plan on that basis. If it turns out to be better, that would be a bonus, but we need to plan for the most negative eventuality.

The British Prime Minister, Ms Theresa May, has committed to invoking Article 50 by the end of March 2017, prior to which she will outline Britain's position. Once Article 50 is invoked, presumably before the end of March, it will set the ball in motion and bring to fruition all of the issues and concerns surrounding the process. However, it will take much longer to provide solutions. In theory, once Article 50 is invoked, a two-year period of negotiation will begin among the other 27 EU countries to determine what trading relationship the European should have with the United Kingdom. If agreement is not reached in that two-year period, the United Kingdom will have to apply for an extension, subject to the approval of the other 27 member states, or failing that, it will have to adopt WTO trade arrangements, with tariffs on trade between Britain and the European Union. It is important to point out that once Article 50 is invoked, the power in the relationship will shift very firmly to the European Union and away from the United Kingdom. Politically, the negotiation process will be extremely difficult and complicated because every member state will have strong vested interests, as well as strong objectives. It will be very difficult politically for the Prime Minister to deliver a settlement that will be satisfactory to her electorate and the political system in the United Kingdom.

It is important to remember that at EU level there will be very strong motivation to make the exit process as difficult as possible for the United Kingdom, not least to dissuade other EU countries from following a similar path. In other words, if an exit from the European Union is made remotely easy, it will create a very dangerous precedent to which EU policymakers will be reluctant to expose themselves.

The long-term issue which will arise at the end of the negotiation process is what trading relationship the United Kingdom will have with the European Union. A soft Brexit describes a situation where the United Kingdom would have access to EU markets and make some contribution to the EU budget but where, significantly, it would have to accept the terms and conditions of the Single Market, in particular one of four key pillars of the European Union - the free movement of people. The result of the referendum on 23 June was very heavily influenced by the notion that, in order for Britain to protect its borders against immigration, leaving the European Union was a necessity. The problem with a soft Brexit is that if the Prime Minister was to go back and say they had agreed to access to the single European market but had to accept the free movement of people, it would be incredibly difficult to sell politically. From the perspective of the European Union, there will be a very strong reluctance to make any concession on the free movement of people, not least because it is one of the key pillars of the Union but also because it would create a dangerous precedent for some member countries such as Hungary, for example, which has a very strong anti-immigration attitude, as demonstrated for many years.

A hard Brexit describes a situation where the United Kingdom would not be part of the customs union of the European Union and where trade between the United Kingdom and the Union would be subject to trade barriers such as tariffs and quotas. Inevitably, this would impact negatively on the United Kingdom's trade with the European Union. Ultimately, Britain would have to explore other export markets, but that would be easier said than done. The reality of trade theory is that geography is the key driver. Countries in close proximity to each other tend to trade with each other. We should never forget this fact.

They are the options - a soft Brexit and a hard Brexit. I find it difficult to see compromises between these two extremes.

A soft Brexit will be incredibly difficult to achieve, hence my opening suggestion we plan on the basis that there will be a hard Brexit.

As regards the United Kingdom's economic performance since the vote on 23 June, contrary to some expectations, particularly in the economics profession in the United Kingdom, including the Treasury, the UK economy has not died. In fact, it continues to perform strongly. One of the key reasons for this is that Brexit has not yet happened and consumer sentiment has not yet been adversely affected. The big issue in the slightly longer term will revolve around the attitude to business investment in the United Kingdom. If companies investing there believe they will not have free access to the EU market, the incentive to invest in the United Kingdom will be questionable. Nissan was going to be a key case study in this regard. There was a distinct possibility that it was going to transfer its manufacturing activities from Sunderland because it sells most of its cars produced in Britain into the EU market. In the event, however, it has committed to continue manufacturing the three marques it currently manufactures in Sunderland because it has obtained agreement from the Prime Minister that it will not be disadvantaged if Britain leaves the European Union. I find that promise incredibly strange because it will be difficult to deliver on it and it also creates a dangerous precedent for other companies.

Looking specifically at the agrifood sector, there are two aspects to consider, the first of which is the performance of sterling. Up to mid-November it had lost almost 30% of its value against the euro in the preceding 12 months. A lot of that weakness occurred since the vote on 23 June. In the past three or four weeks, for reasons related to the weakness of the euro rather than the strength of sterling, we have seen sterling regain ground. That largely reflects problems to do with the euro, particularly the Italian vote and the political agenda in Europe next year, rather than the inherent strength of sterling. From an Irish perspective, this obviously is of significant importance. A couple of issues arise from the weakness of the currency, one of which is the advent of cross-Border shopping. The last time there was a sterling crisis in 2008-09, there was massive damage was done to the agrifood and retail sectors south of the Border owing to the flow of shoppers across the Border. We have seen that happen again in the past two or three months. I recently conducted a price survey which suggested that, on a basket of groceries, one would make a saving of around 7%. If one builds in the cost of travelling and fuel, plus the time involved, it makes no sense whatsoever to shop north of the Border. It is a hugely significant issue for the retail sector in the South, particularly the agrifood sector. While it is not directly related to the Brexit issue, the reality for the retail grocery sector in Ireland is since the sterling crisis in 2008 and 2009 the grocery environment has become incredibly competitive. We have seen serious price compression which has squeezed margins for the agrifood sector. The margin of compression to which it has been exposed is one of the biggest issues facing it.

The longer term issue is the trading relationship the European Union and, by implication, Ireland will have with the United Kingdom. Some 60% of what indigenous Irish industry produces is exported, of which 40% goes to the United Kingdom. For the agrifood sector specifically, 41% of exports in 2015 were to the UK market. Therefore, the indigenous economy, including the agrifood sector, is incredibly exposed to what happens in the UK market. In the event that there will be trade barriers post an EU exit, it will create serious difficulties for the agrifood sector. There is no getting away from this fact. Last year our food exports to the United Kingdom were worth €5.1 billion, while we imported €3.8 billion worth of goods from the United Kingdom. A recent ERSI paper examined the tariffs applied between the European Union and non-trade agreement countries based on WTO trading arrangements. They range from 0% to 70%. In the food sector many of the tariffs run at between 30% and 50%. Therefore, if Britain was to leave without some trade deal, tariffs of between 30% and 50% could be applied to food exports to the United Kingdom. Obviously, that would create serious difficulties for the agrifood sector. On the other hand, an opportunity would be presented for the sector by the fact that tariffs would also be applied to imports of food from the United Kingdom.

It is clear that the Brexit process is uncertain. It will be difficult both at UK and EU level. A soft Brexit with compromises will be virtually impossible to achieve. As I said, we have to operate on the basis that there will be a hard Brexit and plan accordingly.