Don’t mention the War

Apr 01, 2019

In the rural Midlands where I grew up there was a strong folk memory of the 1930s economic war between Ireland and Britain.  A refusal by the Irish government under DeValera to pay the land annuities, which were essentially loans that had been made to Irish farmers under the various Land Acts to buy their holdings, led to the British in turn imposing tariffs and quotas on Irish agricultural produce.  Back then, the results of these tariffs on rural Ireland were calamitous, particularly for the Irish beef industry. 

I was reminded of this folk memory when reading the latest Brexit report from the ESRI this week.  A large part of the focus of the report has to do with the impact of Brexit on the trade in goods between Ireland and Britain.  A disproportionate share of goods which attract tariffs are traded between our two countries, relative to the trade between Britain and other EU member countries.  Just as was the case during the economic war of the 1930s, it is the Irish agriculture and food sector which is most vulnerable to tariffs and which could suffer the most when the World Trade Organisation rules start to apply.

The closer we get to Brexit, the easier it becomes to identify the precise shape of the possible outcomes.  The ESRI research distinguishes between the consequences of a Brexit with a deal, a Brexit without a deal, and a disorderly “off the edge of a cliff” type Brexit where there is an absence of planning and phasing.  Many of the consequences make for depressing reading, but this piece of research is not all doom and gloom.  In particular, it identifies two aspects, neither of which received much by way of headlines in the media coverage perhaps because they are not gloomy enough, but which really deserve more attention.

The first of these is the impact of Brexit on foreign direct investment into Ireland.  In a clever piece of analysis, the ESRI identifies the sectors in which the UK is particularly good at attracting investment from abroad.  Chief among these are banking and investment services followed by professional and support activities, food production, mining and manufacture.  The underlying assumption, and it is a fair one, is that by virtue of losing membership of the EU, the UK will also lose some of this foreign direct investment.  The ESRI then maps these sectors against the sectors where Ireland punches above its weight in terms of attracting foreign direct investment relative to the other EU 27 member states.  The mapping suggests where Ireland might be best positioned to take up some of the losses.

The conclusion drawn by the ESRI is that manufacturing, pharmaceuticals, administrative services and professional activities in Ireland could do well from the Brexit fallout.  To support these activities there is also the suggestion that, relative to its newly non-European neighbour, Ireland could become a very attractive place for skilled migrants to locate.  I have spoken to several executives in the US and Canada in recent weeks who cannot understand why Britain is seeking to cut off a ready supply of people skills from the European Union by restricting free movement.  The ESRI research echoes that sentiment.

The second aspect that I think should be highlighted comes across almost as a throwaway comment towards the end of the document.  This is the assumption that there will be no reaction on the part of firms or government that could help to mitigate some of the economic impact of Brexit.  The analysis is based on business behaviours remaining static in the face of the new trading regime, but they are not remaining static.

This is by no means to criticise the report.  The ESRI has drawn together several moving parts in both the British and the Irish economies to paint a coherent picture of likely outcomes. Their message that ultimately Brexit benefits no one, not least the British, is valid.  However it is equally valid to note the preparations which Irish industry is already making to mitigate exposure – from relocating warehousing and manufacturing plants, to relocating employees, to establishing new supply chain arrangements. 

Many businesses are already engaged in this kind of activity, but equally many have not taken such steps preferring instead to wait and see the outcome of the political debates.  They do this with some justification, as restructuring costs which may turn out to be unnecessary are a waste of money.  For the same reason, industries which have already restructured in anticipation of Brexit will not reverse their decisions, investments and spending if Brexit turns out to be soft, or in name only, or does not happen at all.

From the point of view of the national finances, the biggest risk signalled in the report is the impact of Brexit on jobs growth.  Employment has been the key driver of government finances since the recovery started.  This nation pays its way from PAYE, VAT and excise receipts, all of which grow at times of growth in employment. 

When the tariff barriers went up between our countries in the 1930s, less than £5m sterling per annum in land annuities were at stake.  Now the stakes are very much higher, but the economic relationship is also far more complex. 

Ireland can manage the damage of Brexit in the 2020s much better than we could the damage of the economic war in the 1930s.  Brexit is not a repeat of past history.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland