Oireachtas Joint and Select Committees
Monday, 22 February 2021
Seanad Committee on the Withdrawal of the United Kingdom from the European Union
Impact of EU-UK Trade and Cooperation Agreement on Ireland: Discussion
On behalf of the committee I welcome Dr. Alan Barrett, director, and Dr. Martina Lawless, research professor, at the Economic and Social Research Institute, ESRI, to today's meeting. I thank them both for making themselves available. We are looking forward to the engagement. Dr. Barrett and Dr. Lawless have done much research in this area for many years. They have attended many Oireachtas committees over the past four years on the topic of Brexit and the potential impacts of a deal, a no deal or a weak deal. It will be great to hear from them post deal to see what their thoughts are.
We are aware that Brexit has had huge implications for the country. We are still feeling our way through that and assessing the impact.
The agenda today focuses on the EU-UK Trade and Cooperation Agreement, in one aspect, in terms of its impact on the Irish economy, businesses and households, but also on an analysis of the wider impacts of Brexit on Ireland and Brexit-related matters. I will hand over to Dr. Lawless to make the opening statement.
Dr. Martina Lawless:
I thank the committee for inviting us here today. As the Chairman said, the ESRI, has been working on the potential economic impact of Brexit on Ireland and Northern Ireland since 2015, examining many different aspects of the economic relations and different scenarios as the negotiations evolved. Much attention last year was on the extremely damaging potential event of the UK leaving the EU with no trade deal in place and the substantial tariff costs that outcome could have imposed on both imports and exports flowing between Ireland and Great Britain, as well as possible land bridge disruption.
The signing of the EU-UK Trade and Cooperation Agreement in December 2020 removed that particular risk and was greeted with considerable relief because it avoided the worst-case outcome. In terms of the expected impact on the economy overall, the modelling work the ESRI macroeconomic team undertook along with the Department of Finance estimated that even with a free-trade agreement with the UK, Brexit could reduce GDP in Ireland ten years later by approximately 2.6%. This is approximately half the size of the impact that a disorderly no-deal outcome might have been likely to have.
Aside from the positive news that there would be no tariffs, the EU-UK deal was quite limited in scope in several aspects, which will negatively impact Irish households and businesses. The trade agreement between the UK and EU introduced important restrictions on how goods were to qualify for zero tariffs.
The first set of requirements is that the product must meet the relevant regulatory standards. In most cases, this involves a cost of additional documentation, particularly for animal and food products. These restrictions could also stop import trade entirely in some specific product lines where the EU prohibits their importation from non-member countries.
The second major set of restrictions is that the product must originate in either the EU or UK. While the introduction of new rules and documentation on standards was well flagged in advance, the narrow definition of what qualifies as originating was perhaps less anticipated.
In addition, the agreement was very focused on goods trade. For services trade, we are still in the situation of having a number of temporary recognitions in place with a fair degree of uncertainty as to the final shape of the arrangements for services.
For economic links across the island of Ireland, the Northern Ireland protocol to the withdrawal agreement agreed in 2019 did much to keep trade flowing freely across the Border, but again, this relates only to goods trade. The potential remains for services trade to be affected by further decisions made by both sides on recognition and market access over the coming year and in the longer term.
In terms of the effects on trade in the first weeks post Brexit, the most obvious impacts have been on the import side. A substantial number of changes in documentation and inspections have been put in place and the late date of the final agreement would have impacted on preparation time. Our work on the potential impact of non-tariff barriers on imports suggested that it could increase costs to households by €892 per year unless households were able to switch to alternative products. A particular concern raised in that work was that the impact would be proportionally greater on lower income households given that grocery products account for a higher share of overall expenditure for those households.
At the same time, investments put in place by firms, the various port authorities and the Revenue Commissioners have resulted in less disruption than may have been feared. The expansion of direct shipping routes to Europe has reduced reliance on the land bridge somewhat, although there is not yet much data on the share of trade that this can facilitate.
Firms had also stocked up to some degree. The trade figures released by the Central Statistics Office, CSO, last week showed that imports of food and live animals were 12% higher in December 2020 compared to December 2019. That was despite overall imports being 3% lower, as imports of petroleum products and transport equipment were down substantially. I would suggest these sectors are more likely to have been impacted by Covid-19 travel restrictions than by any Brexit considerations. The restrictions on economic activity due to health measures in place to reduce the spread of Covid-19 are likely to have reduced the volumes of trade over the past few weeks so the full impact of the new customs checks has probably not yet been seen.
On the export side, there has been less evidence of disruption so far but it is important to bear in mind that full customs controls are not yet being implemented by the UK Government. It is phasing in customs checks more gradually than the EU, with checks on food products beginning on 1 April and full customs documentation on arrival of all products not required until 1 July 2021. This means that there is currently an asymmetry in the degree of checks. It is likely that we will see more issues arising when these grace periods are phased out.
Dealing with this sudden increase in reporting requirements is a serious challenge for many firms. There is a sharp learning curve associated with the new systems. In terms of the impact across different types of firms, customs procedures are frequently associated with each consignment, so the costs fall disproportionately on firms shipping small amounts or combining loads. Larger firms that are exporting containers full of a single product, for example, are relatively less impacted by these charges. The burden of the costs arising from Brexit is therefore more likely to fall on smaller Irish firms. In the longer term, greater costs to exporting to the UK may reduce the number of Irish SMEs becoming exporters altogether, as the UK was the typical first market entered and, in many cases, acted as a stepping stone to greater international activity.
Now that a deal on tariffs has been reached, the scale of costs and the knock-on implications for both the ease of cross-Border trade and east-west trade, depends to a large extent on the longer-run degree of regulatory divergence. If standards remain similar between the UK and EU, it is possible that the need for many checks on goods can be minimised and it is possible that some mutual recognition of sanitary and phytosanitary controls, SPS, and veterinary standards could be reached. Divergence over time, on the other hand, could further increase the extent and intensity of checks and hence the costs of trading with the UK.
Looking ahead, there are still many potential long-term impacts of Brexit which have been identified but for which we have little sense of scale. As noted above, the extent of regulatory divergence between the UK and the EU might test the parameters of the EU-UK Trade and Cooperation Agreement. Restrictions on migration from the EU into the UK might, over time, lead to larger flows into Ireland. The post-Brexit path of the UK economy is forecast by many to be weaker in growth terms and this would have direct effects on the Irish economy. There was much discussion about the likely destination of foreign direct investment, FDI, flows post-Brexit in the years after the referendum. The pandemic is likely to be altering flows at the moment but over time we will have a clearer sense of whether a significant shift away from the UK will occur. The unique position of Northern Ireland in terms of access to both the EU and UK markets could impact positively on the growth path of the Northern Ireland economy.
Broader political and constitutional issues will also arise. While it is beyond the competence of the ESRI to comment extensively, there are related economic issues. For example, the withdrawal of the UK from the EU might alter the balance within the EU on topics such as tax harmonisation and trade liberalisation. The ESRI will continue to work on many of these topics, including the all-island economy, in this post-Brexit situation. We would be happy to take questions from members.
I thank Dr. Lawless for that excellent opening statement. She has touched on many areas for us to consider as a committee. I call Senator Gallagher. We are having technical difficulties so we will go to Senator Byrne first and come back to Senator Gallagher.
I thank Dr. Lawless and Dr. Barrett for their presentation. I want to take up some of the points Dr. Lawless made and to flesh them out. I refer to import substitution and where the ESRI sees that there are opportunities in Ireland. I am thinking about flour, for example, more so than steel, which is being impacted by tariffs. Dr. Lawless might outline where she sees opportunities there.
What infrastructural investments need to be made at national level in order to deal with Brexit? Mention was made of companies not exporting to the UK. What supports should the Government consider putting in place to encourage exports to the Continent, particularly now that we have many more direct ferry sailings?
A concern of mine relates to something that will impact on the services side in particular, that being, a divergence in Ireland and the UK's data protection regimes.
From a policy perspective, the final point that Dr. Lawless made was important. Now that the UK is no longer at the Council of Ministers and batting on the same side as us, what issues should Ireland be alert to and with whom should we look to ally?
Dr. Martina Lawless:
I thank the Senator for those questions. Regarding import substitution, flour is a great example of where the agreement was less comprehensive than people had hoped. Even though the UK and EU have almost identical trade arrangements with Canada, Canadian wheat is not being counted as part of the UK's contribution to flour production. Therefore, it is hit by tariffs when it enters Ireland. The trade agreement contains strict rules on which products qualify for free trade access and which do not. Some of these anomalies have emerged. Since Canadian wheat is imported to Ireland on exactly the same terms as it is imported by the UK, it would seem like an obvious place where domestic production capacity could be built up. My understanding is that there is almost no domestic flour production left in Ireland. There are some mills in Northern Ireland. There would seem to be some potential in respect of products that are largely sourced in the UK but are currently being hit because either their inputs are coming from a third country or they are subject to significant regulatory standards checks. The latter applies to quite a few food products. There would be some opportunities for Ireland, and not just domestically. We have used the term "import substitution", but this would also be an area where Ireland could export more into the EU market and replace goods that the UK had been a supplier of to the EU. It is an export opportunity as well an import substitution one.
Regarding infrastructural investment, I am not an expert on infrastructure, but the increase in direct linkages to the EU is important. We have still not seen the UK putting in place full customs checks on its imports, so the many concerns that people had about significant delays at Dover have not emerged yet. However, they remain a substantial risk. Building up direct access to the EU market as much as possible would be useful.
Regarding the UK as an export destination, there is a considerable role for the various enterprise agencies, in particular Enterprise Ireland, to try to support firms in moving towards broader European markets as their first export destinations. What has tended to happen is that companies export to the UK first, build up some expertise and then begin to export more widely. They have tended to enter one market at a time and not become global exporters overnight. The UK has been an easy market for firms to enter, with our common language being a sizable factor. We have a common understanding, many media outlets in common and so on. It has been a low-cost export market for many Irish firms. Without tariffs, it is still a reasonably accessible market, but that will depend on the extent to which the UK continues to have similar regulations and the extent of the checks it installs. Support in thinking about broader European markets would be useful. Putting supports in place would be important, particularly in terms of language, for example, language exchanges and links.
On data, I understand that there is fairly promising news on data equivalence recognition coming from Europe. I do not think an official declaration has been made yet but there were announcements last week that it is being looked into and it is likely that, for the moment at least, the UK would be recognised as having equivalent data protection standards to the EU. This will facilitate data movement between the two. If the UK was not given that sort of equivalence recognition, it would raise quite considerable problems for many services firms in particular to move data out of the EU into another country which does not have data equivalence recognition is quite complicated and quite costly. It is not an area in which I am particularly expert. Dr. Barrett may wish to come in on the broader EU issues.
Dr. Alan Barrett:
I will add to some of Dr. Lawless's points first. Senator Byrne asked about what supports for exporters should be put in place. It brought to mind how, at one of the civic dialogues on Brexit some years ago, I was casually making the point about exporters moving from the UK to continental Europe. Julie Sinnamon of Enterprise Ireland picked me up on it with a very simple, fair point that it is very easy to talk about exporters diverting to other markets instead of going to the UK, but the reality of doing that is much more difficult. One of the early themes that came out of the ESRI research was that it was less about what would happen with Brexit during the transition or in the early days, but about the longer term issues. Dr. Lawless made the point about the extent to which many successful firms' entry routes into exporting was the UK before they went on to further markets. It is a really important point to re-emphasise that that approach to export and export growth is absolutely critical. There is a real concern about dynamics over time and what might be lost. Significant supports are needed but it is not easy.
I do not claim to be an expert on data protection, but a theme that Dr. Lawless raised in her opening remarks is worth restating. Whatever happens and whatever agreements are reached in the next six to nine months, the real challenge will be in the next three to five years. Data protection is one of the areas that evolves all the time. One can imagine that it will be one of the areas where, even if there is agreement initially, there will be pressures continuously around how practice in the area evolves, as case law and so on evolve. We all understand this in Ireland that this is an area we are all trying to get on top of.
On the specific political economy of how we manage our relationships within the EU, I had a conversation with the former Minister, Michael Noonan, some years ago when Brexit was coming along. He made the point that Brexit was not just about Britain leaving but about the impact it would have on the dynamics of the EU after that. We all understood for a long time that when it came to areas such as tax harmonisation and trade liberalisation, two things which are core planks of Irish economic policy and on which, in many ways, the entire edifice is built, if there was a movement away from these within the EU, Ireland could find itself in a difficult position. Again, I would not be an expert on dynamics within the EU but there have been moves to form stronger relationships with some countries, the Hanseatic League is the umbrella name for a grouping that includes Sweden and the Netherlands. There is no doubt that there is a challenge for Irish officials and politicians to ensure they are connecting with like-minded people. However, it is another one of those issues where, with the best will in the world, it will be very challenging. Obviously, apart from Germany and France, Britain was such a big, powerful and significant member of the EU. Having one's interests allied with those of such a significant player was different from having them allied with a more disparate group because it would take more work to get coherent support for a range of the sort of things that are of more interest.
It is an extremely difficult one and on this theme of seeing how things evolve, we will have to monitor that over time.
I thank our guests for their lucid presentations and answers to questions, all of which are very helpful and inform us a good deal. I agree with my colleague, Senator Byrne, about import substitution. If I understood the answer Dr. Lawless gave, she believes we should be working in that area and that it would have to be part of our economic strategy in future.
If I understood the witnesses correctly, many of the nuts and bolts issues have yet to be negotiated and modifications can be achieved. Can we pursue those bilaterally with the UK or must they come under the umbrella of the EU to get a more fluid system and minimum regulations at ports? It was encouraging to hear Dr. Lawless say that Revenue and various Departments had been very successful in that regard. The fact that traffic is moving from Dublin in the direction of Wexford, from where Senator Byrne comes, is helpful. What recommendations should the committee make to achieve modifications in the regulations, reduced bureaucracy and other required results?
The annual household cost of €892 cited by Dr. Lawless and the effects it could have on low income households are stark. They could be particularly stark in a post-Brexit scenario where, sadly, we may have some residual unemployment. Unfortunately, not everybody on a pandemic unemployment payment, PUP, will get back to work. The witnesses are more expert in this area than we are but I am afraid of the effect that will have on certain sectors, particularly hospitality which has been suffering for some time.
The witnesses referred to uncertainty with services. That is concerning. Our colleague, Senator Niall Ó Donnghaile, spoke last week about mutual recognition of qualifications. I ask the witnesses to elaborate on services in general. In that regard, I will raise a specific issue related to services. If I understand the position correctly, the Bank of England policy for the UK and Northern Ireland is not to charge for keeping money on deposit. Such charges may arise in some banks in the Republic. If that were to occur, could we see a flow of capital across the Border as people move their deposits to avoid paying deposit charges? Is that an issue we should be looking at and concerned about? I ask the witnesses to comment.
I thank the witnesses again for their enlightening presentations. The big issue is whether we can continue to deal with the UK on a bilateral basis because, historically, the two countries have had good relations. We should be able to work on that. In that regard, the British-Irish Parliamentary Association, BIPA, is meeting harmoniously here in Leinster House today. We should be fit to work on these issues. Will they come under an EU umbrella or how do the witnesses see that progressing? In addition to the issue with the currency, they might discuss services generally and the income reduction for lower income households. The figure cited would be scary if it were to fully materialise, although, if I understood the Dr. Lawless correctly, it was a bit of a doomsday figure, so to speak.
Dr. Martina Lawless:
I thank the Senator for those questions, which covered some very good issues.
There was a question on how much is still to be negotiated and there is a lot to be covered at various levels across government. For most of the matters, particularly related to services, trade and recognition of standards and regulations, they fall under EU competency. Anything to do with external trade is really managed through the EU institutions so there would be fairly limited scope for the Irish Government to do anything bilaterally there, although it would play into how the negotiations and priorities evolve at the EU level.
Apart from overall trade negotiations, there are a number of matters within the competencies of individual governments to negotiate. These relate to recognition of qualifications and the ability of people to move. Much of this in Ireland falls under the common travel area, and we will have a slightly different relationship with the UK in terms of migration than the rest of the EU. That may be Dr. Barrett's area of expertise more than mine. For many of the really significant areas where the costs and restrictions arise, particularly for services, trade and food regulations, they come under EU areas of expertise and priorities in negotiation.
On the question of the Revenue Commissioners and port authorities, they have done an amazing job. The Revenue Commissioners commented in the past week or so that the number of customs declarations processed in January this year was equivalent to what it would normally do in a full calendar year, and it did it with very little obvious impact on supermarket shelves or speed of delivery. That is an amazing testament to the amount of preparation Revenue has put in place. It is often hard for people to give recognition when problems do not happen but they were very thoroughly anticipated and dealt with in advance.
With the figure of €892, there are a number of caveats. First, it assumes that people go into supermarkets and pick out the same UK product, which is now more expensive, instead of switching to an Irish alternative or an alternative from elsewhere in Europe. It was the best way to get a sense of the scale of the impact of these increased costs. It does not necessarily mean that this is how people would end up with extra spending. It also assumes that all supermarkets and businesses pass on the full costs directly to the consumer. Depending on the level of competition in the market, that may not necessarily be the case.
It is true that one of the big concerns of the paper was that the majority of the costs arising from these extra checks and regulations are falling on food imports and exporters from agricultural and food sectors. They are not evenly spread across products. It has always been a concern on the export side that this is falling quite heavily on our exporters in the agrifood sector and it is also true on the import side that costs are falling quite heavily on the grocery side. That is why it affects lower income households more, as typically they spend more of their income on basic necessities and grocery bills.
In that context, as there was mention of the pandemic unemployment payment, it is important to mention that much of the work we did was pre-Covid. We were doing much work on the impact on the economy of Brexit while the economy was otherwise performing extremely strongly. Now Brexit is coming into an economy that is much weaker, with a much higher unemployment rate, as has been mentioned.
On the specific element of the Bank of England and the potential flow of capital to the North, my understanding is that even with full recognition of financial services trade, opening a bank account in a different jurisdiction comes with additional regulations. I am not an expert on that point.
Dr. Alan Barrett:
I have some supplementary remarks. Senator O'Reilly raised an extremely interesting question regarding areas of future collaboration and co-operation between Ireland and the UK. Again, Dr. Lawless was pointing out that in areas such as trade, with a dominance of EU competencies, there are limits to the bilateral process.
This raises an interesting political issue and a broader economic issue. It is well recognised - all committee members are aware of it and I am sure issues like this will come up in the final report - that one of the great problems Brexit will create is that it will take away the natural forum in which Irish and British Ministers meet one another. Perhaps just as important if not more important was the extent to which Irish officials would meet their British counterparts in a Brussels setting. This provided a natural setting where people got together to talk about issues on the fringes of meetings. I noticed this morning that the British-Irish Parliamentary Assembly was meeting. It is important that such groups are maintained and enhanced to make sure that discussions continue to take place. That is a little bit of international relations.
When it comes to policy areas, there are interesting opportunities for Ireland. Dr. Lawless touched on the common travel area. The common travel area is still unique to Ireland and Britain. To give an example, one thing we worried about at the outset of all the Brexit talk was that it was not absolutely guaranteed that the common travel area would remain in place. For many Irish people, being able to move for purposes of education and professional development was a central part of how we ran our lives. It was not just moving for job purposes but also for education and professional enhancement. Those things are all still possible. Education, for example, is one of those areas where one could have enhanced co-operation between Ireland and the UK. In that context, the Government's decision to maintain Erasmus for Northern Ireland students is a really positive example.
Another issue in the broad area of education, but from the research perspective, is the United Kingdom taking itself out of many EU funding arrangements. This, in a sense, created an opportunity for Ireland to be a bridge to those fine universities in the United Kingdom. For a committee like this, and given that it will be writing a report, it is important to keep an eye on the areas where there can be enhanced co-operation, which is good as an end in itself and also important in maintaining that Irish-British ongoing dialogue and positive interaction.
I apologise to all concerned. I had technical difficulties with the laptop so I have switched to the iPhone. I welcome our guests and thank them for their time in advising us on this issue.
Some of the issues I was going to raise have already been touched on. The key word that comes out of this presentation, in many ways, is "uncertainty". The ongoing uncertainty still exists. We thought when we pressed the Brexit button that the uncertainty would evaporate but, based on what the witnesses have said, it is still very much in play and there are many unknowns out there. It is early days in this process with grace periods and what have you.
Dr. Lawless mentioned standards and divergence. The standards are running parallel in the UK and Europe because the UK is working, by and large, off European standards up to this point. As we move forward, however, there will be increased divergence and that will create its own problems. We see what is happening in Northern Ireland politically. The standards are quite similar in both jurisdictions at present but if the UK divergence increases, that will cause more problems on the island of Ireland.
It has been said that Northern Ireland will enjoy many advantages going forward because of its unique position in that it can trade with the EU and the UK at the same time. I am wondering whether the witnesses agree with that assessment. As someone who comes from the Border counties, is there any potential for those counties to "cash in", as it were, on that particular position going forward? In particular, I am wondering whether Irish companies that are based in Monaghan, Donegal or wherever would be thinking about perhaps opening a location in the North, and if that would have potential for them going forward. I would be interested in hearing the views of the witnesses on that question.
I am concerned about small businesses. As touched upon by Dr. Lawless earlier, for many small businesses starting off in the export of goods, the UK would have been the first step in that process, and they would have developed and grown from there. Now, that step has been removed. What should be done by the Government to be aware of that issue and also to act and put incentives or help in place for companies to help them bridge that initial gap and get them up and running? I am interested to see what exactly will happen with that.
I am interested to hear the views of the witnesses on how they see the UK economy developing. Some commentators, depending on what side of the Brexit argument they came down on, argued that Brexit would be very bad for the UK, while others argued that because of the size of the UK, it could go from strength to strength after Brexit. Dr. Barrett touched upon our relationship with the UK earlier. The UK continues to be our nearest neighbour post Brexit. Dr. Barrett talked about the common travel area and the unique relationship between both jurisdictions. Can we have a bit of the cake, as it were, that Northern Ireland has? Is there potential for us to retain our friendship with the UK, from a business perspective, and perhaps develop that? Is that possible while we are still a member state of the EU? What scope or potential exists along those lines?
I ask both witnesses to look into their crystal balls. It is difficult enough to predict what economies are going to do worldwide. Now we are facing two unknowns, Brexit and Covid-19. I am wondering where the witnesses see the Irish economy post Covid? From the point of view of Ireland as a trading nation, what are the negatives and positives? What should we be looking out and planning for, post Covid?
Dr. Martina Lawless:
On the question of the existence of uncertainty raised by the Senator, that is certainly the case. There was possibly an expectation that the signing of a trade and co-operation agreement would bring an end to all of the uncertainty that we have been talking about in relation to Brexit over the last few years. It really only brought an end to uncertainty about tariffs. Issues concerning the recognition of standards and so on still largely remain in the decisions made by each individual partner in respect of how much they are likely to diverge. That is something that will continually be under review and will evolve as time goes on.
The issue of services was almost entirely absent from the agreement, for example, in respect of details of recognition. Therefore, there is much still to be negotiated. There also remain some issues on which unilateral decisions can be taken by one side or the other but which would have implications for trade by both sides. One of the ironies of the entire Brexit process, which aimed to take the UK out of the EU, is that it has led to much more discussion between the UK and the EU.
One of the ironies of the entire Brexit process, the aim of which was to take the UK out of the EU, is that it has led to much more discussion between the UK and EU. The trade and co-operation agreement set up something in excess of 30 committees to oversee various elements of the arrangement and the practical issues that would arise as it was implemented. I believe we will see the EU dominating much UK economic and political discussion for several years to come because there are still so many areas where details need to be made clear or discussed further or where changes made by one side or the other will have implications for trade between both, particularly if new trade agreements are signed by the UK that might have an impact on the standards of products being brought into the UK. That would have a big impact on the EU and the level of checks and so on. That is a major issue in terms of how the standards will evolve.
As the Senator noted, Northern Ireland is in a unique position. The Northern Ireland protocol relates to trade in goods rather than trade in services. That puts it in a quite an attractive place in which to undertake production considering its access to both the UK and EU markets. I am quite hopeful that it would increase the productivity and output of the Northern Ireland economy, perhaps quite considerably. In this regard, we should consider the extent to which firms currently trade across the Border along the Border counties. There are a very strong supply linkages between firms on both sides of the Border. We have examined these a little over the past couple of years because there could be a very positive spillover effect. The greater the growth in Northern Ireland, the greater the spillover effects on Border counties. It is good news for the island as a whole. There is much positive work to be looked at in terms of all-island economic integration. This is a matter on which the ESRI is planning to do quite a body of work over the coming years.
Regarding the economy of Great Britain specifically, because Northern Ireland is in a quite different position given its access to both markets, many commentators have come up with different forecasts. In general, it is partly driven by politics because every economist, perhaps with a very small number of exceptions, expects that leaving the EU will have negative impacts on the UK economy. How negative those impacts will be is obviously a source of considerable debate but pretty much every forecast suggests the effects will be negative. While it may be possible to become a global trader, pretty much every analysis of international trade, including trade in goods, which obviously entails transport costs, but even trade in services, regarding which one might believe there is a lower cost associated with trade over long distances, has found it is much easier and cheaper and more convenient to trade with close neighbours. Removing oneself from a big trade agreement with a market the size of the EU is likely to have negative consequences for the UK's external trade and economy as a whole. Does Dr. Barrett want to add anything?
Dr. Alan Barrett:
Yes. I have a couple of points. The Northern Ireland situation is obviously fascinating. There are many sensitivities, so we must speak carefully about it. Our former colleague, Professor John FitzGerald, was writing last week about Northern Ireland's unique position, namely, that of having the capacity to trade into both Great Britain and the EU. There is fantastic economic potential in this regard. It is a most unusual situation to be in. If properly exploited, it could be very positive for Northern Ireland. As Dr. Lawless touched on, we should be very enthusiastic about this in the Republic of Ireland because one trades most closely with those who are closest to one. An economy of Northern Ireland that is doing better should be better for Ireland generally, but especially for Border regions, which the Senator has touched on.
There is a potential benefit.
To link it to a longer-term question, a number of economists have been talking recently about the fact there was much less of a peace dividend for Northern Ireland than had been anticipated. While a great degree of political stability was brought to Northern Ireland after the Good Friday Agreement, that has not translated into an economic rejuvenation to the extent that might have been expected. In fact, prior to Brexit happening, many people were getting more optimistic that Northern Ireland would move into the next phase of normalisation, which would have been the economic rejuvenation. Brexit has now created difficulties in that, but the protocol is there and the benefits are possible, given what it has done for Northern Ireland.
One of the reasons it may not be successful, however, is that if businesses are in any way fearful that the protocol will not survive, it is highly unlikely that many of them will invest and try to take advantage of Northern Ireland's unique position. I will not comment on the rights or wrongs of the protocol as such, but the one advantage it holds out is this unique trading possibility. That will not come to fruition if there is great uncertainty about the protocol, which would be unfortunate. I am not really qualified to go into the full intricacies of this. If the Brexit referendum taught us anything, it is that issues of identity trump economics on a good number of occasions. Even if people are arguing about dimensions of the protocol that are not the narrow economic ones I am discussing, we must understand and respect that.
On the Ireland-UK link, for the longest time Irish forecasters in the Republic of Ireland would look to what was happening in the UK economy. Obviously, if the UK economy was growing, Ireland would grow. That link is much weaker than it was previously, but it is still there. As Dr. Lawless pointed out, there was always the sense that Brexit was going to be bad for the UK economy, so even if nothing else happened, there was a sense that it was going to be bad for the Irish economy. On this question of how significant the UK would be for Ireland economically into the future and how much potential is there, again we are back to this word "uncertainty". If we see this regulatory divergence between the EU and the UK in the coming months and years, one can imagine a situation in which trading into the UK will get increasingly burdensome for Irish firms. It could be the case that the decline over time that we have seen in Irish exports going to the UK, to the extent we have had this decline in the share of the total, could accelerate, if anything. However, the point I was making earlier about trying to maintain as many positive links as possible still holds.
I thank our guests for their comprehensive opening statements and their answers to the questions asked. I have some questions for both of them.
In her introduction, Dr. Lawless mentioned that imports had increased in December with, perhaps, many of the manufacturing plants here stocking up a little. We are getting some evidence that supplies and parts are beginning to run low. Has the ESRI had any reports of that as well, particularly for those that are dependent on UK-manufactured parts? Does the ESRI think that will have much of a knock-on effect for manufacturing plants in Ireland? We have heard about those that have been directly affected over the past number of weeks.
Both witnesses spoke about opportunities, and Dr. Lawless mentioned foreign direct investment. What can we do to prepare for maximising that opportunity? How much of a part will language play in that opportunity? Obviously, with the UK gone from the EU, Ireland is the largest English-speaking country left in the EU. Does that give us an opportunity to target the American market and look for that foreign direct investment in Ireland?
Dr. Lawless also mentioned that, unfortunately, the burden is always more likely to fall on the smaller Irish firms. Is there anything we can prepare through our closing statement and report to help those smaller Irish firms to be ready for when the burden comes?
We saw quite a significant increase in imports of certain products in December, which would suggest stocking up by firms at the most risk of being hit by tariffs and extra costs. The only official data for December were released last week by the CSO so I do not have any more up-to-date information about stocks running low. The reduction in the flow of goods coming through in January helped to give more time for these new systems to bed in. It is a little difficult to disentangle the immediate impacts of Brexit in January from the wider shutdown of many activities due to Covid restrictions which happened at the same time.
Regarding opportunities for foreign direct investment, there is certainly a possibility that companies which want to invest in Europe to access the European market and that may previously have invested in the UK will look for alternative locations. It depends on how much their business is likely to be with the EU rather than the UK. However, for many businesses, the EU is a much larger market so it is an attractive position. Ireland already has a high share of foreign direct investment, including in computer services and high-tech manufacturing, so there is a good opportunity for that to be built on further. The language issue is important in making us attractive to foreign direct investment from the USA, as is a wide range of other factors such as the strong educational background and the historical political links between the two countries.
On the issue of small firms, as I said, many of these costs are per consignment. Whether one is exporting goods worth €1,000 or €100,000, one has to fill in the same documentation. For that reason, the cost falls disproportionately on small firms. Enterprise Ireland, the Revenue Commissioners and so on have done considerable work over the last year to show firms how these forms work and that a certain amount of customs documentation is a learning curve. Once firms have filled in these documents a number of times, the process becomes easier and easier. Other costs, such as the need for veterinary checks on food products, will stay. Many educational supports have been put in place already by the agencies, which is useful. There may be a possibility for firms to put together expertise in the freight forwarder sector, which would deal with much of this documentation on behalf of smaller firms. There may be opportunities to use that sector as a conduit.
Dr. Alan Barrett:
As Senator Wall was asking questions, it struck me that there will be a significant interaction between Covid and Brexit. The Senator talked about supports for enterprise. There has never in the history of the State been more support for enterprise but these supports play a particular role at present. We will still have to work out the dynamics of this but we will move to a point, hopefully later this year, where there will be a discussion about withdrawing these supports, and whether we have the fiscal and other bandwidth to redirect some of these supports to address some of the issues that Senator Wall raised.
Senator Malcolm Byrne asked about investment.
This is another question that will be coming up. It is a question of the scope that will be left. I do not want to write the report for the committee but I am already thinking about the challenges to be faced at the end of March. There will be policy challenges relating to Brexit, the ongoing challenge of Covid and the challenge of unwinding the Covid supports. There will be a really complicated mix of policy choices to be made. The Senator's specific question about enterprise supports put the question of how complicated this will be into my head. It is not really an answer but an overall reflection on the challenge.
As all members who indicated have spoken, I will ask the witnesses some questions. Over the years, we have listened to various projections of the potential reduction in GDP, depending on the scenario we ended up with. In her opening statement, Dr. Lawless mentioned that even with the trade deal, we are still looking at a 2.6% reduction. Is that still the ESRI's assessment? I know these are early days. We are only seven weeks into the operation of this new trading environment, even though it feels like it has been a lot longer. Is there any positive outlook from that perspective?
How concerned are the witnesses about the Irish economy as it deals with both Brexit and Covid at the same time? Has the ESRI done any research in that area? Dr. Barrett touched upon the Northern Ireland protocol. I was going to ask a question about that. He spoke about the requirement for certainty if the protocol is to provide opportunities for Northern Ireland. He is absolutely right; no business is going to invest in the North on the basis of having access to both markets if the vote may potentially go the other way in four years' time. Do I take it that in order for there to be opportunities for Northern Ireland from having that unique access to both markets, there must be a degree of certainty that this environment will be maintained in the long term?
Many of the projections suggested that the SME sector and low-income households would be worst hit. Do I take it that this is still the case and that they are still suffering more than others? Has the ESRI done any research on consumer behaviour on foot of Brexit? In the run-up to Brexit, there was a lot of discussion about how people were not changing their behaviour too much because they were waiting to see what would happen. Now that it has happened, has there been a change in consumer behaviour? Dr. Lawless spoke about the worst-case scenario and planning on the basis that consumers would continue to purchase the same products. Have we seen the shift we expected? Are people noticing changes in product prices or products not being available? Are they shifting their behaviours?
Dr. Lawless also spoke about long-term impacts from Brexit. Will she elaborate a little on what she has identified? I appreciate the data are not there to assess these impacts properly but what are the long-term impacts on Ireland from Brexit at which she is looking?
I am checking my notes to see if I have covered all of my questions. I would welcome the witnesses' views on what type of a deal we actually got. Was it very hard, a little bit hard or medium-scale? Many different types of deal were discussed. Dr. Lawless put it aptly when she said the deal gave certainty as to tariffs but that was probably about it. How would the witnesses assess the type of deal we got?
Dr. Martina Lawless:
I thank the Chair. That was a really good range of questions. I will come to the last one first, which was about the type of deal it was. It was very much on the hard-Brexit side. We talked about free trade agreements. There are no off-the-shelf free trade agreements. There is a wide continuum of things that can be included. This agreement was very minimalist. It removed tariffs and quotas, which was very positive, but it did very little on common recognition of standards. The EU has a wide range of agreements on mutual recognition of standards with many of its trading partners. These cover areas such as the recognition of veterinary standards and the avoidance of double checks. There was a wide range of recognition elements that could have been in the deal but were not. That is where a lot of the extra costs are now coming from.
In that sense, it was a relatively disappointing deal.
It was also disappointing in how strictly it defined originating products by not allowing inputs from other countries with free trade deals. Canadian wheat going into flour made in the UK is an example of that. A number of recent broad-ranging free trade deals across the world have included inputs from common free trade agreement countries for the purpose of avoiding tariffs. That could have been done in this deal if there had been a closer set of integrations, but it was not. There are a number of elements not included that would have facilitated a great deal more trade. In that sense, and though obviously not anywhere near the worst-case scenario, it was towards the harder end of the Brexit spectrum by not addressing those tariffs.
The ESRI's estimate of the long-term impact is approximately 2.6%. The big question is how much of this long-term forecast will be felt in the first few months and how much will be spread over time, for example, from extra costs as standards diverge. As part of a research programme with the Department of Finance, we undertook some work late last year on Brexit, Covid and the extent to which they overlapped. Many of the initial estimates of Brexit's impact were done against the background of a much stronger economy. We took data on 57 sectors in the economy and examined the extent to which they were exposed to both Brexit and Covid. We found that the two economic shocks hit quite different sectors. There was limited evidence that Brexit would have an impact on top of that of Covid in a particular sector and make matters much worse for it. However, it would broaden the range of sectors that faced increased costs. The two shocks are hitting different parts of the economy and are not really overlapping for individual sectors.
Regarding our estimates about any cost disproportionately hitting SMEs in the context of business and lower income households in the context of consumers, they remain the reasonable forecasts to make, particularly given how the agreement introduced many extra checks on the food sector because of the absence of any sort of recognition of standards. That is the area in which the greatest costs will hit businesses on the export side and consumers on the import side.
In terms of immediate evidence of consumers shifting behaviour, we have not observed anything specific.
Regarding longer term impacts, one of the issues is how much divergence there will be in goods trade. In services trade, I think there will be continuous negotiations and responses by both sides depending on how the situation evolves for different types of service. In particular, data standards will comprise a major issue. It will also depend on the direction of the EU, which may be slightly different now that the UK is not a member state, as Dr. Barrett mentioned, and how the UK engages with the rest of the world, for example, whether it signs a free trade agreement with the US, China or so on. These factors could have significant impacts on how the UK-EU trade arrangement operates in practice. The more globally active the UK becomes, perhaps the more the EU feels the need to protect the common market, for example, if the UK imports goods on which the EU places restrictions. Much of this situation will evolve.
There are other elements, for example, foreign direct investment and migration on the economic side and the question of how politics could evolve.
If the UK puts very strong restrictions on migration, there could be changes in the flows and Ireland could be quite caught up in that.
Dr. Barrett might wish to speak on the protocol.
Dr. Alan Barrett:
There was a wide range of questions and I do not know how thoroughly we can answer but we will do our best. The thing to understand about the sorts of estimates the ESRI gave of 2.6%, or whatever, is that it was less than otherwise would have been the case. When we were producing a lot of those estimates or forecasts pre-Covid the vision was that the economy would be going quite strongly, maybe around 4% or 5%, and that the Brexit impacts would impose on that and reduce growth relative to where it otherwise would have been but there would still have been a growing economy. While these things were troubling they were not as troubling as they are now in the context of an economy that clearly is under a lot of pressure from Covid. When Covid is added to the mix there is more uncertainty. Our forecasting last year was driven by the assumption that once the restrictions were lifted there was every chance that while not every business would return to normal, the vast bulk of Irish business and commercial activity could move back to where it was. Therefore there was every hope and expectation there would be a return to strong economic growth once the restrictions were lifted. Every time we brought out a forecast, however, we made the point that the difficulty was that the longer the restrictions lasted, the more and more businesses were simply not going to be able to reopen. There will be a point in the post-restriction phase where the more commercial industrial base that has been eliminated, the more difficult it will be to get the economy back on track. The worry is that lockdown does seem to be extending for very good reasons - I do not want to second guess that - but every day it goes on, more and more businesses probably will not return. We will redo our forecasts later in this quarter to try to get a sense of the likely growth this year. As of December we were reasonably optimistic that things could still return and there would be a relatively vibrant economy which would start growing, the Covid-related deficit would close and there would be scope to deal with a lot of the Brexit challenges, but it is uncertain. Given the thinness of the trade deal it is still very hard to know how these things will evolve over time.
I touched on Northern Ireland and the protocol earlier. There is a unique opportunity for Northern Ireland but if the protocol were to be removed, so too would that opportunity. If there is uncertainty around it, it would be unlikely that the benefits would happen that would otherwise occur. There is something of an historic parallel. Some years ago, there was an expectation that corporation tax in the North would be aligned with the rate in the Republic. It was regarded as a possible advance in the economic fortunes of Northern Ireland but for various reasons, it did not happen. Some of us are worried that there is an opportunity for Northern Ireland to make a significant advance but if there are doubts around the protocol it might fold. I want to emphasise that treating this in a sensible way, there is a constituency for whom there are bigger issues than those purely of economic growth. It is obviously very complicated and the Senator and members of the committee are much better placed to deal with that.
I thank Dr. Barrett and Dr. Lawless, Dr. Barrett in particular for the balanced response on the Northern Ireland protocol. It is important to acknowledge, as we have done at previous committee hearings, that there are multiple sides to that issue and the politics of Northern Ireland. As was said, it is not all driven by trade or economic growth. There are other issues of equal importance to people. We must respect that.
I put a number of questions to the witnesses, so I thank them for their comprehensive replies. It has been a worthwhile engagement. All members that have offered have come in, so that brings us to the end of our meeting. I extend my thanks once again to Dr. Alan Barrett, director of the Economic and Social Research Institute, and Dr. Martina Lawless, research professor, ESRI. As always, it has been an interesting and informative engagement.
It is a moveable object. We will be discussing Brexit for the next decade and perhaps longer. I have no doubt we will get a chance to look at the long-term impacts of this in ten years' time, and we can refer to these conversations then. I thank committee members for their engagement this afternoon and those who are tuning in. The committee will meet again at 3 p.m. on Monday, 1 March when we look forward to delving further into other aspects of the Brexit process.