What Brexit means for Ireland

As the ASI’s resident Irishman, I was asked to speak at an event at the Irish Embassy yesterday to consider, among other things, what sort of impact Brexit will have on Ireland and the Irish people. Although Ireland is small, its destiny matters to Britain. Ireland is the United Kingdom’s only land neighbour, Northern Ireland is still unstable, 5.1% of British exports go to Ireland (nearly as many as the 5.7% that go to France), half a million people born in the Republic of Ireland live in the UK, and six million Brits have at least one Irish grandparent.

Irish people living in the UK don’t have much to worry about from Brexit, beyond the normal concerns Brits have too. The right of Irish people to reside in the UK does not come from EU law, but rather stems from British domestic law. The Common Travel Area (CTA) between Ireland and the UK predates our countries’ EU/EEC membership and, provided Ireland does not join the Schengen agreement to get passport-free travel with the rest of the EU, there is little reason to think that this will change. This bilateral deal means that Irish people in the UK are already protected under UK law, unlike EU citizens (whose status should also be guaranteed immediately and unilaterally by the British government, and who remain in limbo until it is). 

The CTA is totemic when it comes to Northern Ireland, because it allows easy travel across the border, and any attempt to undo it would create serious problems there – avoiding even the perception of any backsliding on the progress made in Northern Ireland is a very high priority for everyone involved in the Brexit negotiations.

I think the difficulty of the UK ending freedom of movement while maintaining the Common Travel Area has been overstated somewhat. Freedom of movement is better understood as freedom to work and reside, which is normally not enforced at the border with people from countries we allow visa-free access to. For example, a Canadian citizen travelling to the UK can assume they will be granted access at the border to the UK without getting a visa first, but cannot stay here for more than six months or work here without getting a visa. Assuming we impose some controls on immigration from the EU27, but keep allowing visa-free travel, we will not be blocking Poles or Spaniards at the border but will be preventing them from getting a job (by punishing employers who hire them and deporting people who stay for longer than six months). 

The challenge will be to actually keep track of when EU citizens have entered the UK, so that that six month period is actually enforceable. In my view the best solution to this is to carry out checks on travellers between the island of Ireland (that is, both the Republic and the North) and the UK, and to have a more relaxed policy about people travelling from the Republic to the North. A unified border system along the lines I laid out in “The Border After Brexit” would make enforcement of immigration controls much easier, allowing British and Irish border forces to track entrants more easily. 

Customs checks are a bigger problem, and may prove to be quite costly for the Irish and British economies. Even with a very comprehensive free trade deal, it is likely that UK exports will be subject to ‘rules of origin’ checks by the EU. These checks are designed to prevent people by-passing tariffs by moving goods through middleman countries with low or no tariffs between both the origin and destination countries.

Imagine if the EU had 20% tariffs on Japanese goods but the UK had none on them, and the EU and UK had no tariffs between them. UK firms could import goods from Japan at zero tariffs and then sell them to the EU, again at zero tariffs, by-passing the EU’s tariff barriers. Rules of origin checks are designed to prevent this, and they mean that customs checks will still have to take place.

These can slow down the movement of goods and these delays can be unpredictable. For some products this can increase costs exponentially – for example food and pharmaceuticals that need refrigeration, which may spoil if they are unexpectedly delayed. I suspect these are unavoidable now that the UK is leaving the EU’s Customs Union, and will probably raise costs for Irish importers and, assuming the UK introduces similar checks, for Irish exporters.

Norway (which is outside the Customs Union and so subject to these Rules of Origin checks) and Sweden have minimised the burden of these checks at the border by creating a law enforcement and customs check zone 15km on either side of the border where police and customs officials from both countries can operate on both sides. Automatic number plate recognition allows for easier tracking of vehicles and unified customs paperwork reduces time, costs and complexity. In principle there is no reason that this should not be replicable between Ireland and the UK.

Of course tariffs and regulatory trade barriers on either side between the EU and UK will hurt both sides. I am optimistic about the prospect of a zero-tariff deal but not about the prospect of regulatory trade barriers being kept to a minimum, given the complexity of the issue, the lack of goodwill on both sides of the negotiating table, and the fact that many Conservatives do not seem to believe that regulations as well as tariffs can be a barrier to trade. 

We should be careful not to overestimate the effects on the Irish economy of barriers to trade with the UK, however. 14% of Irish exports go to the UK – a hefty proportion, but less than the 20% that goes to the US and roughly 50% that goes to the rest of the EU. The UK is now a much less dominant trade partner for Ireland than during most of the twentieth century when as late as the 1970s more Irish exports went to the UK than all other destinations put together (in the late 1940s and early 1950s, 90% of Irish exports went to the UK!). Incidentally, this is one reason that Brexit is unlikely to provoke an “Irexit” – the UK just isn’t as important a trading partner as it once was.

Apart from these direct effects, if Brexit reduces UK growth it will probably hurt Ireland too. You might say that when the UK catches a cold, Ireland sneezes – a 1 percentage point drop in UK growth seems to cause a 0.3 percentage point drop in Irish growth. One study projects that Irish GDP will be 0.8-2.7% lower by 2030 (almost as low as the UK) because of Brexit, but there's a lot such things cannot capture.

Dublin may be able to attract at least some City firms that need to move some operations into the EU for passporting purposes. Dublin is English-speaking and well-connected to the US, and Ireland is less taxed and less heavily regulated than France and Germany. But Dublin is also quite a small city, with a much smaller talent pool than London, and very high property prices caused by tight planning laws (though less high than London’s). It would only take a portion of the City moving to Ireland to substantially boost the Irish economy, and if Ireland could make itself attractive to them as a base in the EU it could find that Brexit turns out to be a net positive. Over thirty large insurers are in talks with the Irish Central Bank to relocate to Dublin.

The most serious long-term problem for Ireland after Brexit may be political. The UK and Ireland have long been close allies within the EU, sharing a basic belief in (relatively) low regulation and low tax compared as the way to prosperity. With the UK gone, one of the most powerful voices for this “Anglo-Saxon” model and certainly Ireland’s most close and powerful ally will be gone. Ireland, as a country of four and a half million people, will not have much influence on its own.

The effects of this might be seen in a renewed push by the European Commission for a “Common Consolidated Corporate Tax Base” (CCCTB) – a unified set of rules about what company money actually counts as taxable profits in EU states. The Apple case last year, in which the EC tried to force the Irish government to collect tax from Apple to stop it from acting as a sort of tax haven, was part of this area, and if a CCCTB is passed then harmonisation of the corporation tax rate may be next on the agenda – something that would be very bad for Ireland, which has attracted a lot of investment thanks to its low 12.5% corporate tax rate. Thankfully for Ireland, this is quite unlikely given the fact that matters of taxation at EU level require unanimous consent, giving Ireland a veto. Ireland is therefore only at risk if it decides to succumb to political pressure.

The optimistic thing about Brexit is that it might end up disrupting a lot of the sclerosis in Britain’s politics, giving us an opportunity to reexamine things like our own tax and planning systems – for instance, replacing corporation tax with a border-adjusted cash flow tax like the one being proposed by the Republicans in the US, which would shift the burden of tax from capital to consumption and boost investment and growth as a result. That would be very good for Britain and maybe for Ireland too, as growth here would drive growth there as well, though Ireland would lose much of its attractiveness as an international investment destination – its neighbour would now have a 0% corporation tax! A shift by Ireland to this kind of tax would of course give it that nice little advantage instead.

Brexit isn’t coming at the best time for anyone (both the British and Irish governments would like to have more wiggle room in terms of spending than the austerity-strapped budgets they have) but it’s happening and Ireland will have to ride out the storm. The UK matters less to Ireland than it once did, and unless Brexit is truly catastrophic for the British economy (my guess is that trade barriers with the EU will make us a bit poorer, but there are also big gains to be made if we take them) the main challenges are in implementing things like border and customs checks in a way that minimises time and costs, and figuring out how to stop the EU from turning into something very hostile to Irish interests. 

Many Irish people are shocked that Brexit is happening, and fearful about the future, but if Ireland can tempt over some of the City's banks, it may find that England’s difficulty is its opportunity.