And they're off. Or they will be on Monday when the Brexit trade talks start in Brussels. And for Irish businesses and the economy, one thing is already clear. Any hopes that trade between the EU and UK will operate in future much as it does now needs to be forgotten – we are heading for significant changes and the only question is how dramatic they will be.
A trade deal would soften the blow, significantly, and spread out the costs to the economy over a longer period of time. An exit of the UK from the EU trading bloc at the end of the year without a deal would be much more disruptive. And months of uncertainty lie ahead before businesses know which way this one will land.
A deal is possible, but will require political will and, at the moment, tensions are significant and the talks will start in an environment of suspicion and some distrust. At most, given the time constraints, a minimal deal just covering goods looks possible, with other issues like services trade postponed until a later date.
The negotiations will be about what trade rules apply in future between the EU and UK. With the UK leaving the EU single market, the current completely free flow of trade between the EU and UK will end on December 31st this year – unless an extension to the talks is agreed, which as of now looks unlikely.
Under the rules, the UK must seek an extension of the standstill transition period which has applied since Brexit day by the end of June.
The approach taken by the Johnson government does not bode well
Boris Johnson has said repeatedly that such a request will not be made, doubling down on the threat this week by saying that the UK could walk away from the talks entirely by the end of June if enough progress was not being made, and prepare itself to trade with the EU on World Trade Organisation (WTO) terms after the end of the year. Whether this is bluster, a bargaining position or an intention, only time will tell.
"The approach taken by the Johnson government does not bode well," says Edgar Morgenroth, economics professor at Dublin City University. "It is either another bluff – we remember how Johnson did not die in a ditch in the withdrawal agreement talks – which means lots of uncertainty and volatility in the short term, or they are seriously following an ideologically driven agenda, which will mean the negotiations are doomed to fail."
He adds that regardless of the outcome “costs will increase as at least some additional paperwork will be needed for any trade and, at worst, if negotiations break down, WTO tariffs will apply and many services will no longer be tradable. A breakdown in negotiations could also lead to a trade war.”John McGrane, director-general of the British Irish Chamber of Commerce, says it notes “with grave concern the UK’s stated position that it would consider leaving the negotiating table if insufficient progress has not been made by June. Such positioning can undermine confidence and lead to a cliff-edge scenario that would impede the free flowing trade between both jurisdictions.”
A basic trade deal would eliminate most or all tariffs – special taxes or duties on imports – and quotas that can limit the amount of goods traded
If a deal were done, what might it look like? The UK has said that it wants a trade arrangement similar to the one that currently exists between the EU and Canada – though Thursday’s negotiating guidelines suggest that a bare bones deal covering only trade in goods is the initial UK aim, with other agreements added on afterwards.
A basic trade deal would eliminate most or all tariffs – special taxes or duties on imports – and quotas that can limit the amount of goods traded. But this would still mean checks and significant bureaucracy on goods going between the EU and UK.
For Ireland, the absence of tariffs would be a big plus but there would still be new costs for exporters and importers.
Estimates by consultancy firm Copenhagen Economics were that the cost to Ireland of such a deal might amount to GDP being 3.5-4 per cent lower by 2030 than would otherwise be the case. On current forecasts this would mean the economy would continue to grow, just a bit more slowly. One caveat here is that forecasts may be adjusted anyway in the light of the Covid-19 virus.
If the UK leaves the transition period without a trade deal, then it will trade with the EU on what are called WTO terms. These are the terms on which countries that have no trade deals between each other do business.
This would be similar to what would have happened had the UK left the EU without a withdrawal agreement, as it would involve the disruptive imposition of tariffs on trade in some areas, particularly agriculture and food, and the need for the immediate introduction of customs and regulatory checks and procedures. The UK’s threat to abandon the talks early if enough progress has not been made underlines this risk.
This would involve the immediate imposition of significant trade barriers between the EU and UK, hitting exporters and pushing up the cost of imports.
The Copenhagen study estimated that the economic cost of this would be roughly twice as large as if a trade deal were done between the two sides – with GDP about 7 per cent lower by 2030.
More of the costs would be likely to accrue in the early years, and growth in 2021 and 2022 could be seriously affected. The costs would be concentrated in the parts of the economy most exposed to the new trade barriers. As tariffs are highest in agriculture and on food products – historically this has been the case as countries protected their home food market and farmers – there would be particular problems for the beef sector,which sells about half its output to the UK, where it has traditionally fetched a good price.
Dairy and other food areas would also be affected, as would manufacturing SMEs in areas such as engineering.
Rural parts of Ireland would be most exposed, though the hit would likely be spread across the economy. Previous work by the ESRI estimated that the imposition of WTO tariffs on imports into Ireland from the UK would add more than €1,000 to the average cost of an Irish shopping basket each year, with less well-off sections of the community most exposed.
The critical thing for businesses to understand is that we are now in the transition phase to the new trading arrangement with the UK
Irish businesses trading with the UK face significant challenges in getting prepared. "The critical thing for businesses to understand is that we are now in the transition phase to the new trading arrangement with the UK," says Carol Lynch, a partner in the BDO customs and international trade department.
She says the critical and time-consuming issues for business trading with the UK are:
Putting together a confirmed list of classifications for all your products and identifying tariff (duty) rates;
Dealing with suppliers, reviewing contracts and confirming who is responsible for imports and exports;
Working out how you will lodge import and export declarations – inhouse or with a clearance agent.
For many companies with a lot of transactions, products and suppliers, this could take up to six months, she says.
Get ready to hear a lot – an awful lot – about the level playing field
As the talks get under way on Monday, what will be the key points to be negotiated? Get ready to hear a lot – an awful lot – about the “level playing field”. This refers to EU demands that the UK must maintain standards similar to the EU in areas such as the environment, workers’ rights and state aid to businesses if it is to gain access to the EU single market on tariff-free terms.
The fear in Europe is that the UK will try to cut standards and so give its businesses a competitive advantage via lower costs. The EU is demanding greater commitments than are contained in its deal with Canada – because the UK is much closer – but there is a clear push back from London here . A deal could still be done, though it will require clever wording and some give from both sides.
“The EU and especially Ireland will have to insist on a level playing field or else risk losing jobs to the UK,” according to Morgenroth.
A key part of the withdrawal agreement under which the UK departed from the EU on January 1st was putting in place a new trading regime for Northern Ireland, under which it would follow EU rules in areas of goods and food standards but still remain formally part of the UK customs union.
This was to allow the Border to remain open. For this to work, checks are needed on goods entering Northern Ireland from Britain – otherwise goods could enter the EU single market from the UK without being checked. The UK government has recently cast doubt on its commitment to this deal, saying it wants goods to move freely between Northern Ireland and the rest of the UK.
Cabinet office minister Michael Gove said on Thursday that the Northern Ireland protocol would be implemented “ appropriately” – but continued to insist that there would be no “border in the Irish Sea” – which still leaves open the question of exactly what London plans in this area.
How this will all work is due to be agreed in a special EU-UK committee before the end of this year.
It is vital for Ireland that this is done on time and functions properly – and doing so would be easier if the EU and UK do agree a tariff-free trade deal, as this would remove one layer of complication. This is also a big issue for businesses in the North, who fear the additional impact and costs from the checks.
Businesses in Northern Ireland were promised “the best of both worlds” after Brexit, with access to both the EU and UK markets but, for the moment, the focus is on the practicalities of exactly how the new regime will work and the risk that it will add to costs and cause delays.
Again, there is scope for compromise here. The EU guidelines say, in relation to the special arrangements for Northern Ireland: “While preserving the integrity of the single market, the envisaged partnership should ensure that issues arising from Ireland’s unique geographic situation are addressed.”
So some flexibility may be shown by the EU side – but only up to a point. If there is no trade deal and the Northern Ireland arrangements are not operating, it is not clear what will happen and what steps the EU might seek to secure the single market. So it is all to play for. And we could face some months of bluster and bluff before the real talking starts, under severe time pressure, in late summer.
