Of pressing concern is how Brexit will affect Northern Ireland in terms of trade, freedom of movement of persons, foreign direct investment, and loss of European Union funding.  In this blog, M. Leann Brown argues that evidence suggests that NI and the United Kingdom will ultimately suffer at minimum a 3-4 per cent reduction in GDP per year for a decade as a consequence of Brexit (EU Exit Analysis, 2018).

While states withdrew fairly frequently from regional economic organizations during the “first wave of regionalism” (the 1950s-late 1970s), very little literature provides theoretical guidance as to how to think about the consequences of states’ seceding from regional economic organizations. The EU is so unique and advanced in economic and political integration, there are no comparable cases to draw upon to build or test a theory of member state secession.

Economists’ predictions regarding the potential effects on GDP range from +2 to 20 per cent in some sectors like agriculture. These predictions vary by the models and timelines employed as well as by the analysts’ ideology. However, it is clear that NI will suffer economically more than the rest of the UK, save perhaps the Northeast and West Midlands. Trade will be negatively affected although perhaps more slowly than might be expected. FDI will be more immediately affected by the loss of the 500 potential consumers in the Single Market and the uncertainties associated with these processes.  Various forms of EU funding will cease, and although Britain has committed to compensate NI for some of these losses, its willingness to meet these obligations will undoubtedly be affected by the negative economic fallout Britain itself suffers.

Trade

With or without a bilateral trade agreement, leaving the EU Single Market will negatively impact NI’s trade. In 2017, 56 per cent of NI’s exports worth £8.7 billion went to EU member states. The Republic of Ireland is NI’s number one destination for exports; the value of those exports in 2017 was £2.7 billion (Polley and Hoey 2017). As a member of the Single Market, no tariffs are levied on NI exports to EU member states.  Under the worst case scenario, the EU would treat imports from NI under third country import rules, i.e. they would subject to tariffs and quotas. That would translate, for example, into about a 3.2 per cent tariff on agricultural goods, undermining those exports’ competitiveness.

Post-Brexit, the UK itself might introduce import tariffs or other nontariff barriers like customs controls which would increase costs for NI importers and consumers. However, the UK could reduce or remove regulations and other barriers on third country imports, for example on agricultural or food products.

In negotiations, both the EU and UK have said that they wish to avoid the worst-case scenario regarding loss of access to the Single Market. Analysts have speculated that Britain’s post-Brexit relationship with the EU might follow Norwegian or Swiss models of having access to the Single Market. For example, Norway is a member of the European Economic Area and has adopted 3/5 of the EU’s acquis communautaire. Both Norway and Switzerland are expected to contribute to the EU’s structural and cohesion funds, but lack the ability to participate in EU decision making. After recent negotiations, the EU and the UK have announced that they will avoid the negative trade consequences of leaving the Single Market, but Theresa May said that the new relationship would not be like the Norwegian, Swiss or Canadian relationships, which means that at this point we have no sense of post-Brexit trade relationships.

The border

In addition to trade, the status of the border is fraught with concerns relating to freedom of movement of persons; these concerns are usually discussed in terms of whether there will be a “hard” or “soft border” between NI and the Republic after Brexit. A combination of the 1952 Ireland-UK creation of a Common Travel Area, the creation of the EU Single Market in 1987, and the 1998 demilitarization of the border after the Good Friday Agreement has meant that recently there has been freedom of movement across the border.  Approximately 30,000 people live and work across the border, who would be inconvenienced by reestablishment of border controls. Some suburbs of Derry/Londonderry effectively sprawl across the border (Bell 2016).

Freedom of movement

About 7 per cent of the workforce in NI is from EU countries – Poland, but also Latvia, Lithuania, Portugal.  If there is no control at the borders, EU immigrants seeking work in the UK could cross the Republic-NI border without being challenged. Immigration control was a major issue in the Brexit referendum. The Republic has already identified 250 sites that will require personnel if a hard border is established after Brexit.

Everyone is aware of the political sensitivity of the border. Theresa May said from the outset that the UK aspires to a “seamless” or “frictionless border.” This issue remains unresolved. Questions include where will the border lie – between NI and the Republic or between the island and the UK? What form will the new border controls assume? Could new technologies such as use of vehicular number plate recognition technologies and drones help soften the border?  Most scholars believe that it will be impossible to avoid the reestablishment of some kind of border controls in the wake of Brexit.

Foreign direct investment

The primary question with regard to FDI, is the extent to which NI’s attractiveness as a destination for FDI will be affected by its loss of access to the Single Market. The economic uncertainties associated with Brexit will heighten perceived risk, affecting indigenous and foreign investment, particularly in sectors like agriculture and manufacturing that are closely associated with EU trade. There are already significant disincentives for foreign firms to invest in NI – relatively low productivity rates, a weak private sector, and corresponding strong dependence on public funding, its peripheral location and rurality.

Much discussion has centred around whether a lowering of the corporate income tax could offset the negative effects of Brexit for NI. The NI government has been granted the right to put into place a local corporate tax rate to make the region competitive with the Republic’s 12.5%. Of course at this time without a government, the lowering of the corporate income tax is on hold. Most analysts concur that a lower tax rate will not compensate for the loss of potential FDI’s access to the Single Market and the several years of uncertainties will greatly compound existing deterrents to DFI for NI.

Loss of EU funding

Given that conflict resolution figured prominently among the EU’s original missions, it has devoted significant resources to conflict amelioration in NI. A European Policy Coordination Unit was established within the Office of the First and Deputy First Minister and an Office for the NI Executive was established in Brussels in 2001. The EU created a Northern Ireland Taskforce after the re-establishment of power-sharing in 2007. Overtime, the NI Taskforce has interacted with 17 Directorate Generals, the first time the Commission has established such close relationships with a single region over so many areas. Three MPs represent NI in the European Parliament.

The EU has provided billions of euros in funding to support NI under several programs, likely £11 billion since 1984 (EU Funding Allocations).  The monies have been available for infrastructure projects, business sectors, and political reconciliation projects. The various PEACE projects are very sophisticated, featuring “peace-building from below” strategies that promote cross-border, inter-cultural dialogue. Examples include inter-cultural daycare centres, programs supporting discussion of history and storytelling, and cross-border musical events (Phinnemore et al. 2012).

The sector likely to suffer the most from loss of EU funding is agriculture. Between 2005-2014, NI farmers received £2.5 billion from the Common Agricultural Policy, representing approximately 87 per cent of farm income. Agriculture accounts for about 38,000 jobs, 3.3 per cent of civil employment in NI. Another sector likely to suffer is civil society that employs 4 per cent of the total workforce. Loss of EU funding will translate into loss of jobs in this sector, particularly among women (Miller 2013).

Again, the UK has promised to match the current level of EU spending in these sectors through 2020, but what will happen after that is unclear.  Agriculture is among the sectors devolved to regional responsibility.

So to reiterate, 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.

This post represents the views of the author and not those of the Brexit blog, nor the LSE. Image by .holger licenced under Creative Commons Attribution-Share Alike 4.0 International.

M. Leann Brown retired after thirty years in the classroom of the University of Florida in May 2018.  Her most recent publication is REGIONAL ECONOMIC ORGANIZATIONS AND CONVENTIONAL SECURITY CHALLENGES (Palgrave, 2018). Her current research focuses on how states’ identities affect foreign policymaking.

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