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DCU MBA Blog: Brexit Brief

This is a guide to the main points relating to the Brexit situation by Anthony Foley, Senior Lecturer in Economics, DCU Business School.

 1. The UK has voted to leave the EU. This necessitates the establishment of a new set of rules governing movement of goods, services, capital and people between the UK and the rest of the EU. In addition it will affect a wide range of other issues e.g. Irish student access to UK universities and fees. The Brexit vote was exclusively about staying or leaving; there was no vote on alternative post-Brexit regimes. The Brexit side does not have a unified view on what should replace the EU membership rules. The EU side is also weak on the details of a post membership situation.

2. The new set of economic relationship rules are unknown and uncertain and will derive from negotiations between the EU as a whole and the UK. There is no guarantee that the negotiations will be friendly and designed to minimise economic disruption. They may be grudging and spiteful. One view is that the EU will offer a poor deal on economic relations to discourage other member states from leaving.

3. The exit timescale is related to Article 50 of the Treaty. A member which  decides to leave notifies the European Council of its intent. The European Council then initiates negotiation on the withdrawal arrangements and the future relationship with the EU. This agreement will be arrived at by the qualified majority system at the Council and with the consent of the European Parliament.

4. The exiting state will cease to be an EU member from the date of entry into force of the agreement  (as negotiated) or failing that, two years after the notification of the intention to leave. However, the European Council, acting unanimously, in agreement with the exiting state can extend the period beyond 2 years (with no time limit)

5. The UK government has not yet notified the European Council. The UK prime minister is resigning with effect from October and has stated that it should be the responsibility of his successor to notify the European Council. Some EU senior officials have argued that the UK should notify immediately to speed up the process but there is no legal obligation for the notification to come within a specific time period and this demand has been dropped. It could well be the case that the notification will be a long time coming, even after October, (or maybe never, if circumstances arise that persuade the UK government and parliament to ignore or rerun the referendum).

6. There is enormous uncertainty about the detail of a post exit situation, there is uncertainty about what the UK government will want (and be willing to concede ), there is uncertainty about the negotiating position of the EU (punish the UK or minimise changes in the economic relations), there is uncertainty about the time scale of the process and finally there is great uncertainty about the economic effects of whatever is agreed.

7. The eventual deal will probably have to be approved by the UK parliament and currently the House of Commons is anti-Brexit by a large majority. The final deal may well fall far short of what the Brexit supporters currently expect.

8. The EU has a high degree of economic integration and the Single Market allows the free (or nearly free) mobility of goods, services, capital and labour. The EU and the Brexit side are in favour of free trade. The Brexit side would happily accept the three freedoms of goods, services and capital but are strongly against free movement of labour and people. It is unlikely that the EU would allow continuing full access to the single market for goods, services and capital without labour freedom. This is likely to be the main sticking point in negotiations on a new economic relationship.

9. Membership of the European Economic Area has been identified as a possible post EU regime. Norway is currently in this position. But full membership of the EEA includes mobility of people and also a significant contribution to the EU budget. Alternatively the UK might relate to the EU in much the same way as does China, Russia or the USA at present. This would not include labour mobility but also includes much lower trade liberalisation in services including financial services which the UK does not want.

10. Brexit has two effects. It has generated enormous uncertainty as to future EU/UK economic rules of engagement. This has had a negative impact, and will have a continuing impact, on sterling, stock markets, investment decisions, consumer decisions and overall economic confidence. The second effect is that when the uncertainty is gone (which may be a long time away) the rules governing economic relationships will be different and this will affect business models, market access and transactions costs of UK related business. How different, depends on the details of the new agreement.

11. Brexit will worsen the UK economic performance in the immediate and short term. This will reduce its demand for imports which will hit Irish exporters. This will, in turn, reduce the Irish growth performance.

12. The new deal will be negotiated by the EU as an entity. While Ireland will have an input into the EU negotiating position (and it may be a strong input reflecting our particular political, social and economic relationship with the UK), the final deal will not necessarily reflect all of the Irish concerns. For example, the EU may not be willing to allow a common travel area between the UK and Ireland if the UK will not allow the same mobility of people from elsewhere in the EU).

13. Brexit has caused a large decline in Sterling which is likely to persist, to some extent, for some time if not long term. A much lower Sterling reduces the competitiveness of exports from Ireland to the UK and improves the competitiveness of imports from the UK. Consumers may benefit from the latter but Irish producers competing on the domestic market will lose out. A lower value of Sterling also reduces the attractiveness of Ireland for UK tourists. Fluctuations in the exchange rate with Sterling are not a new phenomenon for the Irish economy but the Brexit related decline is large and likely to be long lasting.

14. As noted in a previous blog a likely positive for the Irish economy is the reduction in the attractiveness of the UK as a centre for servicing the EU single market for both inward foreign investment and domestic UK enterprises because of the likely reduction in ease of access between the EU and the UK depending on the eventual deal. Ireland stands willing and able to give a new English-speaking home to these projects. On the negative side, the UK will have more freedom to improve its tax attractiveness for these projects. Ireland’s increased attractiveness as an English speaking business-friendly location relative to a UK which is outside the EU has substantial economic potential.

15. There is an overall short term negative economic impact arising from the uncertainty which will reduce Ireland’s growth performance. The decline in sterling is likely to be long lasting with its associated negative economic effects ranging from lower inward tourism, increased cross border shopping, reduced exports and increased imports. The ongoing uncertainty will reduce investor and consumer confidence. However, we are still a long way from tariffs, quotas, labour permits, visas, border controls and additional documentation in our economic relationships with the UK.

 

Anthony Foley is Senior Lecturer in Economics in DCU Business School, and lectures on the Executive MBA Programme.

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DCU MBA Blog: Brexit – Economic Effects on Ireland and the Drinks Industry

By Anthony Foley, Senior Lecturer in Economics, DCU Business School

This blog post examines the Brexit impact on the Irish drinks sector but I should start with some clarifying comments. I am convinced by economic analysis that a UK exit from the EU would have a negative economic impact on the global economy, the UK economy and the Irish economy. Ireland and the UK have very strong economic flows in imports, exports, travel and tourism, people and finance. There would also be particular political and social negatives for Ireland because of the Republic/Northern Ireland relationship and the possible termination of the long standing common labour market between Ireland and the UK. The scale of the negative economic effect will depend on the speed, certainty and content of the necessary new trade deal between the UK and the EU, and the UK and the rest of the world.

Very little campaign discussion and debate has taken place on the likely nature of a post exit relationship. Indeed there is not a common position within the Brexit Campaign on the desirable replacement of the existing trade relationship. In addition, there is the added complication that the majority of the UK Commons are against Brexit and that presumably the Commons would have to approve the new deal. Elements of a new deal might disappoint many who would have voted for Brexit. Despite my conviction that Brexit would have negative effects and the uncertainty associated with the post Brexit situation, I must declare that, if I was a voter in the UK referendum, I would vote for exit. This reflects political factors, notably a lack of desire on my part to have an ever closer political union (even though the reform deal allows the UK to “opt out” of ever closer union). I recognise that economic integration brings economic and social benefits and that a degree of political integration is needed to facilitate economic integration but I would prefer the political integration to be minimised and to focus more on inter-government agreements.

There has been much discussion and coverage of the overall economic impact of Brexit on Ireland but relatively little discussion of the impact on specific sectors. This note deals with Brexit and the Irish drinks industry. Brexit will have a negative impact on the Irish drinks industry. It will worsen conditions for trade with the UK. Depending on the details of a new, as of now unknown, trade relationship and agreement between the UK and the EU, new trade regulations and barriers will increase costs for both importers and exporters. This will be a particular problem for small drinks enterprises such as the new craft breweries and small distilleries which may target the UK as an initial export market because of its proximity and similarities. In addition, Sterling has already declined in value because of overall concerns with Brexit in the foreign exchange and financial markets and this will continue and accelerate if the UK votes to leave the EU.

A declining Sterling reduces the competitiveness of exports from Ireland to the UK and improves the competitiveness of imports from the UK. Consumers may benefit from the latter but Irish drinks producers competing on the domestic market will lose out. However, fluctuations in the exchange rate with Sterling are not a new phenomenon for the Irish drinks industry.  The drinks industry has a substantial volume of trade with the UK but the industry, notably in liqueurs and whiskey, has generated substantial export sales in non EU markets which do not have the much easier market access of the EU and EEA countries.

In addition, Brexit is expected to have, and is currently having, an immediate and short term negative impact on the level of UK economic activity which reduces the UK demand for imported products and services. A continuing long term negative overall economic effect on the UK economy is expected from Brexit but this is less certain and depends on how the UK uses its increased policy scope and freedom over the next few years and on the trade deal negotiated with the EU. There may also be a wider negative Brexit effect whereby the uncertainty raised by Brexit, for example, on the future maintenance of the EU, has a global negative economic effect resulting in lower growth and lower levels of economic activity. However, this can be minimised by a speedy determination of the new trade and economic relationship between the EU and the UK.

The Irish drinks industry generated exports of €1241.8 million in 2015, of which €314.4 million or 25% went to the United Kingdom. €224.8 million was sold to Britain and €89.6 million was sold to Northern Ireland. The largest national market for Irish drinks exports is the United States with €485.4 million or 39%. Britain is our second largest national market for drinks exports and Northern Ireland is our third largest. The UK market share of 25% for drinks exports compares to a UK share of 14% for total Irish merchandise exports. The drinks exports are more dependent on the UK market than overall exports. Individual drinks products such as soft drinks and cider are particularly reliant on the UK market, much more so than the average drinks situation, as referred to below.

Drinks imports were €785.1 million in 2015 of which the UK provided €305.8 million or 39%. The UK provided 27% of our total imports resulting in drinks imports being more UK focused than overall imports. Britain provided €273.3 million in drinks imports and Northern Ireland €32.5 million. Britain is by far, the largest source of drinks imports followed by France with €89.2 million. By contrast, the USA provided only €18.2 million in imports compared to the UK €305.8 million. The UK imports include products produced in the UK and products produced elsewhere but distributed from the UK.  Adding imports and exports, Irish drinks international trade was €2026.9 million in 2015, of which the UK accounted for €620.2 million or 30.6%.

The sectoral drinks export dependence on the UK/British market is shown in the table  below. There are very substantial differences between different beverage types with consequent different levels of Brexit-related impact.

UK role in individual Irish exports of beverages 2015

beverageExports € million Exports to UK € millionUK share %
Soft drinks132.4107.881.4
Cider56.940.2 (Britain only)70.7
Beer282.9121.643.0
Whiskey443.919.1 (Britain only)4.3
Other spirits (mainly liqueurs)313.213.5 (Britain only)4.3

Source.  CSO Trade Statistics

Soft drinks exports are very reliant on the UK market and hence are particularly vulnerable to the negative effects of Brexit. 81.4% of soft drinks exports are sold on the UK market. The same is true of cider, 70.7% of cider exports are sold in the British market. Beer has a much lower but still high share of its exports sold in the UK market, 43%.

The situation is completely different for whiskey and liqueurs. Whiskey has been the drinks export growth story of the past few years but the UK has contributed little to it. Of €443.9 million in whiskey exports, only €19.1 million or 4.3% is sold in the British market. 65% of Ireland’s whiskey exports are sold in markets outside the EU. The USA on its own accounts for €233.7 million or 52.6% of total whiskey exports compared to the British 4.3% share. In the liqueurs category Britain accounts for only 4.3% of exports, the same as whiskey. Non-EU markets absorb 78.4% of Irelands liqueur exports compared to Britain’s 4.3% share. The USA absorbs €163.8 million or 52.3% of total Irish liqueur exports.

Within the drinks export sector soft drinks and cider are very exposed to the UK market, beer is also significantly exposed to the UK but whiskey and liqueurs have a small degree of exposure to the British market.

On the import side, soft drinks accounted for €248.9 million of which Britain supplied €173.0 million or 69.5%. There was €233.0 million of wine imports (excluding sparkling wine) of which Britain supplied €14.6 million or 6.3%. Britain supplied €33.6 million of beer imports or 24.2% of the total of €138.7 million. Whiskey imports were only €15.6 million of which Britain supplied €6.4 million or 41.0%. Imports of other spirits and liqueurs amounted to €59.9 million of which Britain supplied €16.2 million and Northern Ireland €23.8 million. The UK share was 66.8%.

Overall, the British or UK sourced drinks imports were soft drinks €173.0 million, beer €33.6 million, whiskey €6.4 million, liqueurs €40.0 million and wine €14.6 million. The increased competitiveness advantage of UK drinks imports into Ireland will be most felt by domestic producers of soft drinks and, to a lesser extent, beer producers.

It is definite, in my opinion, that the short term and current economic impact of Brexit will be negative for Ireland and the drinks industry, and indeed negative for the UK economy. There will be lower UK economic activity, Sterling is declining relative to the euro which reduces Irish trade competitiveness and trade costs and regulation cost will be higher. However, a weaker Sterling improves UK export competitiveness. It is less certain that the longer term performance of the UK economy under Brexit will be definitely worse than if the UK stays in the EU. Much will depend on how the UK government uses its increased policy discretion.  The Brexit campaign has been relatively quiet on what it would do with the increased policy independence.  The scale of the negative impact will depend on the speed and detail of the new UK/EU trade and economic relationship but it is very likely that a reasonable new trade deal will be done with a low impact on trade transaction costs. While some Irish drinks enterprises and sectors will be significantly hit by the direct and indirect effects of Brexit, others such as whiskey, have very limited direct exposure to the UK economy.

Apart from the export/import issues discussed above, Ireland and the drinks industry will have a strong interest in the details of new arrangements for border/customs control, tariffs, regulations, labour mobility, work visas, security and foreign investment. Unfortunately, Ireland will not negotiate this new relationship with the UK. It will be done by the EU as a whole and, while Ireland will have an input, the eventual agreement will reflect the overall EU position. Ireland engages in high volumes of trade with countries outside the EU; the drinks industry has established substantial sectoral markets outside the EU. Membership of the EU is not a necessary condition to develop drinks exports but clearly, the lower the trade barriers the easier is the task. Brexit is not equivalent to termination of economic relations. Brexit will not result in isolation of the UK economy. There will be a new trade relationship between the UK and the EU, as there is a trade relationship between the EU and other economies in the global economy.  The negative economic impact of a Brexit can be minimised and kept low by a speedy agreement on the “new” relationship.

Anthony Foley is Senior Lecturer in Economics in DCU Business School, and lectures on the Executive MBA Programme.

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