Transport and Trade Implications of Brexit
by Edgar Morgenroth (Dublin City University)
While it is generally accepted that Brexit will have a significant impact on UK-EU trade, the precise ways in which trade flows might be impeded is not often discussed. One important area where Brexit is likely to affect goods trade flows is through impacts on transport.
Under all but the most benign Brexit scenario, the reintroduction of some form of customs controls will be required. In particular, if the UK leaves both the Customs Union and the Single Market, which is the stated aim of the UK Government, customs controls will be required. Once the UK agrees tariffs with third countries that are different from those set by the EU there will be an incentive for traders to exploit the differential. Without customs controls the door would be open for this, and this would result in a loss of control of external trade policy – the UK would be the EU’s trade gatekeeper and vice versa. This will not be acceptable to either the EU or the UK.
So what kind of customs controls might be feasible? Some in the UK have suggested some as yet unavailable technological solution. This is by definition not a feasible solution, as Brexit will almost certainly take place in March 2019. Importantly, border controls are not about the routine trade from trusted traders but about the prevention of illegal activity. Smugglers are not going to announce their criminal activity to the authorities.
Likewise, the arrangement between Norway and the EU (Sweden), where only the main border crossing is subject to physical controls while others are monitored by camera, is not suitable. Norway is inside the Single Market and thus applies the EU regulatory framework, and the geography of the border between Norway and Sweden is unique with just 80 border crossings along the 1,600 kilometre border. It is thus likely that at least the main border crossings in Ireland and those at the Channel Tunnel and ports will require some form of border infrastructure, while other less important border crossings will be monitored by random mobile checks, unless Northern Ireland remains de facto in the Customs Union and Single Market.
Research has shown that even where trade is conducted under free trade agreements, border controls still add significantly to costs. For example, the cost of the border controls between the two NAFTA members Canada and USA was found to amount to 2.7% of the value of goods shipped (Taylor et al. 2004). Port compliance costs for meat imports from outside the EU were estimated to be between £382 and £678 for a 20 foot container (Grainger 2014).
Apart from border controls, Brexit might lead to a significantly increased administrative burden for traders that will come at a cost. This might also extend to transit traffic that will be conducted under the 1975 TIR convention unless an agreement between the EU and the UK is reached. One aspect of the TIR convention is that transit permits are costly – currently permits cost between US$ 40 and US$ 220 depending on the EU country where the permit is issued, and the number of countries that need to be crossed.
Potential impacts on transport are not limited to those at the border, but also extend to the regulation of transport operators including market access of haulage companies and driver licensing. Once the UK is no longer a member of the EU, in the absence of an agreement between the UK and the EU, UK based haulage companies will lose their right to provide transport services in the EU, and this loss of market access might be reciprocated by the UK.
No EU Member would be more affected by barriers to transport than Ireland. Importantly, it is not just exports from Ireland to the UK, but also imports from the UK, and exports and imports transported through the UK that would be hit. Indeed, transport from Donegal to Dublin would be hit, as the shortest route will involve crossing an external EU border twice.
A recent paper (Lawless and Morgenroth 2017) shows that while the UK accounts for about 14% of Irish goods exports in value terms, it accounts for 55% of the tonnage exported. Goods imports from the UK account for about 25% of all goods imports and 42% of the total tonnage imported. This reflects the fact that heavier products that incur greater transport costs are typically only shipped relatively short distances. This is important as it suggests that finding alternative markets for these goods will be more difficult as the increased transport costs to other markets relative to those to the UK will make the products less competitive or reduce the profit margin to the producer so as to make other markets unprofitable. It also implies that imports are likely to get more expensive, impacting on consumer prices and competitiveness. Importantly the analysis also shows that over 50% of Irish goods exports to countries other than the UK use the land-bridge through the UK. Thus, any impediments to transport due to Brexit are likely to impact negatively on other exports from Ireland.
Overall, the analysis highlights the sizable potential costs Brexit might impose on the transport sector and thus imports and exports to and from Ireland. The economic effect of Brexit is thus not limited to bilateral trade with the UK but could also impact on Irish trade with other EU members and the rest of the world.
Professor Edgar L. W. Morgenroth (BA, MA, PhD, FAcSS, FeRSA) is full Professor of Economics in the Business School, Dublin City University, Dublin, Ireland. He is also an independent member of the National Economic and Social Council (NESC), a Fellow of the UK Academy of Social Sciences and a Fellow of the Regional Studies Association having served as its vice chairman and treasurer. He was previously Associate Research Professor at the Economic and Social Research Institute (ESRI), and also held positions at Keele University and the Strategic Investment Board (SIB).