For years now, Ireland and the UK have been the best of friends. Very sadly, Brexit is placing the relationship under strain. The positions of the two governments on the Irish border could not be further apart. Ireland is very clear: no trade deal that involves a physical border is acceptable. That obviously implies that the United Kingdom should seek to remain within the European Economic Area, and form a new customs union with the EU. This would replicate its existing trade ties with the bloc, while respecting the vote to leave the EU, and avoid the need for a border within Ireland. The United Kingdom, on its part, is adamant that it must leave the customs union in order to strike separate trade deals with the United States and other countries overseas. To be sure, it pays lip service to the importance of avoiding a border between Northern Ireland and the Republic, but this appears to be nothing more than a cynical manoeuvre. On the one hand, the magical unrealist tendency within the British government appears to think that by talking up the border issue, they can undermine the EU customs union, which has been defined by a common external tariff barrier since the 1950s. This would allow the UK to have its cake and eat it. On the other hand, the lip service will, they hope, allow the UK to place the blame for the consequences of its own decisions on Ireland and the rest of the EU.
What, if anything, can Ireland do? As has been noted recently, the country is not powerless. While the withdrawal agreement between the UK and EU will be decided by qualified majority vote, Ireland does have a potential veto in at least two possibly relevant circumstances. First, it would have a veto should the UK seek to extend the two-year deadline for exit following its Article 50 notification. Second, and probably more to the point, if as seems likely the UK ultimately seeks an ambitious, “mixed” trade deal with the EU that includes provisions on, for example, investment, Ireland will have a veto on that as well.
The UK therefore has the power to give Ireland something that we want: the maintenance of a border-free Ireland. There are encouraging signs that some in Britain may now be moving in that direction, but they are not currently the ones driving British policy. And down the line, Ireland will have the power to deny the UK something that it wants: a trade deal with the EU that goes beyond tariff-free trade in goods, and includes the kinds of provisions on portfolio investment that would be of interest to the City. The question therefore is: can Ireland credibly threaten to use this power in an attempt to prevent the reimposition of a border on our island?
At first sight, the answer seems obvious. We have an interest in maintaining close trade relations with Britain, and so any threat to veto a trade deal between the EU and UK that did not avoid a hard Irish border would be incredible. And perhaps that is the right answer. But I still think it’s worth posing the question.
If there is no trade agreement between the UK and EU, trade between the two parties will be governed by WTO rules. In this hardest of all Brexits, substantial costs will be imposed on Ireland. The two that have received most attention to date are the reimposition of a border, and the substantial damage that will be done to sectors exporting to the UK, particularly food and agri-business.
But now let us consider an alternative scenario, in which the EU and UK sign some sort of a trade deal, but in which the UK also leaves the customs union in order to do separate trade deals with the US, Australia, and so forth. Once the UK does this, a border immediately becomes inevitable: the first major cost of a no-deal Brexit, from an Irish perspective, will be incurred in full, trade deal or no trade deal. Furthermore, once Liam Fox signs separate UK trade deals with cheap food producers overseas, Irish food exporters to the British market will find themselves being severely undercut. The second major cost to us of a no-deal Brexit, the loss of agricultural markets in Britain, may well come about to a large extent, whether or not there is an EU-UK trade deal. Taking both points together, it may be that the opportunity cost to Ireland of a no-deal Brexit may be smaller than we sometimes think, if we start from a scenario where the UK leaves the customs union in order to strike deals with the US and similar countries around the world.
And there are countervailing benefits to Ireland of a no-deal Brexit that have to be set against these opportunity costs: increased inward FDI flows by UK-based firms seeking to export to the EU; and increased costs imposed on the UK economy, which may in time lead that country to apply to rejoin the EU on terms more beneficial to us than the status quo (since they will no longer enjoy their budget rebate).
Yes, we want a close trading relationship with our nearest neighbour, but right now that neighbour is planning to (a) reimpose a border on our island, and (b) sign trade deals that threaten to displace Irish exporters from its market. In my view, the ESRI should not only be modelling the impact of various EU-UK trade deal scenarios on the Irish economy; it should also be modelling the impact on Ireland of the trade deals that the UK may eventually sign with the rest of the world. Opportunity costs are what matter when making decisions, and the net opportunity cost to Ireland of a no-deal Brexit may be smaller than what we sometimes assume, if the alternative involves the UK following through on its current plans. I’d be interested to know how large it would actually be.
And maybe the Irish government should consider playing hard ball in its continuing attempts to avoid the reimposition of a border in Ireland.