Unemployment to rise even if EU-UK free trade deal struck

Irish unemployment will increase by 1 per cent and economic output will fall by about 3.5 per cent even in the event the European Union and the United Kingdom successfully strike a free trade deal, the Central Bank has said.

In the paper, Dealing with Friction: EU-UK Trade and the Irish Economy after Brexit, the regulator examines the possible impact on the Irish economy of an EU-UK free trade agreement (FTA), as well as other scenarios.

It argues that the imposition of World Trade Organisation (WTO) tariffs, which would take place in the event a deal cannot be struck, would substantially reduce, or potentially wipe out UK demand for Irish exports of meat and dairy products.

While an orderly move to an FTA would result in smaller upfront losses than those associated with a disorderly no-deal Brexit, a basic FTA would still imply “significantly higher trade frictions than exist today”.

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The analysis estimates that a transition to an FTA after 2020 would lower Irish output by around 3.5 per cent in the long run, with the unemployment rate 1 percentage point higher than if the UK remained in the EU.

“Whatever the precise nature of any future deal, no arrangement will replicate the degree of trade and economic integration of EU membership, creating significant challenges for exposed sectors of the Irish economy, particularly agri-food,” it says.

Businesses trading between the EU and UK would be required to manage new import and export rules, including customs and security declarations, risk-based inspections and the payment of tariffs for any goods not covered by the FTA.

In relation to EU-UK trade in products of animal origin, “significant new frictions will arise”.

Unless the UK agrees to adhere fully to the EU’s regime for food and plant hygiene, trade in agri-food products would require export health certificates, while there there would also be a need for veterinary inspections.

Taken together, these additional non-tariff restrictions mean that although an FTA could eliminate tariffs and quotas on most products, UK firms would still face substantially increased trade costs relative to the status quo.

Moreover, in relation to services trade, a standard FTA would not provide the same level of market access as membership of the single market.

An FDA scenario would also mean a net reduction in migration of 50,000 people per year to the UK, as well as a reduction of 20 per cent in foreign direct investment. As a result, its productivity would fall 1.3 per cent in the long run.

A more comprehensive EU-UK agreement than the FTA model would “reduce these losses”.

However, if the UK moves to trading on WTO terms after 2020, this would lead to a larger decline in Irish output of 5 per cent. The estimated reduction in output in a disorderly no-deal outcome is 5.6 per cent.

“The combination of higher tariff and non-tariff barriers means that a WTO arrangement after 2020 is assumed to result in the largest decline in trade compared to all other potential trade deal options,” the paper said.

Foreign direct investment to the UK in a WTO scenario would be down 24 per cent, while productivity would fall 1.6 per cent. EU-UK trade in such a scenario would fall 56 per cent.

The average implied WTO tariff on meat is estimated at close to 50 per cent, while the figure for dairy products is over 30 per cent.

“The imposition of tariffs on this scale would substantially reduce, or potentially eliminate, UK demand for Irish exports of these goods,” it said.