Switching to new export markets won’t be that easy following Brexit

The global economy has started to gain traction, at last. Global economic growth has been unbalanced since the financial crisis, but for the first time in several years all regions of the world economy should experience a synchronised upturn in 2017, according to the World Trade Organisation (WTO) in its latest release.

Switching to new export markets won’t be that easy following Brexit

The timing of the upswing is fortuitous for the thousands of Irish businesses who rely heavily on the UK market and can expect to see disruption to their customer base as the Brexit process grinds its way to a conclusion.

The statistics tend to lag the reality and hence the upswing is most likely already well on its way. As regards the outlook for exports, the latest available sentiment indicators show continued strong growth in international markets — the Purchasing Managers’ Index for the manufacturing and services sectors both point to a pronounced expansion in new export orders during the first two months of 2017.

As was evident over the past few years, Irish export growth is expected to exceed that of global demand in 2017 and 2018. The basis of the over-achieving on world markets, according to the ESRI — Ireland’s economic think tank — is the strong specialised position of Ireland’s goods exporters, both food and non-food, in fast growth sectors, as well as the increasing success of services exporters in the most dynamic social media and cloud software sectors.

The volume of services exports from Ireland has grown rapidly over the past decade, moving Ireland into the top-10 globally, according to the WTO, which places the country as a major-league player.

The fact that demand for services tends to be far less volatile on international markets than manufacturing and agricultural product demand will also be a welcome stabilising influence as we try to counter the fall-out from the Brexit negotiations.

However, the ESRI warns that switching from the UK market to other markets will not be easy. Its report points to the enormity of the task of shifting a significant portion of the current 49% of food exports and 42% of non-food exports currently sold to the UK, into a new market.

Perhaps the most crucial finding in the report is the indication that one-in-four companies usually fail to succeed when entering into a new market and of the companies that succeed in staying in the new market, one third of them have to drop existing product lines and introduce new products.

The think-tank advises that critical to the success of Irish exporters in moving away from the UK market will be their ability to handle continuous churning of products and markets, and the cost associated with this process.

The freedom with which services exports move across borders globally should enable a continued uninterrupted flow of the services from Ireland to the UK regardless of the outcome of the Brexit negotiations.

As services exports have been the fastest growing sector of our international trade for the past decade, the low likelihood of being impacted by disruption in supplying the UK after Brexit is important for both companies trading in the sector as well as the economy as a whole.

However, the ESRI report points to very low export participation rates amongst services businesses, with a miniscule 1.5% of Irish-owned services businesses actually exporting. The success of the sector primarily comes from the large foreign-owned sector and a few ‘’superstars’’ in the Irish-owned sector.

There are many lessons for both Enterprise Ireland and Bord Bia — the state’s primary trade promoting agencies — in the ESRI report which demonstrates the risky nature of exporting, particularly when it comes to entering a new market.

Of particular note is the ESRI comment that even for experienced exporters, “the probability of a new product becoming established in a new market is not very high.”

From the Government’s perspective, the need for substantial financial support to assist Irish-owned businesses currently locked into the UK market, to move into new markets and to develop new products essential to succeeding in these new markets, is crucial if we are to avoid a major shock to the economy in the wake of Brexit.

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