Sunday 8 December 2019

Brexit threats to imports could trigger historic shift

More attention needs to be paid to import disruptions in the event of a hard Brexit. Stock photo
More attention needs to be paid to import disruptions in the event of a hard Brexit. Stock photo

Comment: Dan O'Brien

Discussion of Brexit focuses much more on exports, which are generated by producers, than imports, which are consumed by individuals as end-products and by businesses as inputs. As the risk of a no-deal Brexit rises more attention will be focused on potential supply disruptions - to both exports and imports.

More attention needs to be paid to import disruptions, for two reasons. First, as EU tariffs will have to be collected and goods cleared through Irish customs after a hard Brexit, supply disruptions are possible. There could even be shortages. Everything from empty shelves in supermarkets to companies running short on components must be considered. This is a more serious scenario economically and societally than exporters having problems getting products into the British market.

The second reason the import side of the equation may end up being more problematic is because of how the British are shaping up to deal with a no-deal Brexit. They are talking about working on the 'continuity principle'. That could well mean that, in order to minimise a supply crunch after March 29th next, they allow imports into the UK on the same basis as before, ie with no tariffs even if the EU imposes tariffs on their goods.

If the British wave trucks arriving from Ireland in without customs checks and without imposing tariffs, at least in the first weeks and months after a no-deal Brexit, the immediate risks for exporters to Britain, though elevated, might just possibly be less serious than feared (although that view must remain tentative, and for businesses that use Britain as a land bridge to the Continent the problem of crossing the English channel may make the route impossible).

After a no-deal exit, imports from Britain would be subject to whatever EU tariff regime the bloc decides on collectively - most likely the same World Trade Organisation tariffs that apply to other countries with which the EU does not have bilateral trade deals. As has been much discussed, imports would certainly be subject to new customs checks. This means there is the potential for significant disruption.

Before discussing the Ireland-UK import relationship now and in the post-Brexit future, let's first put it all in some historical context. Going back to the early decades after independence, almost all foreign goods brought into Ireland were from Britain. Even as recently as the early 1970s, when both Ireland and Britain joined the European customs union, nearly half of goods shipped into Ireland originated in Britain. As was expected, import dependence on Britain declined steadily after accession to the 'common market' and with the advent of the single market in the early 1990s.

But the trend was arrested at the most unexpected moment - the point when Ireland joined the euro without the UK. It was widely believed that the elimination of exchange rate risk with a massive neighbouring market would incentivise economic agents in Ireland to shift from British to eurozone suppliers in order take advantage of exchange rate stability.

But that didn't happen for the most part. Joining the euro actually coincided with the halting of the trend towards import diversification away from our nearest neighbour, and around 30pc of goods exports continued to be sourced from across the water. Over the past few years it has fallen again - to under 25pc - but dependence remains large. It is greater still when the large quantities of goods transhipped across the British land bridge are considered.

Imports are broken down by trade statisticians into four broad categories: consumer goods; capital goods; and intermediary goods, which are used as inputs in the production process.

As the first chart shows, the latter account for almost half of British-made imports. Ireland Inc has been buying around €8bn of intermediate goods - all kinds of widgets, energy products, chemicals, etc - from the UK in recent years. As the second chart shows, imports of these goods from the UK (including Northern Ireland) account for about quarter of all such goods imported from the entire world.

Given both these figures it is clear that the potential disruption for Irish industry is considerable in the event of a no-deal.

The Financial Times last week reported that Irish companies have been stockpiling their products in Britain to ensure that they can supply that market after Brexit. If production lines are not to be at risk of grinding to a halt in April next year, many businesses will surely now be considering extra purchases of imported inputs to boost inventories ahead of Brexit. They are also likely to be making longer-term arrangements, most notably replacing their British-made inputs for continental ones.

Half of all food and drink imports originate in Britain. When foodstuffs that come via land bridge are included, Ireland remains highly dependent on our neighbour for imported food supplies. Although, as a net exporter of food, there is less to worry about than in Britain, which is a net importer, there is a real risk of disruption to this most essential of products. In the case of cereals and vegetables, which Ireland is a net importer, potential shortages of two of the most common staples - bread and potatoes - are of particular concern.

The 'other consumer goods' category may present less of a challenge, with the exception of healthcare products. In today's world of multiple brands and producers, it may be easy enough to find alternative sources of mobile phones, furniture and the like, and a lot easier to live without them for a while than sliced pans and spuds.

Capital goods pose even less of an overarching challenge if Brexit takes a turn for the worst. Plant, machinery and the like imported from Britain accounts for just 7pc of total capital equipment imports. Britain's decline as a major manufacturer partly explains the trend, but a shift to sourcing from the continent is the big driver. In 1997, capital goods imports from the UK exceeded all other EU countries combined. In 2017, the EU26 accounted for almost 10 times more than the UK.

If Brexit ends up causing a similar shift in other categories of goods imports, the economic interconnectedness of these islands will undergo a truly historic change.

Sunday Indo Business

Also in Business