Friday 9 December 2016

Apocalypse now?: Trade is one thing, supply is another

While some sectors here may suffer, writes Ana Boata, for others, Brexit offers new opportunities

Ana Boata

Published 03/07/2016 | 02:30

Ana Boata is European economist at Euler Hermes, the world's leading trade credit insurer
Ana Boata is European economist at Euler Hermes, the world's leading trade credit insurer

The result of the UK's EU referendum looks likely to have profound effects on trade and supply chain finance for many of Ireland's commercial and export sectors - but near-term pain has the potential to turn to long-term gain for canny investors and business people.

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In the short- term, there will be painful economic dislocation as the two close trading partners adjust to the UK's non-EU status and Ireland finds new markets, as Ireland is highly dependent on the UK for trade and investment. Currently, 32pc of all Irish imports come from the UK, while 15pc of all Irish exports go there.

This negative balance of goods also makes Ireland more dependent on a post-Brexit free trade agreement between the UK and the EU.

Ireland's export losses could reach a cumulative €1bn between 2017 and 2019 in a 'soft Leave' scenario (the UK negotiates a new free trade agreement with the EU) and up to €1.3bn of loss in a 'hard Leave' scenario (no free trade agreement with the EU). That's the equivalent to 0.5pc of the Irish GDP, a relatively harsh impact.

Irish imports from the UK are concentrated on oil and higher value-added products (electronics, chemicals, machinery and equipment) and could prove extremely difficult to substitute - at least in the short to medium term, or to produce domestically given the incomplete supply chain and a likely rise in import prices.

So Ireland could suffer higher energy prices and possible supply disruption as most energy imports come from the UK (Scotland supplies Ireland with 95pc of its gas). The industrial and chemicals sectors are likely be impacted the most, as will the agri-food sector, as much of Ireland's food exports go to the UK.

Additionally, Ireland imports 9pc (worth €11.9bn in 2015) and exports 19pc of all its services to the UK (€22.6bn in 2015). A contraction in both imports and exports of services is likely, following a downsized UK financial market and a rise in operational costs.

All of this could lead Irish GDP growth to fall by 0.9pc between 2017 and 2019 in the case of 'soft Leave' and 1.4pc in a 'hard Leave'. The deteriorating economic environment in both Ireland and the UK increases the risks of more insolvencies and late payment or non-payment for Irish businesses.

However, the longer-term gain could include Dublin attracting significant investment flows from the UK, notably in the financial, chemicals and pharmaceutical sectors, provided Ireland replaces the loss in export market shares and attracts additional foreign direct investment.

Substitution is possible if Ireland manages to attract London-based European banks and American investors by making the country the new US gateway to Europe, for example. Dublin's financial sector, Ireland's location and the business-friendly tax system should all help.

Further investment could be attracted in the high-tech and digital sector: the EU headquarters of US giants Google, Facebook and Microsoft are already located in Dublin, while Apple is based in Cork.

Ana Boata is European economist at Euler Hermes, the world's leading trade credit insurer

Sunday Indo Business

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