Recent UK trade and investment figures have shown Ireland is holding its place as a key export market and importer to the UK. Carol Lynch, Partner, BDO Customs and International Trade Services, breaks down the current state of play in Irish trade and asks is there anything we need to be concerned about.
As everyone will know there have been many difficulties with the global supply chain over 2022, with increased lead times in terms of delivery, increased container costs (now on the decrease), inflation and geo-political issues affecting security of supply.
This has led to the discussions around ‘friend-shoring’ or ‘ally-shoring’.
Mostly led by the US, this line of thought advises that in order to maintain access to critical raw material supplies, companies should restructure supply chains to ensure manufacturing is carried out in countries which are political allies and economically stable.
Equally, we can see an increase on restrictions being imposed on exports, such as on high-tech semi-conductors. This is done in an attempt to restrict the growth of the Chinese industry and domination of the consumer electronics industry and, again, to ensure security of supply in the future.
The European Chips Act aims to avoid future semi-conductor shortages and will mobilise more than €43 billion of public and private investment to ensure the EU can swiftly respond to any future supply chain disruptions.
Future of Trade
In this new world, it could be seen that trade will be increasingly focused on, as well as significantly easier, with close allies and neighbours. In this case, Ireland’s trade with the EU and UK are centre-stage, as well as trade with the US - this is the result of our close relationships from an FDI perspective.
Taking these geopolitical views and applying them to current trade analysis, how does this viewpoint play out, particularly in the context of the trade disruption caused by Brexit?
In many ways, Brexit was of most relevance to Ireland when trade negations began. In one fell swoop, the close trading ties that the two countries had in place for many hundreds of years were disrupted.
These trading links had been in place since before the European Union and Single Market even came into effect. Brexit put in place trade barriers between Ireland and the UK which go directly against the current political trade models and at the same time reversed an open trading model that came into effect in 1992.
In terms of trade between the UK and EU, the October 2022 ERSI trade report showed that Brexit decreased export trade from the UK to the EU by about 20% and import trade from the EU to the UK by about 16% since January 2021. Obviously, this is a significant downturn. However, fortunately we are not seeing the same percentage reductions in Ireland-UK trade.
Before we discuss issues facing the EU-UK trading partnership, and why Ireland seems to be avoiding the brunt of a declining trade relationship, it’s worth bearing a few things in mind.
Brexit impacted different member states within the EU in dramatically different ways. The ESRI report noted that the extent to which Brexit impacted individual EU member states depended, to a large extent, on the initial scale and composition of their trade with the UK, which was typically around the 4% mark. Pre-Brexit this trade took place freely and without trade barriers.
Post-Brexit, as was to be expected, saw an increase in paperwork, export/import requirements and trade barriers. This had a significant negative effect on free trade. It increased during 2022 when the UK imposed full customs controls on all EU imports (excluding Ireland).
Ireland has always been an outlier in terms of the level of trade with the UK, compared to other EU countries. In fact, the ESRI report found that 33% of Ireland’s imports came from the UK in 2015, with high volume coming from wholesale and retail sectors. Within this key sector, a key factor was the integrated wholesale and retail sectors, with the UK acting as a distribution hub for EU and global products which would be shipped first to the UK and then a portion of same being onward shipped to Ireland.
How has this changed over 2021 and 2022. Or has it?
While we can see a small (less than 1%) dip in exports to Britain in September 2022 versus September 2021, overall, in the 9 months of January to September 2021 versus January to September 2022, exports have increased by c.23%.
Imports have increased from €1.4bn to €2bn, when comparing September 2022 to September 2021, and to €17.5bn (from €10.5bn) when comparing January to September 2022 against January to September 2021. This significant increase in imports is primarily a result of an increase in the value (or cost) of mineral fuel and chemical imports.
To a large extent, the increase in trade is driven by the pharmaceutical industry, as well as trade in chemicals and related products. Trade in pharmaceutical, chemicals and related products are also a heavy influencer and dominate our trade statistics and exports to the EU and US. This shows us the impact of the pharmaceutical and FDI industry on Ireland’s trade statistics.
Outside of the chemical/pharmaceutical area, Ireland’s next highest exports are in food and animal exports to Britain, followed by machinery and transport equipment. These areas tend to be more dominated by Irish firms.
It is interesting to compare this to the recent 2022 report by the UK Department for International Trade, Trade & Investment. It found Ireland to be the UK’s sixth largest trading partner in the four quarters to Q2 2022, again showing the importance of our trade with the UK.
What does this show us?
Firstly, our inter-dependence both in terms of our US dominated FDI sector and our relationship with the UK, is critical to our continued economic growth and development. However secondly, and equally important, is the Irish exporters have adapted well to the challenges of Brexit and geopolitical challenges faced in 2021 and 2022. This resilience will continue to be tested over the next 12 months as politics continues to impact on trade.
The continued growth may, for example, face further challenges when all Customs requirements are fully implemented by the UK on Irish imports.
An additional concern is that the November AIB Manufacturing PMI report showed the first contraction in manufacturing since May 2020, with significant declines in new business and output. We can expect to see this reflected in the trade analysis over the next few months. It’s a trend that we will continue to keep an eye on.
Content adapted from Business Plus.