An independent study by Copenhagen Economics for the Government paints a bleak picture where, even in a best-case scenario, Irish GDP will be 2.8% lower compared with an alternative situation in which, by 2030, the UK had not left the EU.

That European Economic Area (EEA) scenario, similar to the type of arrangement which operates between the EU and Norway and Iceland, would see a 3.3% drop in exports and a 3.5% fall in imports.

Three other scenarios portray increasingly harmful scenarios, with the worst — a World Trade Organisation (WTO) scenario, with the EU and UK imposing tariffs on each other’s goods in a classic ‘hard Brexit’ — slashing our GDP by 7% and resulting in a 7.7% fall in exports and an 8.2% drop in imports.

The report also rings alarm bells for some of the sectors most exposed to the impact of Brexit, presenting a serious threat to rural Ireland.

The report states that 82% of employment in agri-food, the beef sector, and the dairy sector are outside Dublin — and all three face a Brexit impact to exports and production which far exceed the national averages.

According to the report:

Brexit will have negative impacts on the Irish economy in all scenarios;

Irish exports and imports of goods and services are predicted to be negatively affected by Brexit in all scenarios;

Brexit will also impact Irish wages negatively for all skill groups.

In addition to the EEA and WTO scenarios, the report also looks at a Customs Union scenario — which assumes an EU-UK agreement that would mean duty-free trade for most products but some tariffs and border inspections — and a Free trade agreement scenario, broadly similar to the Customs Union outlook and with similar economic impact.

Areas of strategic importance include the agri-food sector, pharma-chemicals, electric machinery, wholesale and retail, and air transport. The report stresses that domestic policy responses can mitigate the impact of Brexit.

Agri-food, including beef and dairy, are where “the largest impacts occur” although other primary agriculture sub-sectors such as grains, fruit and vegetables, forestry, and fishing will also be negatively affected.

Pharma-chemicals could see production fall by 1% to 5% compared with non-Brexit 2030 levels, while production in electric machinery could drop by between 5% and 10%.

Wholesale and retail could face new costs in supply chains and will also be negatively affected by an overall drop in consumer demand resulting from Brexit, while air transport could face substantial challenges on routes to the UK.

“Of the scenarios analysed in this report, the EEA-scenario is the outcome that would minimise the economic loss [in GDP] for Ireland in the EU-UK trade negotiations,” says the report. “Measured relative to Irish GDP in 2015, the difference between the ‘best’ [EEA] scenario and the ‘worst’ [WTO] is €11bn per year in 2015-level.

“In a hypothetical situation, where regulatory divergence for goods and services could be avoided and hence the Brexit impacts only related to tariffs and border costs, the theoretical loss to Irish GDP would be further reduced to around 1% of GDP or approximately €3bn in 2015 terms.”

It says the best possible trade negotiation outcome for Ireland involves no tariffs, large quotas for agricultural products, low border costs, landbridge transit, low regulatory divergence, and low barriers for service trade.

As for domestic policy responses, it advises trade promotion that would help existing exporters access new markets, enterprise policies to aid the transition from declining to growing sectors, and a focus on supporting skills “required by the unavoidable adjustments”.

The scenarios

by Noel Baker and Joe Leogue

1. Agi-food

Ireland’s prized agri-food sector could be facing its biggest-ever challenge with Brexit looming.

The report points out the processed food industry is the biggest of the three agri-food sub-sectors, alongside beef and other meats, and dairy — with all threatened by the impact of Brexit.

Projections would see total exports in the sector plummet by between 15% and 31% below the 2030 non-Brexit baseline level in the EEA and WTO scenarios, with the fall of 16-17% in the FTA and CU scenarios not much more palatable.

The most extreme drop in exports to the UK could be as much as 87% and only as low as 40%, with production also projected to decrease by between 10% and 21% compared to the 2030 levels.

It said production would be negatively affected in all scenarios and the report comes to a similarly bleak conclusion regarding jobs: “Employment will be affected proportionately to production in the scenarios, ie, that at 10% reduction in production would lead to a 10% reduction in employment compared to the 2030 baseline.”

The main fear is centred on regulatory divergence, alongside the prospect of tariffs and customs costs which, in themselves would be hugely damaging. A UK outside the EU could change rules and procedures around food standards, common labelling and so on, and impose swinging customs costs and tariffs.

It is also hugely worrying for rural areas as 82% of jobs in processed foods are based outside Dublin.

Responding to the report, Minister for Business Enterprise and Innovation Heather Humphreys said the Government was “acutely aware that certain sectors are particularly exposed to Brexit”.

2 Beef and dairy exports

The “substantial” exports from Ireland to the UK of beef and dairy products could be decimated by Brexit, putting jobs at risk.

The report by Copenhagen Economics notes 50% of Ireland’s total beef exports are to the UK, along with 42% of total volume of Irish dairy exports.

Total exports from the beef sector could plunge by between 18% and 35% below 2030 non-Brexit baseline levels, with exports of beef to the UK potentially falling by as much as 53%.

Production “will also be negatively affected in all scenarios”, with a drop of 11% the most cheerful forecast.

The situation in dairy is arguably worse, with 65% of our cheddar and 54% of our butter heading to the UK. In addition, around 600m-700m litres of milk are imported from the North for processing here.

According to the report: “North-South milk trade may not be commercially viable if tariffs and border costs are imposed.”

It forecasts total exports falling 18% to 40% below non-Brexit 2030 levels, with exports to the UK falling by as much as 76% in a worst case scenario and production falling by between 8% and 18%.

In the best-case EEA scenario, the negative 18% impact on exports would be the result of tariffs/customs and regulatory divergence.

“Just like beef, the dairy industry is benefitting from common EU regulation,” it said. “Post-Brexit, there is a risk of divergence in the regulatory environment between the UK and the EU which will have a bearing on Ireland’s trade with the UK.”

That includes a loss of “preferential treatment” compared with non-EU producers such as New Zealand.

It is bad news for rural Ireland, with 82% of jobs in dairy and 82% employment and in beef, sheep and other cattle meat based outside the capital.

3 Pharma-chemicals

The report warns that a hard Brexit would hit exports from the Irish pharma-chemicals sectors by some 5%, more than the entirety of Irish beef exports.

The pharmaceutical and chemicals sector is the absolute largest export sector in Ireland, with the Central Statistics Office reporting that the industry accounts for 57% of Ireland’s goods exported in 2015.

The UK market represents 7% of the sector’s total exports.

The worst-case scenario would see exports to the UK drop by up to 42% but would be 7% down on a non-Brexit situation if the UK were to enter a European Economic Area arrangement on leaving the EU.

The authors predict the impacts in the pharma-chemicals sector would be “almost entirely driven by regulatory divergence and by increasing border costs”.

A difference in the regulations of how medicines are produced and sold would create the biggest costs to the Irish sector, largely because industry currently treats the UK and Ireland as the one market for pharmaceuticals.

As such, the report’s authors warn, the status quo would change with any regulatory divergence.

“Some pharmaceutical products are so-called dual-packs, that is, produced and packed jointly for the Irish and British market because of common language and common regulation, and hence for sale in Ireland and the UK with no adjustments,” the Copenhagen Economics report states.

“If changes to the regulation would affect this, it would also add costs and reduce trade and production in Ireland.”

4 Retail and wholesale

The wholesale, retail, restaurant, and accommodation sectors will face “substantial challenges” as a result of Brexit, the report predicts, while export of electrical machinery from Ireland could diminish by up to 9%.

Aside from a predicted decline in consumer demand, the report’s authors say retail chains that operate in both Ireland and the UK could face new costs in their supply chain and as a result of changing regulatory requirements in each jurisdiction.

It says the cost of importing goods from the UK, particularly processed foods, will rise, and that the sector will be hit by tariffs, border costs, and costs associated with meeting different regulations in the UK and Ireland.

One such regulatory divergence would be food labelling, with the UK and EU possibly making different requirements for what is displayed on food packaging.

The authors say the electrical machinery sector — such as computers, televisions, and mobile phones — exported a combined €15bn in 2015, just €1bn shy of the combined agri-food sector in the same period.

Of these exports, 17% went to the UK, while nearly a third (30%) of imports came from the UK.

The report estimates exports from this sector will fall by between 5% and 9% compared to a non-Brexit situation in 2030.

Production would fall by up to 10% and employment could take a hit by some 2% to 5%.

“The impact in all scenarios is very much driven by the risk of regulatory divergence, and to a smaller extent by border inspections,” states the report. “Tariffs are low on many products in the sector as a result of the WTO agreement on information technology.”

5 Financial services

The financial services sector in Ireland could benefit from Brexit, with output rising by 3% to 4% compared to if the UK had voted to remain in EU.

The report highlights how membership of the EU, or the European Economic Area, allows financial institutions to provide services in other EU states without the need to establish legally separate entities in each country.

This authorisation, called a financial services passport, is available for nine different types of banking product, such as lending, deposit-taking, and asset management.

These passports, however, are not available to non-EU or non-EEA companies, resulting in regulatory barriers for outsiders looking to operate in EU states.

The report estimates a 3%-4% benefit to Ireland should a hard Brexit result in a failure by the UK to negotiate access to the EU market.

A hard Brexit, it predicts, would give the Irish financial services sector a better access to talent and a possible further benefit of seeing firms relocate from the UK to Ireland in order to retain access to the EU market.

It must be noted that this prediction comes with a caveat.

“However, it should be emphasised that this result does not capture the possible long-term structural changes that might occur if a large part of the financial sector moves out of London to a continental location, or if large parts of the financial sector shifts away from Europe to other locations, for example, New York,” warns the

report.

“In these cases, the financial service sector in Ireland would be severely negatively impacted.”

6 Travel and tourism

Brexit will cause significant complications for air travel — including the Dublin-London route which is Europe’s busiest international route — unless an agreement is reached on how UK-owned airlines will operate in future.

As it stands airlines who wish to offer flights within the European Common Aviation Area (ECAA) must be majority EU-owned.

This means that a number of airlines that are majority UK-owned risk losing their rights to operate flights within the EU unless a deal is done that allows such companies to operate within the ECAA.

The report warns that further complications for these companies could arise if no deal is done and the airlines respond by attempting to restructure their ownership.

“If affected airlines changed their ownership structure to remain an EU carrier, they may lose access to the intra-UK market since the UK would be unlikely to allow EU carriers to operate intra-UK flights without reciprocity from the EU,” it warns.

The report’s authors suggest a potential solution would be a deal that would see the UK re-join the ECAA as a non-EU member, similar to Bosnia and Hercegovina.

“However, this would require unanimous support from the Member States which could be challenging due to potential political and technical issues,” it says.

The report also cautions that further complications could arise if the UK decides to govern its own airspace, therefore removing itself from integration with the rest of Europe. Tourism will also take a hit, it warns. More than 40% of inbound visitors to Ireland come from the UK. This will see a decline due to a general economic downturn post-Brexit and a subsequent sterling depreciation.