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BREXIT: THE NEW FRONTIER?

July 2017

On 23 June 2016 the United Kingdom electorate voted to exit from the European Union.  On 29 March 2017 the British Government served formal notice under article 50(2) of the Treaty on European Union (TEU) on the EU of its decision to withdraw from the EU which was followed by the commencement of formal negotiations between the British government and the EU on 19 June 2017.  Under article 50(3) of the TEU the UK is required to exit from the EU by no later than 29 March 2019, regardless of whether all of the arrangements between the EU and the UK have been finalised.  This deadline can only be extended if all of the 27 members of the EU together with the UK so agree.

Brexit is a startling event and one with seismic political and economic consequences for the Republic of Ireland and indeed Northern Ireland.  The UK is the most important trading partner for Ireland.  According to the Central Statistics Office (December 2016) Ireland:

  • exports €15.6 billion of goods (15% of total) to the UK
  • imports €11.4 billion of goods (32% of total) from the UK
  • exports €18.0 billion of services (20% of total) to the UK
  • imports €11.4 billion of services (11% of total) from the UK

In addition:

  • Foreign Direct Investment from Ireland to the UK – € 89 billion
  • Foreign Direct Investment from the UK to Ireland – € 37 billion.

Deadline

The current negotiations between the UK government and the EU regarding the arrangements to replace the EU are highly contentious on both sides and it remains to be seen whether agreement, or even agreement in principle, will be reached on most of the significant issues before the exit deadline.  For instance, the recent free trade agreement between the EU and Singapore, a relatively minor trading EU partner, was entered into after bilateral talks between the European commission and the Singapore which began in early 2010.  The final text of the treaty was settled in June 2015.  It would be unrealistic to expect that the vastly more complex political, economic and taxation issues involved in Brexit to be settled by March 2019.   The end position of the UK Government and EU will not be known for some time.

Customs Union

The existing customs union is a type of free-trade area. The EU has agreed to abolish restrictions on mutual trade between member states, and to set up a common system of tariffs and import quotas that apply to non-members of the EU. This is the “common external tariff” (CET).  The main benefit of a customs union is clear in the absence of a CET.   For example, if Ireland had zero tariffs on Chinese widgets, but Britain had a 5% tariff, then it would be tempting to import Chinese widgets into Ireland, and from there (freely) to the UK. So the UK would have to carefully investigate widget imports from Ireland, and impose a tariff on any attempted imports from Ireland of Chinese widgets (these are the “rules of origin” regulations). With a CET, however, no such investigations are necessary because no such arrangements are possible. One disadvantage of a customs union, however, is that its members are not allowed to negotiate their own trade deals with countries outside the EU.

The EU’s single market is also known as the “internal market”. This is another type of advanced free-trade area. Not only do goods move freely between EU member states, but so do services, capital and people (these are known as the three fundamental freedoms). To achieve this much more ambitious goal, the EU imposes harmonising regulations across the single market. This is the reason for much of the regulations adopted by the EU in relation to products and services across the EU. This is why there are sometimes unpopular regulations on, for instance, the efficiency of widgets across the EU. In the absence of such regulations there might be competition to adopt the lowest standards: member states might compete to produce the cheapest-possible widgets across the EU, possibly to the detriment of consumers. This also underpins the free movement of people.

It is possible for the UK to be a member of the single market without being an EU member. The European Economic Area (EEA) agreement comprises three countries (Liechtenstein, Iceland and Norway) in such a position. None of the EEA countries is part of EU customs union and each is therefore entitled to agree its own deals although each is obliged to comply with complicated “rules of origin” regulations.

If however the UK decides to exit the single market, there is little value in being part of the customs union; exiting it would allow the UK to negotiate its own trade deals.

Soft Brexit (the Norwegian Model)

If Britain decides to continue to be part of the single market, which eliminates all tariff and most non-tariff barriers as well as customs controls with other EU states, it will have to comply with most EU laws, including most controversially the free movement of people from other EU countries and the voluminous single-market regulations which are enforced by the European Court.  Norway and Switzerland, which are outside the EU but largely inside the single market, have negotiated the right to do so, but they still contribute to the EU budget. It appears to be the free movement of persons (i.e. control over immigration) which is one of the biggest obstacles for the UK.   If the UK were to chose the Norwegian Model, which is commonly referred to as a “soft” Brexit, it would retain many of the benefits of EU membership but at the price of a loss of control particularly over the free movement of people and have to make a politically unpopular payment to the EU budget.  Public opinion in the UK may consider these constraints as undermining the essential reason for Brexit.

A soft Brexit should mean that the likelihood of physical customs controls on the border between the Republic of Ireland and Northern Ireland is reduced or eliminated.  Many also believe that it would involve the least disruption to Irish exports to and imports from the UK.

Hard Brexit (the American model)

On the other hand a “hard Brexit” with an exit from the Customs Union and the Single Market would put the UK in a position similar to outside countries such as the USA. The USA is not subject to free movement of people from other EU countries or to all of the EU’s single-market regulations, and makes no contributions to the EU budget.   But because the USA is also not part of the single market, it makes exports from the USA into the EU subject to both tariff and non-tariff barriers. Because the EU accounts for 44% of Britain’s exports, any such barriers could substantially raise the costs that Brexit will impose on the British economy.

If the UK exits from the Customs Union a physical customs border, in some shape or form, is inevitable between the Republic of Ireland and Northern Ireland.  This will also cause disruption of some degree to the movement of people and goods, and most likely reduce, exports and imports between Ireland and the UK.

The Brexit team in Whitney Moore will be happy to assist you further if you have queries on how Brexit will affect your business; whether you are a company based in Ireland or based outside the EU and considering investing in Ireland.

For more information, please get in touch with your usual Whitney Moore contact, Brendan Ringrose or any member of our Corporate team.