UK free trade deals will be tough for Irish exporters

UK free trade deals will be tough for Irish exporters

The crystal ball is somewhat cloudy on the question of whether the latest Brexit deal will return the UK to business as usual.

In the short-term, the deal is unlikely to help the UK avoid a technical recession.

In the medium-term, a soft Brexit, with zero tariffs, will depend on a successful setting up of the technical details related to the EU customs union to avoid physical checks on the island of Ireland.

For Irish exporters, this means less uncertainty, given that the probability of a no-deal has effectively been eliminated.

A rise in business confidence is expected, which should boost domestic investment in both the UK and Ireland. (It had contracted over the past two years.) Foreign investment should also gain momentum.

However, as uncertainty slowly fades, the depletion of stockpiling, due to frontloading of imports into the UK ahead of the previous Brexit deadline, of October 31, is expected to affect Ireland’s exporters for the next six months.

Consumers front-loaded their spending, as witnessed by the strong UK retail sales growth over the past few months, while companies accumulated high levels of stocks to offset potential import tariffs and customs delays. Consumers and businesses are now overstocked.

The Bank of England reported that business stocks had reached their highest levels since the 2009 financial crisis. While the Bank of England is likely to have cut interest rates by year-end by up to half-a-percent, economists agree that this would not be enough to prevent a liquidity risk for some UK companies.

British firms have borne the brunt of the uncertainty and the higher financial costs related to Brexit preparations.

International credit insurance agency Euler Hermes reported that business insolvencies in the UK are expected to increase 16 % in 2020, up 5% on the current year, with consequent risks to Irish businesses.

Thanks to UK companies’ and households’ preparations for a no-deal Brexit, the EU tapped billions of additional export demand in the first half of 2019.

Ireland’s exporters benefitted the most from this wave of contingency stockpiling in 2019, accounting for a third of the EU export gain. However, they should also be those to suffer the most from the negative destocking effects in the coming months.

Sterling will most likely be the biggest winner from the Brexit deal, but it will remain a prisoner of the volatile political environment.

The UK currency has been the main Brexit risk barometer since the 2016 referendum, losing, at one stage, 20% of its value.

Most of the currency dealers now consider sterling to be undervalued and that the lower Brexit uncertainty should lift it against the euro by the end of 2019.

In the previous version of the withdrawal agreement, the backstop would have forced the whole of the UK to remain in the EU customs union, in the event that no technological solution was found to avoid physical checks on the island of Ireland.

The latest deal stipulates that the North would be treated differently from the rest of the UK as an entry point to the EU, aligning with the EU’s regulatory arrangements for goods, while remaining in the UK’s customs union.

A customs border will be set up in the Irish Sea, requiring customs declarations on goods sent from Britain to Northern Ireland.

Once the new government is formed in Westminster, the UK will kick-off the 21-month transition period, which is due to extend to the end of 2021.

This will also see the start of negotiations on the future trade agreement with the EU.

If things go to plan, there will eventually be a “comprehensive and balanced free trade agreement.”

However, beyond the EU net, the UK is planning free trade deals with other countries, which will “ensure no tariffs, fees, charges, or quantitative restrictions across all sectors.”

This has the potential to create ugly competition for Irish exporters.

In a week when the OECD’s report of SMEs and entrepreneurship in Ireland warned that there was an over-reliance on the UK market by Irish exporters, continuing with business as usual for the 3,200 exporters and 32,152 importers who trade only with the UK must be considered folly.

John Whelan is managing partner at The Linkage-Partnership, an adviser to Irish and international firms on trade

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