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.