Supply chains the fourth Brexit whammy

Supply chains the fourth Brexit whammy

As nonsense and whimsical wishful thinking about soft borders recede, our appetite for hard, fact-based economic scenarios increases. To date, we have had just two systematic quantitative analyses of the impact of a crash-out Brexit on Ireland: Working Paper 550 from the Economic and Social Research in November 2016, and “Potential Impact of WTO tariffs on cross-border trade” from Intertrade Ireland in June this year. We can now add a third: “EU-UK agricultural trade: State of play and possible impacts of Brexit“, from the Agriculture Committee of the European Parliament.

In seeking to measure the potential impact of Brexit, economists must take account of all the factors and how they interact. The Intertrade analysis, for example, constructed scenarios based on the combined effects of WTO tariffs, the cost of typical non-tariff barriers as calculated by the World Bank, and revenue loss due to the fall in the value of sterling.

To this mix, the economists who prepared the report for the European Parliament have added a fourth whammy: the loss of value in Irish exports because of the impact of the first three factors on their supply chain.

“Because of its tight relationship with the UK, of all EU27 countries, Ireland is affected the most by Brexit, and not only in agri-food sectors. In relative terms, its GDP decreases even more than UK’s GDP (-3.4% vs -2.4%). This is explained by a drop in Irish agri-food exports to the UK and to the rest of the World, including EU27 countries as Irish production relies heavily on imported intermediates from the UK.” (Emphasis added).

This reliance on British materials, parts and components goes far beyond the highly exposed agri-food sector; the negative effect of ‘non-tariff mechanisms’ on supply chains could well damage sectors where tariffs are low or non-existent. One example not mentioned in the report:When Britain leaves the EU, VAT becomes liable at the point of entry on all British imports. Apart from the cash-flow burden, there is potential for delays and the need for costly stockpiling.

“The impact of Brexit on Irish trade and the Irish economy will likely be very large,” notes the report. Its headline projection of a 3.4 drop in GDP is broadly in line with other forecasts but the bad news does not end there. Because of the supply-chain effect, agri-food exports to all markets could be hit to the extent of 71% with a total GDP impact of up to 9% in the most malign combination of negative factors.