Monday 22 January 2018

Brexit and Trump - the perfect storm Ireland now has to face up to

Donald Trump and Nigel Farage
Donald Trump and Nigel Farage

Padraic White

We face more threats to the Irish economic model now than I can ever remember. To name a few: Brexit, the Trump Presidency and the hostility of the EU Commission to our success in attracting foreign investment as manifested in the attack on our corporate tax regime and our national reputation by its tax penalties on Apple in Ireland.

I approach this from the perspective of a 20-year-career in IDA-Ireland - 10 of them as managing director - at a time when the IDA was responsible for promoting foreign and indigenous industry.

I was there when the organisation's executives fanned out across the world in January 1973 to proclaim that Ireland was now a member of the then Common Market of some 250 million people.

I was there when Ireland surprised the EU Commission by finding an attractive successor to tax exemption on exports - which was contrary to the EU Treaty - by introducing from 1981 a 10pc tax on all manufacturing profits and which was compatible with the EU Treaty.

Membership of the EU and the low-tax regime have served Ireland well. There are now 200,000 directly employed by IDA-backed foreign companies in Ireland and another 140,000 in related employment - that is, a total of 340,000 employed today who depend on the foreign sector. These foreign companies account for the majority of exports of goods and services from Ireland.

Irish firms have benefited hugely from EU membership, including access to the UK market, and our low-tax regime which applies equally to them. More than 200,000 people are employed in companies supported by Enterprise Ireland, with the main focus on export. This model faces its greatest challenges over the next four years.

Let me start with the Brexit threat, where public confusion exists between two separate processes: namely UK exit from the EU and negotiation of a new UK/EU trade agreement.

Article 50 of the Treaty is clinical in stating that once notified by a member state of its decision to withdraw, the negotiations are about the arrangements for withdrawal and have to be concluded within two years. Then, when the UK withdrawal arrangements come into force, the UK becomes "a third country" as far as the EU is concerned. It is only then, after formally exiting the EU, that a new trade agreement can be signed with the UK and come into effect.

So there is no specific provision built in for negotiating a new agreement post-Brexit. In the realpolitik world, there will presumably be a parallel set of negotiations on the new trading and economic relationship between the UK and the EU which is of such importance to Ireland.

Since Prime Minister Theresa May's speech on January 17, the nature of such a post-Brexit deal is much clearer. The UK will not be part of the Single Market with free movement of people, goods, capital and services.

The UK will not be part of the EU Customs Union with its common external tariffs. This was not explicitly stated but it is incompatible with the Customs Union for the UK to negotiate bilateral trade agreements with other countries. So, the UK will have to negotiate a new trade agreement with the EU and each of the remaining 27 member states will have to sign off on it. All trade agreements are tortuous, particularly on agricultural access and services including financial services.

Without it adopting a punitive attitude to these negotiations, it's hard to see the EU having such goodwill as to offer the UK the same free-trade access it has now. There may be sectors or products where there is an equivalence of benefits, but it's hard to imagine each member state agreeing to a deal which comes close to free trade.

The Irish negotiators face considerable dilemmas in these negotiations. Ireland will want as free as possible access to the UK for our industries, particularly for beef, dairy and food products. But how far will we want to go in pushing for a UK deal close to free trade with the EU market and so largely offsetting Ireland's comparative advantage as a full member of the EU with full trading access to its markets for foreign industries based here?

Will the UK be able to offer post-Brexit most of the advantages to FDI of access to the EU market - without the costs and restrictions of membership? I cannot see how it will be possible to negotiate a new EU trade agreement with the EU and have it signed off by member states and come into force with the exit of the UK.

The consequence would be the entry into force, as a default regime, of the World Trade Organisation (WTO) tariffs. The Department of Finance set out some of the possible consequences of a WTO regime to the Oireachtas Finance Committee recently. It's pretty scary: 30pc decline in Irish exports to the UK; 50pc tariff on meat; 25pc tariff on dairy and eggs and 35pc on processed meat.

If Brexit weren't enough, there is also the challenge of President Trump's America First policies. There are jitters in Ireland about his commitment to keeping jobs in America or bringing them home. He has specifically in recent days referred to US companies shifting jobs overseas and selling back into the US the products then made - he states he will impose a 35pc border tax on such products.

The US companies in Ireland are here for a different reason: to give a powerful base within the EU and capitalise on Irish skills. The Irish tax rate of 12.5pc helps them choose Ireland rather than other countries within the EU. I believe that rationale will supported by the new US administration. Even a reduction of US corporate taxes to 20pc or possibly 15pc would not undermine the rationale for US companies in Ireland.

Finally, it is possible to visualise a scenario in the next few years where, following the visit last Friday of Prime Minister May to President Trump, the UK wins a bilateral trade agreement on a fast-track with the USA, has a generous free-trade agreement with the EU, is not bound by any of the state aid restrictions of EU membership and can reduce its corporate tax to any rate it decides.

Ireland is a global competitor for FDI with Singapore. Will we then have a "new Singapore" on our doorstep in the UK positioned offshore the main EU markets and with highly favourable bilateral trade deals with both the EU and the USA?

Padraic White is the former managing director of IDA Ireland

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