Brexit? Ireland is Having a Cow

Background

While the English Crown had control over Ireland by 1542, it was not until the Union with Ireland Act of 1800 that the predominantly Catholic island was formally incorporated into the United Kingdom. Through that Act and others, the Crown dissolved the Irish Parliament and abolished all tariff protection, absolving Ireland of any economic autonomy.  

Ireland’s lack of fiscal self-determination famously contributed to the Great Famine of 1845, in which the island’s agricultural economy was stretched to the point of unprecedented collapse. 

Over the next century, despite rebellions, crackdowns, and recurrent boom and bust cycles, the economies of both islands continued to interweave. Even freedom from British rule in 1921 did little to disentangle Ireland from the economic moorings of the British economy. And with much of the latter’s industrial infrastructure destroyed during the struggle for independence, the Irish Free State was even more reliant on the export of agricultural goods to the UK than it was beforehand. 

Ireland took few sustainable steps to diversify its trading partners after independence, and focused instead on implementing protectionist policies.  Between 1931 and 1936, the number of items subject to Irish import tariffs jumped from 68 to 281, many of which were considered vital goods. And Britain followed suit; by 1934, imports of beef and veal from Ireland were completely restricted, crippling Ireland’s primarily agrarian populace.

Historians argue that the damage incurred by the escalating tariffs may have set Ireland’s economic progress back decades, which was further compounded by the effects of the global Great Depression. It was not until 1973 when Ireland, along with Britain and Denmark, joined a customs union within the European Economic Community—a precursor to the EU which already included six of the continent’s largest economies—that the country’s trade began to truly flourish. Liberated from the shadow of the UK through access to the world’s largest economic community, the Irish economy quickly reversed course, witnessing four percent growth in national income for several years straight. 

Despite a few periods of economic unease in the late 1970s and 1980s—much of which can be attributed to downturns in global markets—by the 1990s Ireland had established an open and diversified economy. Thus when the community’s single market was established in 1993, allowing the free movement of goods into the UK and across much of Europe, Ireland’s economy took off; between 1991 and 2001, Irish GDP growth averaged above seven percent a year, earning it the moniker “Celtic Tiger.” 

The Celtic Tiger: fueled by low corporate taxes, foreign direct investment, an export-driven economy, and access to Europe’s single market, Ireland rapidly transformed into one of Western Europe’s and the world’s most prosperous countries. 

Although Ireland fell into a deep recession during the global economic crisis of 2008, its economy has since rebounded to pre-crisis levels of growth. GDP grew 5.2 percent in 2014 and 7.8 percent in 2015—the fastest in the Eurozone. 

Simultaneously—and perhaps counterintuitively—the Irish economy has also grown much closer to that of its former occupier, capitalizing on the UK’s growing population and tariff-free import market. The looming threat of Brexit, which would only begin in 2018 and take several years to complete, could fundamentally challenge some of the economic gains that the Celtic Tiger has made over the past fifty years. 

Don’t let the door hit EU on the way out

Given its small population and export-driven economic growth, Ireland continues to profit heavily from the free movement of goods and geographic proximity to Britain, and several of the country’s exports to the UK continue to play an integral role in the health of its economy. Therefore, as seen in the past, increased barriers to trade would be detrimental Ireland’s economy, both in the short and long term.

Ireland’s agri-food sector, which accounts for roughly seven percent of the country’s total GDP, is disproportionately threatened by Brexit and the potential new barriers to trade it represents. The sector is more dependent on the British export market than others, and the UK represents one of the largest net importers of such products in the world. In 2014, for example, the UK ran a €27.6 billion ($31.5 billion) trade deficit for major agri-food commodities and products. Of this deficit, every major import category outside of edible fruits and nuts—including beverages, dairy, meat, vegetables and tobacco—was primarily sourced from within the European Union. And unsurprisingly, Ireland played a large role in filling that demand; in 2014, total Irish agri-food exports were worth close to €11 billion ($12.6 billion) in 2014, €4.5 billion ($5.14 billion) of which (roughly 42 percent) went to the UK—Ireland’s largest such partner. 

Yet just how much Brexit will hurt Ireland’s agricultural sector is still far from clear, and understandably so, The specifics of Britain’s exit from the EU will not officially be discussed until after the referendum, making it difficult to predict what the economic fallout of such a departure might be. Given both the current economic situation in the EU and greater historical perspective, however, there are a number of scenarios that appear more likely to occur in the case of Brexit. 

So far, various economists mention roughly 11 possible outcomes regarding future UK-EU agricultural trade policy in the event of Brexit, ranging from free trade and access to the European Union’s single market, to basic “most favored nation” (MFN) status that govern the members of the World Trade Organization (WTO). 

Less than two months before the Brexit referendum, however, the so-called Leave campaign's most senior figure, Justice Secretary Michael Gove, confirmed that his group does not advocate pursuing full access to the European Union’s single market. As Secretary Gove explained, full access would almost assuredly require the UK to contribute to the union’s budget, implement Brussels-dictated regulations, and accept the free movement of people across borders to gain access to the market’s half billion citizens, which represent three of the primary reasons why voters are contemplating Brexit in the first place. 

Instead, hardliners like Gove have advocated for entering into agreements similar to those that Albania and Serbia have secured, in which the countries have free trade access to the EU, but are not subject to the regulations that govern the trading block. Critics, however, have shot back that these types of agreements are unique for more fragile European states that may eventually join the EU. The staunchest in the Leave campaign have argued that the UK would formulate its own bilateral trade agreements. Still, senior European policymakers have said that the UK would not receive any special treatment in the discussions, and that the negotiations would be tough.

As members of the WTO and without a free trade agreement, the UK and the European community would default to either a customs union or MFN status, both of which establish equal but the higher levels of tariffs compared to any other bilateral trade agreement. While the UK has indicated it will pursue bilateral trade agreements with other of the world’s largest economies to mitigate losing access to the European Single Market, its economic relationship with Ireland will, in almost every reasonable scenario, be stymied by newfound tariffs; an analysis by the Irish government’s Economic and Social Research Institute indicates that bilateral trade between the countries of the British Isles could fall between 21.6 and 56.6 percent. Although most Irish exports will ultimately be diverted to the country’s other primary export markets, which includes Belgium, Germany, France, and the U.S., competition, saturated markets, and shipping costs are likely to reduce the value of the same exports by between 15 and 30 percent. By applying these costs to the nearly €11 billion ($12.6 billion) in total Irish agri-food exports in 2014, we reach a lower bound of €150 million ($171.4 million) and an upper bound of €800 million ($914.1 million) per year in lost export value of Irish agri-food exports after Brexit. 

In another, less hardline Brexit scenario, the UK would leave the EU, but become a member of the European Free Trade Association (EFTA), much like Norway, Iceland, Switzerland and Liechtenstein, and would therefore have to continue to contribute to the EU budget and be subject to the EU’s rules. Most agricultural trade, however, does not fall within the bounds of the agreements that these countries have with the EU: The EU’s Common Agricultural Policy (CAP) is not part of the agreement. And so even if the UK were to enter immediately into the EFTA, agricultural products, and the farmers who produce them, would still be affected by Brexit. However, it is important to note that the agreements governing EFTA-EU relations do stipulate that agricultural trade should be liberalized over time, and that EFTA countries have entered into individual, bilateral trade agreements with the EU for specific agricultural products. So in this scenario, the effects on Irish farmers could still be stark, but perhaps less so, and less permanently, than they would be in a complete Brexit.

And through all of these scenarios, there is significant uncertainty as to when the parties would be able to reach agreements, and when, therefore, they could be implemented—which translates into uncertainty in terms of cost. Also uncertain is how UK policies across trade and agriculture would look (and when they would be implemented) following a Brexit; right now, the UK implements EU-wide policies, but upon departure would need to formulate and implement its own. 

Bad Moo-ve 

Discounting the alcoholic beverage industry, no industries are more important to the Irish agri-food sector than beef and dairy, and no export market is more important than the U.K. As of 2014, animal products accounted for roughly 16 percent—or $3.14 billion—of Ireland’s $19.2 billion annual exports to its former occupier. More specifically, beef exports accounted for $913 million in 2014, or 4.7 percent of Ireland’s total exports to the UK—of all product categories, only broadcasting equipment and packaged medicines represented a larger share of Ireland’s total export value. Notably, Irish beef production also outpaced its own domestic consumption by 640 percent in 2015, highlighting the industry’s fundamental dependence on access to foreign markets. 

Going even further, the most recent data suggests that Ireland was the origin of 54 percent of British frozen beef imports (by value), 70 percent of its fresh and chilled beef imports, 28 percent of its cheese imports, and 56 percent of its butter imports in 2014. And from the opposite perspective, the U.K. bought 51 percent of Ireland’s total beef exports in the same year, signaling a structural reliance on one another. 

Ireland has capitalized on the comparative advantages of its economic reality; a history of cattle-rearing and geographic proximity to the world’s seventh largest beef importer have so far helped the Irish cattle industry flourish. 

In case of a Brexit, especially in light of the hardline stance of its most vocal supporters, terms of trade for the Irish cattle industry will more closely reflect that of any other Most Favored Nation WTO member. Especially if the U.K. actively seeks out other bilateral trade agreements, which would be likely, Irish beef and dairy producers will be at a stark disadvantage compared to the world’s larger, more scaled and ultra-efficient exporters, regardless of geographic proximity.

In case of a Brexit, the artificially inflated prices received for Irish beef will likely begin to represent a number closer to the global composite. The prices received by global exporters Brazil and Australia may even witness marginal gains.

At the same time, the fact that Irish exports have to travel farther to get to continental Europe—it takes roughly 20 percent less time to ship goods from Dublin to Liverpool than to Le Havre, France—will only further increase the price for Irish beef and dairy products. 

Conversely, Ireland may be somewhat buoyed by access to the U.S. market, which was granted last year after precautions were taken to prevent mad cow disease. As of 2015, not all EU countries had been granted that same access, allowing for relatively less-competitive access into one of the world’s largest beef markets. And as the world’s largest consumer of beef, with per capita consumption roughly twice that of Europe, the United States is an exciting market capable of at least tempering the effects of Brexit for Irish cattle farmers. 

This is not to say that Irish beef will easily find space in the U.S. market. Over half of U.S. beef imports come from Australia and Mexico, whose producers both receive two dollars less per kilogram of beef than Ireland (as of 2013).  Both Mexico and Canada, both large beef exporters, also share a land border with the U.S., which significantly reduces prohibitive shipping costs. Aware of this intense international competition, Irish cattle farmers have already begun targeting organic and grass-fed beef markets in the U.S. Imports of grass-fed beef already account for roughly $1 billion, or between 20 and 30 percent of the American import market, and are growing. Meanwhile, the majority of Irish cattle are already raised on grass. Ireland is therefore likely to continue targeting similar niche markets, a strategy that will become increasingly common for all Irish producers in the case of a potential Brexit.

All’s well that ends well

It’s now less than two months out from the referendum, and Brexit polls are neck and neck. With roughly 46 percent projected to vote to stay in the EU, 43 percent projected to vote to leave, and the remaining 11 percent undecided, either outcome seems possible. However, when one considers that some respected pundits are putting the likelihood of Brexit closer to 22 percent—and that referendum voters often err on the side of caution and maintaining the status quo—the chances appear less likely. Moreover, if the EU’s economy is ultimately the concern for the British, voters should now rest easy: Just last month the Eurozone’s GDP finally surpassed its pre-crisis levels. And lastly, although votes for remaining and leaving are now polling closely, the Leave group has not yet been projected to win. In other words, what possibly could happen in the six weeks that has not happened in the past nine months?

Even if the British public votes to leave in next month’s referendum, a complete Brexit could take place anywhere between 2018 and 2025. Assuming the majority of U.K. citizens vote to leave the European Union on June 23rd, however, analyses of every likely scenario indicate that the relationship that Ireland and the U.K.—as well as continental Europe and the U.K.—have worked so hard to establish would be negatively affected. And if that weren’t good enough reason, the British Treasury recently released a 200-page analysis in which it predicted the country’s GDP to be 6.2 percent lower by 2030 than in a non-Brexit scenario. 

Most troubling for Ireland—which would have no control over the potential 20 percent reduction in bilateral trade with its largest partner—any post-Brexit trade agreements that are made will be the responsibility of the greater EU, as member states are prohibited from signing their own trade deals. Whatever deal is struck, therefore, is unlikely to reflect Ireland’s outsized reliance on the British market. Thus, given the circumstances, it is not a matter of if but how badly Brexit will hurt agriculture in Ireland. Who knows—there may be a lot more smuggled contraband and sedated livestock crossing the border into Northern Ireland once again. The cows won’t be aware they are crossing an international border, but farmers surely will.