Written Evidence submitted by the IIEA for the Northern Ireland Affairs Committee’s inquiry into Northern Ireland and the EU Referendum (EUN0009)

About the IIEA

Founded in 1991, the IIEA is Ireland’s leading think tank on European and international issues. It is independent of government, business and all political parties and is a not-for-profit organisation with charitable status.

The IIEA provides a forum for a unique community of stakeholders. Its members constitute a wide-ranging network including former Heads of State, government ministers, senior civil servants, CEOs and managing directors, ambassadors and senior representatives from trade unions, academia and NGOs.

A series of working groups examines specific policy areas of relevance to the business and policy communities. Each group has a high-level project leader and chair. The groups analyse a wide range of current and forthcoming strategic issues at European and international level, with the aim of considering the issues, developing a range of policy options or scenarios and exploring their implications for Ireland and Europe.

The IIEA’s UK Project Group, tasked with analysing the UK’s changing relationship with the European Union, has been in operation for two decades. In that time, the group has published widely on the topic of the UK in Europe, including a series of three books. The most recent of these books, Britain and Europe: The Endgame – An Irish Perspective, which was published in March 2015, analyses the future of UK-EU relations in light of Prime Minister David Cameron’s EU reform negotiations, and the subsequent In/Out referendum to be held in the UK.

Introduction and summary of key points

1. Relations between Ireland and Britain have evolved over the last century from a situation of asymmetrical dependence to a much more equal footing. For fifty years after Irish independence, the country’s economy and agricultural sector remained markedly dependent on its largest neighbour. Indeed, Ireland’s overwhelming economic dependence on the UK at the time meant that, when the two countries joined the European Communities, on the same day in 1973, the Irish accession to the EEC was contingent upon the accession of its larger neighbour[1].
2. It is worth remembering too that at the time of joining the EEC, Ireland’s political relations with its neighbour were difficult, set against the background of the violence and political stalemate in Northern Ireland.
3. In the four decades since, however, the Anglo-Irish relationship has been transformed, and the positive change in relations was due in no small part to EU membership. Joint membership of the EU provided a forum which enabled personal contacts to develop between Irish and British politicians and officials in a way that had not previously been possible. It necessitated contact on diverse policy issues, contributed to the process of easing bi-lateral tensions between the two, and assisted the two states in moving towards a common Northern Ireland policy[2].
4. The process has strengthened cross-border ties, and fostered stable political and economic interdependencies between the two countries.

Economic dependencies

5. The latter point, that of economic interdependencies, is a key one in the modern context.
6. Although the Irish economy is now much more diversified than at any point in the past, Ireland and the UK remain major trading partners, to an extent far out of proportion to their relative sizes. The two countries conduct over €1bn in merchandise and services trade every week, or approximately €65 billion per annum, sustaining a combined total of 400,000 jobs on either side of the Irish Sea. The economic relationship between the two remains vitally important. The UK is Ireland’s largest export recipient; Ireland is the fifth-largest destination of UK exports, which exceeds by far the relative size of its population and economy. And this is far from a one-directional relationship: the UK exports more to Ireland than it does to China, India and Brazil combined. As of 2014, Ireland was the UK’s 6th largest export market, and a destination for more than £18 billion worth of British goods and services.
7. The UK is Ireland’s largest export recipient; Ireland is the fifth-largest destination of UK exports, which exceeds by far the relative size of its population and economy. And this is far from a one-directional relationship: the UK exports more to Ireland than it does to China, India and Brazil combined. As of 2014, Ireland was the UK’s 6th largest export market, and a destination for more than £18 billion worth of British goods and services.

The Northern Irish Dimension

8. The fact that Northern Ireland and the Republic of Ireland are both part of the EU Single Market has generated increased cross-border activity both in terms of trade of goods and services and in terms of cross-border enterprise co-operation and investment.  For many businesses on the island, the “border” is no longer a negative issue.  Research suggests that to the extent that the border features in business thinking, it can often be a positive factor.

9. Closeness to the border permits firms to operate easily in adjacent markets and to stabilise their operations over a wider range of markets than just their local one where they had started. The border, for these kinds of enterprises, is no longer a barrier. It is more like a gateway. Many parts of the Northern and Southern business community are now focused on deriving benefits from improved island transport and communication infrastructure and from positive spill-overs associated with our island’s location within the Single European Market. 
10. Northern Ireland may be the smallest UK region, with some 1.81 million people (or 1.5 per cent of the UK’s citizens), and its estimated GDP[3] is the smallest of the UK’s regions, but the issue of ‘Brexit’ arguably matters more to this region than others. Northern Ireland is the only part of the United Kingdom that shares a land border with another EU member state and is heavily involved in a range of cross-border cultural, economic and political initiatives. A ‘Brexit’ raises a number of challenging issues for Northern Ireland about not only this cross border dimension but also its links to the continent.
11. This paper will assess a number of the most pertinent implications for Northern Ireland, under the following headings

• Implications for cross-border relations
• Implications for Trade and Economy
• Implications for the Agri-Food sector

12. The key points of this submission include that:

• Customs posts are likely at the Northern Irish border irrespective of the terms of a British exit;
• Passport controls at the border are possible in certain post-Brexit scenarios, though political sensitivities on both sides of the border may prevent this from coming to pass;
• Overall impact on the Northern Irish economy is uncertain, but it is likely that any negative implications for the UK would be accentuated in its less competitive regions, including Northern Ireland;
• Access to the Single Market is an important determining factor in securing Foreign Direct Investment, and could offset the positive impact of Northern Ireland’s incoming 12.5% corporate tax rate; and
• Brexit would be unambiguously negative for the Northern Irish Agri-food sector. Furthermore, as this issue is of such critical importance to the Northern Irish Agri-food sector and to the wider economy, an authoritative study is urgently required to guide policy and political decision making.

1. Implications for cross-border relations

This section describes the possible implications for cross border relations. It concludes that some hardening of the border is possible in the event of Brexit, with customs posts being the most likely outcome. Passport controls are possible, but less likely. It draws no conclusions regarding the future of the peace process, but argues that the stability offered by the status quo is preferable to the uncertainty inherent in Brexit.

1.1 The common travel area and the border

13. Before examining potential issues for the border, we must first provide some background on the Common Travel Area (CTA). Through the CTA, Irish and British citizens enjoy a remarkable degree of migratory freedom between the Republic of Ireland and the UK.
14. The CTA is something of a peculiarity in the context of modern bilateral arrangements. It has existed since shortly after the secession of the Irish Free State in 1922 (albeit with some interruption during World War II and the post-war period), but the CTA is not directly provided for in legislation in either Ireland or the UK (though it is referred to in other documentation, for example the UK Immigration Act 1971, and the Convention on Social Security between Ireland and the UK, of 2007).
15. The first public agreement between Ireland and the UK on the matter was the 2011 Joint Statement Regarding Co-Operation on Measures to Secure the External Common Travel Area Border, but this agreement is in itself not legally binding, stating that it is "is not intended to create legally binding obligations, nor to create or confer any right, privilege or benefit on any person or party, private or public."
16. In fact, the most prominent legal reference to the CTA is in a protocol attached to the Treaty of Amsterdam, and which exempted Ireland and the UK from participation in the Schengen acquis:

The United Kingdom and Ireland may continue to make arrangements between themselves relating to the movement of persons between their territories ('the Common Travel Area') [...] Accordingly, as long as they maintain such arrangements, the provisions of 98 Protocols Article 1 of this Protocol shall apply to Ireland under the same terms and conditions as for the United Kingdom. Nothing in Article 7a of the Treaty establishing the European Community, in any other provision of that Treaty or of the Treaty on European Union or in any measure adopted under them, shall affect any such arrangements

17. As discussed later in this section, this protocol has some relevance to the future of the border, depending on the terms of a British exit.
18. Though the CTA is somewhat vaguely defined in the legal sense, it nonetheless has had tangible benefits for British-Irish relations, and for trade and mobility on the island of Ireland. Among the benefits of this arrangement with the UK, in the post-conflict era, is the absence of a border in practical terms between the Republic and Northern Ireland. 
19. The combination of the CTA, full EU membership, the creation of the Single Market, as well as the onset of the peace process, ultimately meant that both customs posts and checkpoints became unnecessary. The eventual dismantling of security posts and reopening of secondary border-crossings has made the presence of the border difficult to discern – today, only the changing road signs are an indication that one has traversed the border. As has been noted by Cathal McCall, of Queens University Belfast, these developments ushered in a new era of cross-border cooperation:

This softening of the Irish border has involved de-emphasising state sovereignty and overcoming borders as barriers to communication, mobility, and trade – as embodied in the process of Europeanisation and the 1998 agreement. That agreement created a cross-border institutional infrastructure comprising the north-south ministerial council, which brings together ministers from the Republic of Ireland and Northern Ireland, and a number of north-south implementation bodies. It was bolstered by the eventual removal of the British border security regime located primarily in South Armagh, known to some as “bandit country”[4]

1.2 What would happen to the border in the event of a Brexit?

20. In light of this progress, many commentators have expressed concern over the future of the border in the event of Brexit. Indeed, the issue of customs or passport controls - or both -  inevitably arises in the discussion surrounding Brexit. Some commentators have downplayed this issue on the basis that the issue could be easily resolved, but it is far from certain that this would be the case.
21. Thus, any analysis of the implications of Brexit for Northern Ireland must take this uncertainty into account and examine the possible Brexit scenarios in which a hardening of the border is possible.

Possible Brexit Scenarios and their implications for the Border

22. The implications for the border depends on the nature of the post-Brexit EU-UK arrangements, namely:

• If the UK remains as part of the Single Market either as EEA/EU or some ‘special arrangement’ similar to the Swiss agreement. In this scenario, the UK would be obliged to abide by Single Market regulations, including freedom of movement, and would not have a voice at the table during the creation of future Single Market rules[5];

or

• If agreement cannot be reached on post-Brexit Single Market access, and the UK finds itself outside the EU and Single Market, in which case it would conduct its trade with the EU on the basis of WTO rules

23. The implications of these two scenarios for the border are analysed below.

Scenario 1 – The UK Remains a Part of the Single Market through the EEA, or through a special arrangement – Border Customs Posts likely

24. If the UK remains in the Single Market either as EEA or a special UK/EU arrangement with the application of the four freedoms of movement of goods, capital, services and persons then the issues of passport controls does not arise as free movement rights remain and the opt-out from Schengen under Protocol 20 of the Treaty of Amsterdam, described earlier, will likely continue to apply.
25. However, the issue of customs controls does arise because the UK would be outside the Customs Union covered by Treaty Articles 30, 31, and 32 TFEU along with the Common Commercial Policy in Articles 206 and 207 TFEU. Free trade would be primarily in industrial merchandise goods and services and not in agriculture and fisheries products unless, in deference to Ireland’s requirements, free trade in agriculture and fisheries products was agreed. Regardless, customs Rules of Origin procedures would apply to all merchandise trade. In the event that agriculture and fisheries products were excluded from free trade, significant customs tariffs would be applicable here.
26. An EFTA Factsheet of August 2014 on EEA/EU trade had this to say on the issue,

The EEA agreement provides for a free trade area covering all the EEA states. However, the EEA Agreement does not extend the EU Customs Union to the EEA EFTA states. The aim of both the free trade area and the EU Customs Union is to abolish tariffs on trade between the parties. However, whereas in the EU Customs Union, the EU Member States have abolished customs borders and procedures between each other, these are still in place between the EEA EFTA States and the EU, as well as between the three EEA EFTA States. Furthermore, the common customs tariff on imports to the EU from third countries is not harmonised with the EEA EFTA States.             

27. It is clear from this that Customs posts and procedures would be required between North and South similar to the old Customs posts between Dundalk and Newry at the border. Whether a simplified procedure that would obviate the need for physical presentation of documentation and possible inspection for each consignment could be put in place is impossible to say at this point.
28. The purpose of the EU’s Rules of Origin procedure is to ensure that goods with a lower tariff below the EU common external tariff cannot enter through the UK or vice versa and then be in free circulation. This could arise because the UK, if it leaves the EU, would be outside the Customs Union and Common Commercial Policy regardless of what type of free trade agreement (if any) it manages to negotiate. It is also the case that where revenue issues arise then administrations will tend to err on the side of caution to protect revenue and trade. So, even though tariffs on industrial goods are low, Rules of Origin procedures will apply to UK/EU trade and Customs posts with provision for physical inspection are very likely to be required.
29. In the case of an absence of free trade in agriculture and fisheries products or a situation where the UK and EU tariffs on these products diverged then customs procedures and checking would arise. If for example the UK reverted to a cheap food policy following Brexit and set agricultural tariffs below that of the EU, then in the absence of customs controls the market in the Republic of Ireland could be flooded with cheap imports.
30. One must also factor in to this equation the difficulties in securing a territorial demarcation that is already somewhat porous – the Government of the Republic of Ireland reports that cross-border fuel-smuggling alone already costs the treasury €300mn per year in lost taxes. Differential pricing of products such as diesel and cigarettes have long been a factor in driving borderland smuggling. Any further price or currency fluctuation, as is quite conceivable in the post-Brexit scenario, could further drive illegal trade and make proper securing of the border an economic imperative for both states. The costs associated with such an initiative would be substantial - it is worth noting that there exist 34 border-crossing roads in Co. Louth alone, which accounts for just a small fraction of the length of the border.

Scenario 2 – No Single Market Access, No special Arrangement – Customs controls very likely; Passport Controls possible

31. In the event of a Brexit, and a failure to agree access to the Single Market on an EEA or a ‘special arrangement’, then the need for Customs controls would be even stronger. All goods both industrial and Agriculture and Fisheries would have tariffs and would need to be subject to Rules of Origin to ensure that the common external tariff was not bypassed for the EU or indeed the UK where it had a higher tariff than the EU.
32. It is in this scenario that the issue of Border passport control could arise.
33. The main issue would be whether Ireland would still have an opt-out from the Schengen area under the Protocol in the Treaty of Amsterdam, on the exclusion of the UK and Ireland from certain aspects of Treaty Articles 26 and 77 which establish and internal market without internal frontiers and controls. The structure of the Protocol is that Article 1 gives the UK the right to exercise passport controls at its borders. It is then set out in Article 2 that Ireland by virtue of the common travel area between the UK and Ireland is given the same rights for as long as it maintains the common travel area.             

The above leaves us with two conclusions:

1. Customs controls including at the North /South Border are very likely in the event of Brexit irrespective of the subsequent trade relationship negotiated by the UK.
2. Passport controls are less likely, but nonetheless possible in the event of the UK leaving both the EU and the Single Market.

34. Either of the above outcomes would be a dramatic departure from current arrangements. After two decades of an open border and cross-border peacebuilding, one might reasonably assume that, in the event of Brexit, there could be some degree of political and social uncertainty associated with a more visible border.
35. It would therefore not be unreasonable to assume that the EU, in order to accommodate a Member State for whom North/South passport controls would have significant political implications, would be sympathetic to Irish requirements. It might in turn be a reasonable assumption that the EU would endeavour to ensure that an agreement could be reached to avoid passport controls.
36. But such an outcome cannot be guaranteed, and we must note in this context the centrality of the immigration question to the UK’s reform agenda, as well as the ongoing discussion over migration and its impact on security in Europe. In a situation in which the UK opted out of the Single Market and the four freedoms, in part to control immigration, then maintaining the common travel area and the open border would make control of immigration complicated, to say the least. Indeed, the Common Travel Area has previously been identified by UK officials as a “weak link” in the ability to control peoples entering or leaving the United Kingdom.[6] A heightening of these sensitivities in the post-Brexit scenario could have implications for its continuation.
37. As the ESRI noted in their 2015 report Brexit: Scoping the possible implications for Ireland, it could reasonably be argued that the imposition of passport controls between Northern Ireland and the Republic “would be avoided so as to protect progress on an enormously sensitive political issue,” but the report goes on to note that this cannot be asserted with any certainty.
38. Indeed, since there is no legal precedent for this; since there exists no means of predicting the climate of the UK withdrawal negotiations in the European Council; and since the post-Brexit political climate with respect to migration and security also cannot be predicted, we concur with the ESRI’s conclusion that it cannot be assumed that the status quo ante with respect to the North/South border could be protected in the above Brexit scenarios.

1.3 Implications for the peace process

39. The implications for the peace process in Northern Ireland cannot be reliably predicted, particularly in light of the uncertainty surrounding the border issues described above. In the event of a true hardening of the land-border, it takes no great feat of imagination to envisage a worst-case scenario. Though the concerns expressed by observers are honestly held, the issue should perhaps not be overstated. While it is clear that Brexit could present the Northern Irish settlement with challenging circumstances, it is also true that maintaining the settlement is and will remain a priority of the Irish, British and Northern Irish sides. It might therefore be hasty to assume that decades of peace-building and post-conflict normalisation efforts in Northern Irish society would simply be undone in the event of Brexit.
40. Nonetheless, it is true that Northern Ireland faces enduring challenges of restoring inter-community harmony and of addressing the troubled legacy of history, and we must be alert to potential risks engendered by any change to the status quo. The fragile peace in Northern Ireland requires constant attention and efforts in London, Dublin and Belfast, and while informal and formal contacts between Irish and British officials could continue to be cultivated within the bilateral context, they would lose a very important element of commonality if the UK were no longer in the EU.

Implications for the UK as a unitary state?

41. One must also factor in the potential for internal structural changes to the UK as a unitary state bringing together England, Scotland, Wales and Northern Ireland. In this context, Brexit could constitute a systemic shock, as outlined in the IIEA book, Britain and Europe: The Endgame. There is a growing belief that a UK withdrawal from the EU could trigger another referendum on independence in Scotland.
42. This the ‘dual sovereignty’ question facing the UK, and referred to in the IIEA’s successive books on the subject, is now explicitly wired in to the political argument over the country’s future. The consequences of a successful Scottish independence referendum for Northern Ireland would be profound, since it would challenge existing political identities on both sides of society, would leave Northern Ireland vulnerable to a much less communitarian English majority less inclined to subsidise poorer peripheries, and could even put Irish unity on the political agenda much sooner that most political elites and citizens expect or desire.[7] 

Structural funds

43. Brexit could also see the eventual reduction or termination of EU structural funds and funding for cross-border cooperation, which continues to assist the peace process and the economic development of the border region. Indeed, through this funding the EU has played an important role in helping to shape the post-conflict social landscape of Northern Ireland.
44. Indeed, the region has benefitted considerably from structural funds and peace monies. The peace process has been receiving financial support from the EU since 1989, through both EU regional policy and EU contributions to the International Fund for Ireland (IFI).
45. Two main programmes exist in this respect:

• The first is INTERREG, which is a relatively modest source of funding which aims to increase cross-border cooperation by focusing on eliminating asymmetric development in border areas, and to overcome borders as barriers to communication, mobility, and trade
• The second, and most important, is the PEACE programme, originally approved in 1995 and now in its fourth iteration (PEACE IV), which aims to promote and enhance cross-community integration in the North.

46. Whilst significant progress has been made since the first iteration of the PEACE programme, there is still work to be done in improving cross-community relations and integrating still-divided communities.
47. The new programming period for 2014-2020 will provide an opportunity for continued EU assistance to help address the peace and reconciliation needs of the region, with a particular focus on creating opportunities for young people – a much needed initiative in a region which saw youth unemployment reach 22% in 2015 (estimated by PwC to cost the NI economy £1bn per annum in lost productivity).
48. Some €2.4 billion was received from the EU between 2007 and 2013 with a broadly similar amount being available in the PEACE IV programme between 2014 and 2020.
49. In the event of Brexit, this money would cease.

Could these funds be replaced from the UK budget in the event of Brexit?

50. The sums made available from the cessation of UK net contributions to the EU budget could be reallocated to replace the PEACE and INTERREG funds. But it should be noted that for the UK, Brexit is unlikely to be a zero-sum process, in which EU budget savings would directly offset EU funding losses. One must also consider in this context the possible losses to UK GDP of the post-Brexit scenario, which have variously been placed at between -1% and -4%, depending on the source, as well as the multiple other competing demands for these ‘saved’ EU funds, including the possibility of increased border and customs controls mentioned previously.

1.4 What would be the effect on cross-border institutions?

51. The main cross-border institutions established by the Good Friday Agreement are under Strands 2 and 3 of the Good Friday Agreement, and exist primarily in the context of North-South and East-West relations. There is no reason to believe that most of the existing UK-Irish cross-border institutions would not continue to exist and function post-Brexit.
52. Nonetheless, a British departure from the EU could cause unintentional changes in the political and economic dynamics of the British-Irish relationship, and this could have implications for the functioning of these institutions.
53. One potentially positive outcome, or at least a mitigating factor, would be that the institutions created by the Belfast Agreement could provide a potential means to manage any difficulties arising from change in the UK’s relationship with the EU and internal UK developments. The British-Irish Council (BIC), with its aim “to promote the harmonious and mutually beneficial development of the totality of relationships among the peoples of these islands”, offers a possible avenue.[8]
54. The Council could become a significant network for the development of regional interests and could enable a more equal relationship between the various nations and regions of these islands, particularly if England were given a separate representation. It must be recognised, however, that, in order to be effective, the BIC would require radical new powers - it would also require greater engagement by the London government in the workings of the Council than has heretofore been the case. (This issue is discussed in greater detail in the chapter by Tom Arnold and James Kilcourse in Britain and Europe: The Endgame – An Irish Perspective).
55. There is also a negative implication to be accounted for in the event of Brexit - one particular cross-border body would be unable to continue: The Special EU Programmes Body (SEUPB). It is one of the most prominent of the six North /South cooperation bodies established under the Good Friday Agreement, and is responsible for administering the programmes discussed previously, including the INTERREG Programme covering Northern Ireland, the border counties of the Republic of Ireland and Western Scotland and also the PEACE Programme which covers Northern Ireland and the border counties of the Republic of Ireland. As noted earlier, in the event of Brexit, these EU funds would cease, and the SEUPB could no longer continue to operate.

1.5 Trade deals between the UK and RoI, post-Brexit – A Clarification

56. In the context of cross-border relations, it is necessary to make a clarification. In recent months, a theory has been advanced that, in the event of Brexit, a trade deal could be agreed between the UK and Ireland. This is generally presented as a counter-weight to arguments that suggest a negative implication of Brexit for cross-border trade.
57. However, such a deal is not possible on a bilateral basis between the two states.
58. Under the Common Commercial Policy set out in Article 206 and 207 TFEU negotiating trade agreements is an exclusive EU competence and can only be negotiated by the Commission on behalf of the Member States of the European Union[9].
59. Here, we will again employ the scenario-based analysis used earlier in this submission.

Scenario 1 – UK leaves but maintains access to the Single Market

If the UK left the EU but stayed in the Single Market it would be outside the Customs Union (Articles 30,31 ,32 TFEU) and the Common Commercial Policy (Articles 206 and 207 TFEU).

The UK would therefore be free to negotiate trade agreements with Third Countries. It could have a free trade agreement with the EU as part of the Single Market and if it were similar to the EEA/EU agreement it would cover free trade in goods and services but with only limited free trade in agricultural and fisheries products.

However, it is possible that because the approach to free trade in agriculture and fisheries products is influenced on the EU side by the extent of the access that the EU requires in those products, that Ireland’s requirement for access might mean that free trade in this area might be greater than is currently the case for the EEA/EU agreement. There are also issues under GATT rules that require a certain proportion of tariff lines to be subject to free trade that could influence the extent of free trade in this area.

Thus while the UK as part of the Single Market but outside the Customs Union and Common Commercial Policy would be able to conclude trade deals with Third Countries, this would not include Ireland because only the EU can conclude trade agreements on behalf of EU Member States with non-EU states.

Scenario 2 – UK leaves and does not maintain access to the Single Market

If the UK left both the EU and the Single Market, it would most likely trade under WTO rules because the EU would be very unlikely to concede a comprehensive free trade agreement like EU-Canada that did not fully apply Single Market rules.

Again the UK could negotiate agreements with Third Countries but this would not include Ireland – thus all trade with Ireland would be subject to tariffs and the impact would be significant for the indigenous sector which has a disproportionate trading pattern with the UK and also is labour intensive with a consequent significant impact on jobs.

60. In conclusion then, and contrary to recent statements, there are no circumstances following Brexit in which Ireland and the UK could conclude a trade agreement separate from a UK/EU agreement.

Section 2. Economic and Trade Implications

This section describes the current state of trade relations between Ireland and the UK, and highlights possible vulnerabilities for the Northern Irish economy in the event of Brexit.

It notes that, though there are uncertainties associated with the losses or gains the UK economy would experience in the Brexit scenario, it is unlikely that less competitive regions, such as Northern Ireland, will enjoy any significant economic benefits from a UK withdrawal. Additionally, any negative consequences for UK GDP would likely be accentuated in the case of the North.

Furthermore, the attractiveness of Northern Ireland as a hub for FDI is likely to be negatively affected if the region loses direct access to the Single Market, irrespective of incoming changes to its corporate tax policy.

2.1 Economic Impact of Brexit on the UK

61. The economic impact of Brexit on the UK is the subject of intense speculation, and is challenging to predict. The most comprehensive study of the British prospects outside the EU is the Open Europe study: What if ..? The Consequences, Challenges and Opportunities facing Britain outside the EU, published in March, 2015[10]. 
62. With respect to the wider UK consequences, in the Open Europe study the Brexit costs versus benefits are narrowly bounded in the range of loss/gains of GDP by the year 2030: At worst, a loss of 2.2% of GDP in the likely event that the UK be unable to agree on direct access to the Single Market and be forced to fall back on WTO arrangements post Brexit; at best, a gain of 1.6% of GDP, should the UK be able to secure a beneficial EU Free Trade Agreement.[11]

The Northern Irish Dimension

63. The economic development challenges faced by NI are perhaps the most serious of all UK regions. After decades of civil unrest, the expectation after the Belfast Agreement was that the region at peace would rapidly reap the economic benefits of its new devolved governance structures while playing a role in the wider EU system into which, as a region of the UK, it is fully integrated. However, progress has been slow and its internal links within the UK, its close geographical proximity to the Republic of Ireland, its EU links and links to the rest of the world have not yet generated the anticipated resurgence of growth in the private sector. Brexit is likely to further complicate external links at a time when the new NI low rate of corporation tax might be expected to be a significant attractor of inward investment.

64. An important background to the development challenges facing Northern Ireland is that the much larger economy of the Republic of Ireland has been able to use its available policy autonomy to reap many, but not all, of the economic benefits of its sovereignty while playing a role in the wider EU system into which it is now integrated. Northern Ireland, a region of the UK with a relatively new and complicated power sharing administration, has found it more difficult to follow this policy route, either through its intra-UK links with the British economy or through its close geographical proximity and evolving links to the Irish economy, its main export market after external sales to Britain.

65. This sub-optimal situation within Northern Ireland has been exacerbated by the reluctance of the UK government to participate in a series of European Post-Single Market initiatives designed to move further ahead in the creation of a more deeply integrated European market place. The most important of these concerns the fact that the UK remains outside the Eurozone, and that economic impacts on UK-Irish and North-South trade of fluctuations in the euro-sterling rate have been far greater than any consequences of fluctuations in the rate against the Danish and Swedish currencies (the only other "old" EU member states outside the Eurozone). Movements of the currencies of the newer Member States that have not yet joined, but are obliged to do so eventually, have been relatively small.

66. The island of Ireland is unfortunate in that the pattern of its economic activities is divided by an international land border between a small state and a region of a larger state that have tax systems that are not very harmonised and currencies that can fluctuate rapidly and through large margins. It is well known that price deviations induced by exchange rate fluctuations can often take a long time to work through the economy. On the island as a whole, this can appear as a kind of disruptive negative-sum process where both sides lose.

67. Fluctuations in the euro-sterling rate have serious implications for product sourcing arrangements by producers and retailers, and these are often difficult to change at short notice. There is a danger that border regions will focus on serving the narrow, transient cross-border market in eras of favourable prices, and fail to strengthen and deepen these markets in a way that would make them less vulnerable to reverses in relative currency strengths. The consolidation of the Northern peace process, combined with the reality of the Single European Market, are longer-term factors that have served in the past to offset the short-term price fluctuations caused by exchange rates.

2.2 Impact of Brexit on the Northern Irish Economy

68. Attempting to ascertain the direct impact of a Brexit on the economy of Northern Ireland is a challenge, but it is certain that there would be knock-on consequences for all parties on the island. In their 2015 report The Consequences for the Northern Ireland Economy from a United Kingdom exit from the European Union, the Northern Ireland Assembly and the Open University Business School argued that any negative effect of Brexit on the UK economy would likely be accentuated in Northern Ireland:

An inference can be made about this impact from growth and unemployment rates. The trend rate of growth of the Northern Ireland economy is about a third lower compare to that of the UK. The comparative unemployment rate of about is about twice that of the UK as a whole. Thus, if the median forecast for the impact on UK GDP from a BREXIT is around 2% lower, then we could expect trend total GDP to be 3% lower in Northern Ireland. Similarly, we would expect trend total unemployment in to increase by a proportionate amount. The drivers for these changes would be primarily the impact of reduced cross-border trade and economic co-operation; FDI; and a loss of EU economic development funding programmes. In the case of less FDI, the spillovers effects of higher productivity, training and skills and more importantly derived demand for domestic production, tradable and non-tradable services would decrease.

69. In addition, any gains, even of the modest nature proposed by the OpenEurope study mentioned previously (+1.6% GDP in the event of a favourable Free Trade Agreement with the EU), would likely require a dramatic increase in UK competitiveness, exposing the weaknesses of any UK regional economies that do not currently enjoy competitive strengths in traded services (e.g., banking, insurance) or advanced manufacturing.

70. In what follows we try to highlight some of the vulnerabilities in the case of Northern Ireland, including agriculture, manufacturing and services, and FDI. But in view of the impossibility of defining precisely the nature of the post-Brexit UK-EU relationship, we may only examine the issue in broad terms. 

2.2.1 Potentially vulnerable sectors – Agriculture, Manufacturing, and Services

71. With respect to Agriculture is it is difficult to envisage a situation where NI farmers would be better off under a Brexit regime compared to continued EU membership and the existing CAP. We consider this the most vulnerable sector for Northern Ireland and, as such, Section 3 of this submission is devoted entirely to the implications for this sector. In overall terms, our analysis points to the conclusion that, similar to the Republic of Ireland, a Brexit would be unambiguously negative for the Northern Irish Agri-food sector.

72. With respect to manufacturing, Northern Irish trade with the EU, both exports and imports, is significant. Although Northern Ireland is, overall, the UK region least exposed to trade with the EU, it is nevertheless true that any disruption of this trade would have consequences for an economy that is in a fragile state of recovery after decades of decline. In contrast to the more prosperous UK regions, there is almost no possibility that the NI manufacturing sector would be better off after Brexit.

73. Unlike the service sector in most other UK regions, in Northern Ireland it is dominated by consumer and public services, with only limited producer services and few exportable services. Consequently, the health of the NI service sector is almost completely dependent on the availability of public finance (i.e., the so-called subvention from London[12]) and to the general health of the economy (e.g., the level of household disposable income). To the extent that Brexit places extra strain on the UK exchequer and may lead to slower growth compared to a situation of continued EU membership, the Northern Irish service sector is likely to suffer from slower growth.

2.2.2 Impact on Foreign Direct Investment

74. The UK is a leading location for FDI. The UK’s inward FDI stock is the largest in Europe and the second in the world after the US. In 2014, the inward FDI stock in the UK amounted to $1,662.9 billion. As documented in the World Investment Report 2015, other EU countries account for 50 per cent of the UK’s inward FDI stock. Major holders of the UK’s FDI stock from the EU are: The Netherlands (15 per cent), France (8 per cent), and Germany (7 per cent). Ireland’s share in the UK’s inward FDI stock is 1.5 per cent. The US is the largest investing country in the UK, holding 29 per cent of the UK’s FDI stock.
75. In a recent address to the IIEA, Paul Drechsler, the head of the Confederation of British Industry noted:

The Single Market acts as a magnet for global investment. Single Market access is the most commonly cited reason for investing in the UK. With almost three in four investors saying the Single Market is important to the UK’s attractiveness.

76. Of course, establishing the exact magnitude of the ‘EU effect’ on UK inward FDI, and hence the consequences of withdrawal, is difficult. The decision to invest will always be motivated by a number of factors, including many which would persist after a departure (including integrity of the legal system, an attractive business climate and predominant use of the English language, as just three examples).
77. Nonetheless, it is logical to assume that Membership of the Single Market should naturally stimulate FDI in the UK from outside the EU, since by doing so, companies can access 27 other EU markets tariff-free. In a survey of 2,272 multinationals, the UN Conference on Trade and Development found that size of the local market was the most important criterion determining the location of FDI for both the manufacturing and services sectors, and the third most important for the primary sector. This would suggest that EU membership plays an important role in determining investment decisions. Further integration of EU markets, particularly in services and digital, is likely to continue to have a positive effect on FDI and productivity growth in the UK.
78. It is also expected that upcoming free trade deals, in particular TTIP, will have positive effect on FDI. The recent report by the ESRI on Scoping the Possible Economic Implications of Brexit on Ireland stated:

The UK and Ireland are also expected to benefit significantly from additional liberalisation of trade and investment with the US if a successful conclusion of the Transatlantic Trade and Investment Partnership (TTIP) is reached. A recent study (CEPR 2013) has estimated that the implementation of the TTIP would increase the UK’s GDP by 0.14-0.35 per cent annually over a ten-year period compared to a baseline scenario without an agreement.

79.              In the case of Ireland, the gains are expected to be even more substantial, a 2015 report estimated that the gains from TTIP would increase Ireland’s GDP by 1.1 per cent. Ireland’s exports would increase by 3.8 per cent and its investment by 1.5 per cent. Export expansion linked to the TTIP is expected to generate 5,000-10,000 additional jobs in Ireland.[13]

The Northern Irish Dimension

80. To date, Northern Ireland has not been a significant beneficiary of this trend, having accounted for just 5% of UK FDI in 2013-2014 (compared to 85% in England). But FDI now lies at the very heart of efforts being made to transform, modernise and develop the Northern Ireland economy. It is well established that regions such as Northern Ireland (as well as small states such as the Republic of Ireland) find it very difficult to design successful economic growth strategies based mainly on their own local resources. To an increasing extent they have come to rely on inward investment in order to acquire physical and financial capital, access to new technologies, upgrading of skills in the local labour force and entry to global export markets.

81. A focus on inward investment is considered by most analysts of small regional economies as a necessary condition for rapid growth in an increasingly globalised economy. Indeed, it has been extensively documented that FDI is an important channel for advanced technology transfer which contributes to substantial productivity gains and long-term economic growth.
82. The implementation of the new, low rate of corporation tax is expected to boost the rate of inward investment along the general lines of the experience of the Republic of Ireland, which has had a low rate of corporation tax since the late 1950s, and in turn contribute to the sustainability of the Northern Irish economy. But the success of the Republic in this area was largely predicated on its membership of the EU. The bulk of inward investment originated in the USA, and free access to the huge EU Single Market (the ‘Passport’) was a key attractor.

83. Depending on the terms of withdrawal, and in particular whether the UK maintains access to the Single Market, Brexit could severely complicate this process for Northern Ireland as it seeks inward investment – possibly, in fact, to the advantage of the Republic of Ireland. Faced with a choice of investment in Dublin or Belfast, cities on the same island, which enjoy many of the same advantages and are separated by just 166km, direct access to a market of the scale of the EU’s Single Market could well be a decisive factor.

FDI and capital and migrant labour flows in and out of Northern Ireland

84. Unlike the South East region of the UK, centred on London, capital flows into Northern Ireland appear to arise mainly as a result of foreign direct investment, which, as detailed above, could be impacted in the event of Brexit. The patterns of inward and outward migration flows for NI mirror the flows for Britain, but were tempered by the negative impacts of civil unrest.  A summary is shown in the figure below.

85. The most relevant data are those of "Phase 3", which shows that NI had significant net inward migration flows after the enlargement of the EU in 2004.  It should be noted that the UK, Ireland and Sweden imposed few restrictions on migration from the eight joining states, and research suggests that the NI economy benefitted from inward flows of young, well-educated and trained migrants.  In view of the attention given to curbing inward migration to the UK, which is the most contentious aspect of the UK negotiations with the EU, it is likely that Brexit would curb such inward flows severely. This would probably lead to a static NI population and skill shortages may arise. This would inevitably have an impact on the region’s attractiveness for multinational investment.

The nature of the UK’s departure is important in this context

86. While some commentators have suggested that the UK and EU would, in the event of Brexit, inevitably come to an arrangement which preserved the best aspects of the trading relationship, in reality this is far from a safe assumption. In the event of a withdrawal negotiation, the interests of the other 27 Member States will inevitably come into play, and some Member States may be inclined to take a harder position than others – some may see the City of London, for example, as a formidable competitor to the financial and business interests of their own capitals. This in turn raises the prospect of at least two years of grinding uncertainty in the business climate in the UK and Europe while the post-Brexit terms of the relationship are negotiated – very possibly longer, if EU Heads of State and Government are forced to unanimously agree to extend the negotiations.

87. Of course, uncertainty can, in and of itself, be a destabilising factor, and it must be taken into account the possible damage this lack of clarity might cause to FDI across the region. The ratings agency, Standard and Poor’s have already stated on several occasions[14] that they could lower the UK’s credit rating if they conclude Brexit to be likely – due to the overall economic uncertainty associated with this course. Uncertainty about Britain’s relationship with the EU could also have a number of unintended consequences for investment and supply chains, and could damage companies’ confidence and compel them to think twice before investing or taking on new projects in the UK.

Section 3. Implications for the Agri-food Sector

This section argues that the implications of Brexit for the Northern Irish agri-food sector would be unambiguously negative. The analysis suggests that a Brexit would bring a greater proportionate risk to income levels in the NI Agri-food sector than its ROI counterpart or to other regions within the UK.  What is indisputable is that, as this issue is of such critical importance to the NI Agri-food sector and to the wider economy, an authoritative study is urgently required to guide policy and political decision making.

88. While a number of studies on the impact of a Brexit for the agri-food sectors in the UK and the Republic of Ireland (ROI) have been published, no such detailed analysis for the Northern Ireland (NI) Agri-food sector has been produced. 

89. The most authoritative study on the implications for the ROI Agri-food sector was conducted by Professor Alan Matthews[15]. The study examined existing agri-food trading patterns, and possible post-Brexit trade policy with the EU, UK trade policy with non-EU, UK agricultural and regulatory policies, the re-introduction of the Northern Ireland land border, and EU agricultural policy without the EU.  The study concluded that a Brexit would be 'unambiguously negative from the perspective of both Irish producers and consumers' and for the wider Agri-food sector.

90. A number of recent studies have analysed the implications of a Brexit for the UK Agri-food sector as a whole, including by the UK National Farming Union (NFU)[16], Professor Allan Buckwell for the Worshipful Company of Farmers[17], Alan Matthews[18], and the Farmer Scientist Network on behalf of the Yorkshire Agricultural Society[19].  The latter study concluded that 'It is difficult to see exit as beneficial to the UK farming sector, or to the UK food and drink industry more generally'.

91. There are similarities between the ROI and NI Agri-food sectors in terms of their relative weight in the overall economy, their dependence on exports to the EU, and the degree to which CAP income supports represent a high proportion of net farm income.  These similarities are illustrated in the table below.  The EU is by far the most important destination for Agri-food exports in each case.  In terms of net farm income, NI is significantly more heavily dependent on EU subsidies than the UK as a whole or ROI.

92. Against this background, the IIEA has conducted an analysis on the implications of a Brexit for the NI Agri-food sector, applying a broadly similar methodology as applied by Alan Matthews for his study on the ROI while using simplifying assumptions. The basic approach used is to compare arrangements under the EU's Common Agricultural Policy (CAP) with the likely levels of such support from the UK exchequer in a post-Brexit situation. 

93. Two key areas were examined: the level of support under the CAP (direct farm payments, environmental and rural development support and investment support) and trade and market access arrangements which will directly impact on food prices and incomes.  A more detailed analysis will examine both issues from a short-term, immediately post- Brexit, and a longer term (10-20 years), policy perspective.

94. In comparing the situation for NI either within the EU or outside the EU post-Brexit, a further set of assumptions needs to be made.  The EU CAP is due to undertake another reform in light of a new EU Multiannual Financial Framework post- 2020.  A post-Brexit world would require agreement on UK trading arrangements for Agri-food and all other goods and services with both the EU and the rest of the world.  Speculating in detail on either of these matters is beyond the scope of the analysis thus far conducted. However, the analysis has been simplified to the most basic level to focus on the question - what is the likely relative level of income for the NI Agri-food sector under a continuing CAP or alternatively post-Brexit where the UK exchequer provides support?

95. The income level under the CAP will be a combination of the income support arrangements, as modified following another CAP reform, plus the trading income from the current single market access to the EU.  In the post-Brexit situation, the income level will be the combination of the UK Exchequer support plus the trading income earned by NI farming under whatever new trading arrangements are negotiated.

96. There are uncertainties and risks to NI farm income under both scenarios.  There is a risk that the share of EU budget spending available to a reformed CAP under the next Multiannual Financing Framework will continue to decrease, in line with a longer term trend.  However, there is widespread political support with the EU-28 for a continuing strong support for agriculture and rural development policy and, in addition, the COP-21 commitments on climate change are likely to result in additional support for environmental payments to farmers under a reformed CAP.  Both factors point to a conclusion that support levels under continued EU membership for the type of farming structures as reflected in the NI situation will be either at somewhat reduced or broadly similar levels compared to the current situation.

97. The income support levels from the UK exchequer to NI farming and Agri-food sector will be influenced by two key factors: overall UK government policy towards agriculture including direct farm income support payments, and the size and allocation of the block grant to NI.  A 2005 DEFRA/ Treasury policy position on CAP, reaffirmed in 2011, was that direct farm payments should be eliminated by 2020.  In the event of a Brexit, the UK would have to implement a new agricultural policy to replace the CAP and the above stated policy position may change.  But should that position be maintained, or only slightly modified, NI agriculture would be in an extremely vulnerable position given the high proportion of net farm income accounted for by subsidies.

98. A variation on that policy would be to give additional autonomy to the devolved administrations in NI and Scotland in respect of a new UK agricultural policy.  This would be part of a wider financial settlement following on from the Fresh Start Agreement involving the level of the block grant from the UK government to NI allied to the new arrangements for corporate tax rates for NI.  While such additional agricultural policy autonomy might be welcomed within the devolved NI administration, it is clear that unless an additional provision of at least £300 million is made to the block grant to fully compensate for the existing levels of support under CAP, there would be pressure on farm income.

99. The analysis of the likely level of trading income under the two scenarios is more clear cut.  Trading arrangements for the NI Agri-food sector with the EU will be less favourable in a post-Brexit situation than in the current single market situation:  the only question is by how much.  This will depend on the outcome of negotiations on new market access arrangements between the UK and EU. In his analysis on the implications of a Brexit for the UK Agri-food sector, Alan Matthews estimates that even if the UK agri-food sector retained duty-free access to the EU, there would still be higher trade costs equivalent to a 5% tariff on exports, which would directly impact on farm prices and income levels. More worrying, from the point of view of NI agriculture, is that the UK is likely to commit to lower overall border protection against third country imports, either by lowering tariffs generally across the board, or by giving significantly greater market access under preferential trade agreements with New Zealand, Australia, Canada, the United States and Mercosur countries. Easier access to the UK market for these exporters will put downward pressure on market prices for the main beef and dairy products exported from NI farms to the rest of the UK.

100. In summary, the relevant comparison for the NI Agri-food sector is between a reformed CAP assumed likely to deliver support levels at somewhat reduced or broadly similar to current levels and a post Brexit situation characterised by the convergence of a number of significant risks.  These include a changing UK agricultural policy with less priority being given to direct income support, the possibility that this changing policy will give more latitude to the devolved administrations at a time when there is ongoing pressure on the level of the U.K. block grant to NI, and uncertainly about the trading and market access arrangements with the EU post Brexit. The combination of replacing the current level of CAP support plus compensating for the trading losses suggests that a figure of substantially in excess of £ 300 million would need to be allocated from within the UK block grant if current support levels to the NI Agri- food sector are to be sustained.  If such a sum were not available, this would put further substantial downward pressure on NI farming and agri-food sector income.

101. In the longer term, there is a strong possibility that the UK would move to a lower food price policy, with more liberalised trading arrangements with the rest of the world, given the respective weights of the consumer and producer lobbies.  While this policy option may make political and economic sense for the UK as a whole, it would work to the disadvantage of the NI agri-food sector in that it would reduce the value of the NI food sales within the UK.

102. In overall terms, this analysis points to the conclusion that, similar to the ROI, a Brexit would be unambiguously negative for the NI Agri-food sector. This analysis indeed suggests that a Brexit would bring a greater proportionate risk to income levels in the NI Agri-food sector than its ROI counterpart or to other regions within the UK.  What is indisputable is that, as this issue is of such critical importance to the NI Agri-food sector and to the wider economy, an authoritative study is urgently required to guide policy and political decision making.

Conclusion

103. This study identifies a number of possible implications for Northern Ireland of Brexit, as well some areas in which the status quo would likely be preserved.

104. Broadly our conclusions are:

105. The implications for the border depends on the nature of the UK’s withdrawal arrangements, but it is very likely that some hardening of the border, most likely in the form of customs posts, would be necessary for legal, political and economic reasons. The implementation of passport controls is a possibility, but is dependent on a number of other factors which cannot be predicted with any certainty. The peace process, meanwhile, has benefitted greatly from the current status quo. In the event of Brexit, there is clearly an element of uncertainty associated, though it perhaps should not be overstated, since maintaining the stability of the Northern Irish settlement will doubtless continue to be a priority for governments on both sides of the Irish sea, and of course among politicians in the North itself.

106. The economic implications of Brexit may present challenges for Northern Ireland. Vulnerable sectors identified include manufacturing, where Northern Irish trade with the EU, both exports and imports, is significant, and any disruption of this trade would have consequences for an economy that is in a fragile state of recovery after decades of decline; and the service sector which in Northern Ireland is dominated by consumer and public services, and almost completely dependent on the availability of public finance and by implication on the general health of the economy.
107. The most vulnerable area, according to our analysis, is the Agri-food sector, which is characterised by the convergence of a number of significant risks.  These include a changing UK agricultural policy with less priority being given to direct income support, the possibility that this changing policy will give more latitude to the devolved administrations at a time when there is ongoing pressure on the level of the U.K. block grant to NI, and uncertainly about the trading and market access arrangements with the EU post Brexit.
108. In all instances, Brexit introduces uncertainties that must be accounted for as a matter of urgency in order to ensure that Northern Ireland’s prospects outside of the EU, should that situation arise, are fully understood.

In conclusion

109. The possibility of Brexit presents us with an unprecedented set of circumstances, but its implications for Northern Ireland, though challenging to predict, would appear from this study to tend towards the negative.

110. As noted, we have identified areas in which the status quo would either be negatively affected or unchanged. However, it is more challenging to identify areas in which a clear and unambiguous advantage would be gained by Northern Ireland were the UK to leave the European Union. This is particularly true in the case of the economic, trade and agri-food implications, in which Northern Ireland is a significant beneficiary of current EU membership, whether it be in the form of the Common Agricultural Policy or the region’s unfettered access to the Single Market.

111. All of the UK regional economies, and particularly Northern Ireland, will need to explore how they are likely to fare under Brexit compared to continuation of UK membership of the EU.  Specifically, they will need to examine which of these two polar situations is likely to provide the best supporting context for recovery and/or development of their respective economies.

112. Will there be a preference for remaining inside the EU, with its commitment to greater regional cohesion and equity; its evolving social institutions and protections; and a benign context within which North-South and East-West problems can be handled? Or will there be a preference for the UK to leave the EU and embrace a brave new post-Brexit world? Such a decision is likely to be beneficial for the strong economy of the English South East, focused on London, but in our view may tend to be neglectful of the development needs of the less competitive UK regions.

113. We hope that this submission will form a useful part of the committee’s deliberations on these questions.

22 February 2016

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