Brexit and the Political Economy of Northern Ireland

M. Leann Brown (University of Florida)

There has been a flood of speculation, analysis, predictions and dire warnings about the possible economic consequences of the secession of the United Kingdom from the European Union for Northern Ireland (NI). Much of this commentary focuses on the possible effects on trade, the movement of persons, foreign direct investment, and EU funding that NI will experience after leaving the Single Market. Evidence suggests that the UK exit from the EU will translate into a significant reduction in Northern Ireland’s gross product and proportionate decreases in employment due to effects on cross-border trade and economic cooperation, foreign direct investment, and the loss of EU peace and economic development funding. It is likely that NI and the UK will suffer at minimum a four and three per cent reduction in GDP annually, respectively, for a decade, and NI will suffer more than the rest of the UK save perhaps for the North East and West Midlands (House of Commons 2018).

When (or if) Britain leaves the Single Market, there likely will be a strong negative impact on trade as tariffs may be levied on NI’s exports and imports, and nontariff barriers such as border controls, rules of origin, and technical barriers introduced. The costs of NTBs are generally higher than tariffs. NI will be more negatively affected by these changes than the rest of Britain in that it exports more to the EU than it imports from it. In 2017, NI’s balance of trade with the EU moved from a deficit to a surplus. In 2018, 60 per cent of NI’s total exports of L8.87 billion went to EU member states (Stennett 2019). With no deal, World Trade Organization fallback tariff rates on sectors vary from 1.5% on machinery, transport equipment, and energy to 26.1% on agricultural goods (House of Commons 2018). The unknowns associated with this issue are multiple. What terms of trade, if any, will be negotiated between the EU and the UK? Will the UK follow the Norwegian or Swiss model of benefitting from cooperation with the EU without some membership obligations but lacking access to EU decision making or will it “crash out” of the EU and be forced to accept WTO rules?

A combination of the 1952 Ireland/UK Common Travel Area agreement, the creation of the EU Single Market in 1987, and the 1998 demilitarization of the border after implementation of the Good Friday Agreement meant that “the physical manifestation of the Irish border itself is hardly discernible and there is freedom of movement across it.” (Gromley-Heenan and Aughey 2017). Approximately 30,000 workers cross the NI-Republic border daily to live and work and would be inconvenienced by the reinstitution of border checks. However, if there are no border controls after Brexit, emigrants seeking work in the UK could enter via NI unchallenged. British Prime Minister Theresa May said from the outset that the UK aspires to a “seamless” or “frictionless border.” Some unionists are concerned that if the island remains without a border and a border is established instead between the island the UK, NI would be returned to its quasi-quarantined status associated with the Troubles. Unionists have labeled the border question an “existential threat” to the UK. The immigration question is less salient in NI than in the rest of the UK. The hospitality, social care, agriculture, and food processing industries are concerned that they will be unable to recruit enough workers should the free movement of workers end. Where will the border lie—between NI and the Republic or between the entire island and the UK? What form will now border controls assume, if any? Proposals to avoid difficulties at the border include a number of technological solutions such as the use of vehicular number plate recognition and drones (Walsh 2018). However, May has admitted that technology cannot solve all of these issues.

The primary question with regard to foreign direct investment is the extent to which NI’s attractiveness as a destination for FDI will be undermined by its loss of access to the EU Single Market of 500 potential consumers. Research suggests the size of the local market is the most important criterion determining the location of FDI in manufacturing and services sectors and the third most important for primary commodities sectors. Economic uncertainties associated with Brexit have already heightened perceived risk, affecting domestic and global investment, particularly in agriculture and manufacturing that are closely associated with EU trade. Much discussion has centered on whether the corporate tax rate of 12.5 per cent planned for April 2018 would offset the negative effects of Brexit for NI. Pessimists ask “Will multinationals site investment in Northern Ireland where there is such uncertainty over future tariffs and access to the EU market when there’s a low-tax EU state just 60 miles south?” (O’Carroll and McDonald 2016). It should also be pointed out that the corporate tax reduction may not materialize in the foreseeable future given that there is no government and budget in NI at this time.

The strengths and incentives for FDI in NI include a relatively young population with high quality education and increasingly flexible and responsive skills training programs; competitive labor costs; 100 per cent broadband coverage; good transport links internally, with the Republic, and the rest of the UK; low crime rates; and an attractive natural environment. Disincentives for FDI include relatively low productivity rates, a weak private sector, and NI’s peripheral location and rurality. Low productivity is linked to factors like high rates of economic inactivity and weak productivity in sectors like agriculture and food processing. One must conclude that loss of access to the EU Single Market and the several years of uncertainties association with Brexit will greatly compound existing deterrents for FDI for NI.

The EU has focused special attention and devoted significant resources to conflict amelioration in NI. A Northern Ireland Task Force was created after the re-establishment of power-sharing in May 2007, and since annual and biannual action plans and strategy documents have been generated focusing on improving the region’s economy competitiveness and creating employment opportunities. At present, the Task Force is comprised of representatives from seventeen Directorates General devoted to sustainable socio-economic development (EU Commission 2018).

The table below provides details of EU funding to NI between 2007 and 2020.

EU FUNDING TO NORTHERN IRELAND	2007-2013	2014-2020
European Sustainable Competitiveness Programme	E307 million
Investment for Growth and Jobs Programme (European Rural Development Fund)		E308 million
European Social Fund Programme	E165.7 million	E205.2 million
INTERREG IVA[1]	E224 million	E240.3 million
PEACE (III and IV)	E279 million	E229.1 million
European Fisheries Fund	E18 million	E23.5 million
Rural Development Programme (Pillar II)	E171 million	E228 million
CAP Direct Payment (Pillar I) Programme	E2,271 million	E2,299 million

(Miller 2013, 99; http://www.eurolink-eu.net/eu-funding-2/)

The various PEACE programs, totally approximately E1.5 billion, are quite sophisticated and support ‘peace-building from below” strategies that promote cross-border, inter-cultural dialogue to foster acceptance of diversity and recognition of commonalities. Examples include supporting inter-cultural day care centres and programs that facilitate discussions of history and storytelling, cross-border, inter-cultural musical events and other leisure activities (Phinnemore et al., 2012).

Agriculture is the sector likely to suffer the most from the loss of EU funding. Approximately 38,000 farmers and rural projects currently receive EU Common Agricultural Policy support. Many farmers rely on EU direct payments for viability and the loss of this funding could significantly reduce the number of farms, farmers, and farm production, thus increasing rural unemployment and land dereliction. All told, NI is poised to lose about L500 million a year in EU funding, the most of any UK region. It is unclear if and how the devolved government and the UK will replace this EU funding (O’Carroll and McDonald 2016).

So to reiterate, while negotiations are still underway, evidence suggests that it is likely that both the UK and NI will suffer annually at minimum 3-4 per cent reduction in GDP, respectively, as a consequence of Brexit. A loss of 4 per cent GDP in NI will throw an economy not yet fully recovered from the Great Recession into negative growth for a decade. These could be very uncertain and painful times in NI.

 

M. Leann Brown retired in May 2018 after more than 25 years in the Department of Political Science at the University of Florida.  Her most recent book is REGIONAL ECONOMIC ORGANIZATIONS AND CONVENTIONAL SECURITY CHALLENGES by Palgrave Publishers (See http://www.palgrave.com/us/book/9783319705323).  Brown’s current research focuses on the relationships among states’ identities and foreign policy.