The impact of WTO rules for Northern Ireland

“Future trade relations between the UK and the EU-27 will only come up towards the end of the two-year negotiating process, that we have now entered,” he explains.

“Under such circumstances, it is quite feasible that both parties will not have enough time to settle their future trading arrangements and in these circumstances, a WTO default position could kick in automatically.

“The other option could be that of a strategic decision taken by the UK government to opt for WTO rules as its preferred trading position with the EU-27, irrespective of what develops courtesy of the formal Brexit negotiations.

“The UK is strong enough to go it alone and relying on WTO would allow new trade deals outside the EU regulations. The WTO option also opens up the possibility of the UK re-orienting trade towards new and emerging markets.”

Magennis explains that the WTO is an intergovernmental organisation, which regulates international trade. It officially commenced operations on 1 January 1995, replacing the General Agreement on Tariffs and Trade (GATT), which had commenced in 1948.

“WTO aims to reduce tariffs, eliminate non-tariff barriers and produce predictable trading arrangements,” he adds. The same conditions, without discrimination, are offered to all 164 WTO members, accounting for 95 per cent of all world trade, with baseline rules on goods, services and intellectual property rights.

“WTO members must apply a schedule of tariffs or a combination of tariffs and quotas, where agriculture is concerned. Exceptions to these regulations are permitted only when members sign bilateral deals or sign deals with developing countries.”

Magennis stressed that the imposition of WTO rules on future trade arrangements between the UK and the EU-27 would have a proportionately higher impact on food products, including dairy, beef and flour.

“Many of these commodities are extremely important, where agri-food in Northern Ireland is concerned,” he stresses. “Such circumstances would represent the hardest of all Brexits.”

Turning to specific trends that have impacted on the economies of Northern Ireland, the Republic of Ireland and the UK over the past number of years, Magennis said that all three regions had enjoyed a degree of economic recovery.

“This is particularly the case in the Republic of Ireland where 2015 saw a 25 point growth spurt relative to 2008.” Magennis referred to this as the “recasting moment”. “We have also seen a modest recovery in employment levels across all three regions since 2012,” he says.

Magennis outlines that 61,000 net new jobs had been created within Northern Ireland’s economy during the period 2012 to 2016, despite an employment downturn in the public administration sectors. Modest growth, in contrast, had been recorded in administration and support services; health and social work; the hospitality sector; manufacturing and agriculture.

“In a world post-Brexit, Northern Ireland has four key challenges, or economic weaknesses, to consider. These are the fiscal deficit, the continuing and real income squeeze, the hidden labour market weakness and our productivity malaise.”

Explaining that Northern Ireland’s current fiscal deficit is £9.8 billion, he says: “The nominal income figure for 2015/16 was £13.8 billion while total expenditure on public services amounted to £23.6 billion.

“In tandem with this, a real income squeeze has been generated by a decade of no wage growth and spending that has been fuelled by borrowing. Adding to the fragility of Northern Ireland’s economy is the fact that part time employment is increasing.

“We also have a productivity malaise to overcome. Currently, Northern Ireland’s productivity gap with Germany is running at 34 per cent. The equivalent figure for the UK as a whole is 19 per cent.”

Looking ahead, Magennis outlines three possible scenarios for the UK economy up to 2018. The first of these is a growth fuelled option with consumer spending on the up and unemployment levels falling.

“Alternatively, we could see a slowing economy, as inflation bites, with investment flat and exports weakening. If, however, we have a scenario unfolding, which sees the Brexit negotiations going badly, then we could see consumption stalling, government expenditure falling and exports becoming the only driver for growth.”
Magennis predicted the economy in the Republic of Ireland to grow by at least 2 per cent up to 2018. Where Northern Ireland’s economy is concerned, Magennis outlined alternating options that might kick in post-Brexit.

The most optimistic forecast would see employment rates in Northern Ireland converge with the UK as a whole. This scenario incudes lower corporation tax rates becoming the norm.

He adds: “The most likely economic outcome is based on moderate Brexit assumptions and no reduction in the rate of corporation tax, due to uncertainty over price and mechanism. The lower scenario assumes a Brexit scenario that goes wrong, entailing a major impact on trade and consumer spending.

“This is the outcome closest to the lower estimates of long-term GDP by independent forecasters of Brexit in the UK.”

Magennis highlighted the significant weakening of sterling against both the euro and the US dollar in the wake of the EU referendum vote.

“This is good for exports but it does create inflation,” he adds. “Moreover, it is difficult to predict how exchange rates will fluctuate as the Brexit negotiations progress over the next two years.”

The Ulster University academic says that approximately two thirds of exports from Northern Ireland are destined for the EU-28, with the Republic of Ireland accounting for 60 per cent.

“Manufacturing sells 80 per cent outside Northern Ireland but where most other sectors are concerned, this figure drops to less than 25 per cent.”

Looking beyond Brexit, Magennis believes that the challenge facing Northern Ireland’s economy is clear: “We have a high reliance on a very small number of export markets and, in addition, we have too few exporters.”

Pointing to the potentially disastrous implications for cross border trade on the island of Ireland if the Brexit negotiations go the wrong way, he adds: “Cross border manufacturing trade amounts to €3 billion annually, a high percentage of which is accounted for by food and drink.

“By one estimate more than €300 million would be paid in tariffs under WTO rules. Of this figure, 85 per cent would be payable by agri-food products. The agri-food and materials’ sectors are most exposed to a Brexit deal, which would see the introduction of WTO measures.

“Brexit will bring big challenges. Immigration controls are likely, which will impact on the size of Northern Ireland’s labour pool. If WTO rules are introduced, a border will become reality. This will have both political and economic consequences.

“General uncertainty impacts on business decisions, from both an investment and recruitment perspective. As details of negotiations emerge, we can expect more volatility on financial markets.”

But Magennis is confident that a deal will be struck to to ensure that trade and other facets of co-operation continue between the UK and the EU-27.

“This is assuming the divorce settlement is arrived at. Thus far, the pessimistic assumptions of independent analyses have proven to be over-stated. The question is: will this continue? We also need to focus on what options can be presented to ensure that Northern Ireland’s bespoke sectoral, migration and contingency needs are met.”

Ulster University’s Eoin Magennis told the Brexit: Northern Ireland’s Futures conference that post-Brexit UK could find itself trading under the auspices of World Trade Organisation (WTO) rules for one of two reasons.

“Such circumstances would represent the hardest of all Brexits.”