Original Article by Prof. Eamonn Walsh: Irish Times 20.05.16

There is a widespread belief that Brexit is bad for Ireland. Headlines appear highlighting billions of losses.

These headlines are well-intentioned but incorrect. Borrowing from Donald Rumsfeld, Brexit largely comprises unknown unknowns – and the only known known is trade statistics. To estimate billions of losses, one must use trade statistics.

Sadly, these statistics have been misinterpreted in a manner that would make Donald Trump blush. As I will explain, Irish trade statistics must be interpreted with extreme caution. If one does this, there are scenarios where Ireland – far from being a victim – becomes a beneficiary of Brexit.

For example, according to UK trade statistics, Britain exports champagne to Ireland. More interestingly, Ireland exports champagne to Britain. What is probably going on is that a UK supermarket chain takes delivery of champagne in the UK and delivers it to Dublin. This is recorded as an export from the UK to Ireland. Champagne is then delivered from Dublin to Belfastand is recorded as an export from Ireland to the UK. Many EU exports to Ireland are mischaracterised as exports from the UK. I estimate that at least 15 per cent of UK exports to Ireland are more correctly understood as exports from the EU.

While EU trade figures are understated, there is a similar problem for imports from the rest of the world. For example, I was surprised to find that sports shoes (or trainers) are a major export from the UK to Ireland (and also an export from Ireland to the UK).

I have yet to find a pair of sports shoes with a “Made in the UK” label, but perhaps I should have asked for trainers. However, it is far more likely that trainers are imported into the UK and subsequently re-exported to Ireland. At least a further 15 per cent of UK exports to Ireland are really exports from the rest of the world.

Compounded distortions

These distortions are compounded by additional “exports” from Ireland that reflect minimal Irish economic activity. This reflects the complex operations of multinationals and could account for another 40 per cent of trade. Therefore, phrases such as “our largest trading partner” should be used with extreme caution.

Rather than take meaningless aggregate trade figures to interpret the impact of Brexit, it could be better to work from the bottom up. For example, if Brexit occurred, how would it affect imports to Ireland?

The worst-case scenario is that all UK goods are subject to EU tariffs. Using trade data for 2015, I estimate that additional tariffs payable on these goods are unlikely to have been more than €100 million and probably less. This is a relatively small loss compared to the harbingers of doom who throw around numbers in the billions. Further, the existence of these tariffs will favour domestic suppliers and supply chains that do not rely upon UK trade.

On the export front, everything depends upon whether the UK chooses to impose tariffs. If Britain does not impose tariffs, then many Irish exporters stand to gain. EU tariffs will place UK goods at a competitive disadvantage and create opportunities for Irish exporters to gain share in Europe. The Irish food industry will be a major beneficiary. The only potential cloud is exporters to the UK who will now compete with non-EU countries (beef is an example).

Worst-case scenario

On the other hand, should Britain impose tariffs, this will result in a less desirable outcome. Using 2015 trade data and assuming that Britain uses EU tariff rates, the worst-case scenario is additional tariffs of €220 million. The food sector will bear most of this additional pain and its ability to exploit the EU market will be the main mitigating factor. However, at best, there will be €80 million of additional tariffs that will have to be addressed.

Should Brexit occur, it will have consequences for Ireland. It is only when the referendum occurs that the unknown knowns (for example exchange rates) and the unknown unknowns will begin to become apparent.

However, if a Brexit occurs it is not necessarily a bad thing for Ireland. Barring an implosion of the UK economy after the referendum, the downside risks for Ireland are by no means catastrophic, and could generate significant upside opportunities. Negotiations between the EU, Ireland and the UK will largely dictate how good or how bad the outcome is. Our challenge at this time is to identify negotiating positions that have a firm grounding in actual trade patterns rather than deeply misleading aggregate trade statistics.

Eamonn Walsh is PwC Professor of Accounting at UCD College of Business.