By Conor Lambe, Economist at Danske Bank
Last week, the Prime Minister outlined her strategy for negotiating the UK’s exit from the European Union. We now know that during the exit talks, the Government will be seeking to establish a comprehensive free trade agreement between the UK and the EU, regain control of immigration and secure the freedom to strike trade deals around the world. But Theresa May made it clear that remaining part of the Single Market is not on the Government’s wish list. So what are the implications of the Prime Minister’s historic speech for the Northern Ireland economy?
For local businesses, like those throughout the UK, the terms of the Government’s hoped-for free trade agreement with the EU will be crucial. According to HMRC’s regional trade statistics, in the first three quarters of 2016 around 50 per cent of UK goods exports and 56 per cent of goods imports were exchanged with the EU. In Northern Ireland, this was 54 per cent and 73 per cent respectively. These high numbers emphasise just how important it is that the UK Government can secure “the greatest possible access” to the Single Market it is seeking. However, this will not be without its challenges. It is not always easy to agree a trade deal, even without the additional complexities around immigration and budgetary contributions that Brexit will also involve.
Then there’s the question of the Customs Union. Theresa May said that she does want some form of customs agreement with the EU, but does not want to be bound by the Common Commercial Policy or the Common External Tariff, as they would prevent the UK from agreeing trade deals with other economies. It seems that the best outcome would be a situation where the UK maintains tariff-free access to EU markets but can also set its own external trade policy. However there are no guarantees that this will be achievable. If the UK’s negotiators can’t reach some form of customs agreement, it is possible that border checks could be set up between Northern Ireland and the Republic of Ireland. This could be particularly challenging for local businesses as around 32 per cent of Northern Ireland’s goods exports went to the Republic of Ireland in the third quarter of 2016.
However, if a full customs agreement can’t be reached with the EU, there may be another option for addressing how the UK and Ireland continue to interact. A report published by the House of Lords European Union Committee in December raised the idea of a bilateral agreement between the UK and Ireland. This could cover customs and trade terms between the two economies if the UK loses its access to the Customs Union. It would also be a way to maintain the Common Travel Area between the UK and Ireland, which was one of Theresa May’s twelve objectives for the exit negotiations. But this option also has its difficulties. The Common Commercial Policy means that only the EU can negotiate a trade deal, not the individual Member States. Given the historical ties between the UK and the Republic of Ireland, it must be hoped that negotiators in Europe would be willing to ratify this type of bespoke agreement as part of the final exit package, if the need arose.
Following recent political events, the Secretary of State for Northern Ireland has confirmed that an election will take place on 2nd March. After this occurs, local policymakers will need to engage with the UK Government as it prepares to go into the formal negotiation process with the EU. Emphasising the importance of maintaining free trade between Northern Ireland and the Republic of Ireland once the UK is no longer part of the European Union must be one of their top priorities.
This article was published in the News Letter on 24th January 2017