Staff Paper 2017 Brexit: A Sectoral Overview Aisling Kirby Department of Public Expenditure and Reform The author would like to thank colleagues from the Department of Public Expenditure and Reform and officials from other Departments for their useful comments and suggestions. This paper has been prepared by IGEES staff in the Department of Public Expenditure & Reform. The views presented in this paper do not represent the official views of the Department of Public Expenditure and Reform or the Minister for Public Expenditure and Reform. 1 Contents Key Messages ................................................................................................................................ 4 Section 1: Methodology..................................................................................................................... 8 1.1 Aim of Research ....................................................................................................................... 8 1.2 Data ......................................................................................................................................... 8 1.3 Existing Brexit-related Literature .............................................................................................. 8 1.4 Limitations ............................................................................................................................... 9 1.5 Structure of the Paper............................................................................................................ 10 Section 2: Introduction .................................................................................................................... 11 2.1 Background ............................................................................................................................ 11 2.2 Brexit Developments.............................................................................................................. 11 2.3 Potential Implications ............................................................................................................ 12 Section 3: Context ........................................................................................................................... 14 3.1 Introduction ........................................................................................................................... 14 3.2 Brexit through the Gravity Model for Trade ........................................................................... 14 3.3 Potential Producer and Consumer Implications ...................................................................... 16 3.4 Overarching Features of the UK Economy at Present ............................................................. 16 3.5 Overarching Features of the Irish Economy at Present ........................................................... 18 Section 4: Potential Trade Arrangements ......................................................................................... 21 4.1 Context .................................................................................................................................. 21 4.2 Trade Arrangements Explored in Some Existing Brexit Literature ........................................... 21 4.3 Potential Challenges for Sectors under a WTO Scenario ......................................................... 28 4.4 Non-tariff Barrier Costs .......................................................................................................... 32 Section 5: Investment Decisions, Employment Effects and Output Growth ...................................... 34 5.1 Background ............................................................................................................................ 34 5.2 Prolonged Investment Decisions ............................................................................................ 34 5.3 Delayed Hiring ....................................................................................................................... 36 5.4 Effect on Output .................................................................................................................... 38 Section 6: Exchange Rate Volatility .................................................................................................. 39 6.1 Brexit - Short Term Shocks ..................................................................................................... 39 6.2 Lessons from the Global Recession ........................................................................................ 39 6.3 Exchange Rate Volatility ......................................................................................................... 40 6.4 Characteristics of Exporting Irish SMEs ................................................................................... 41 Section 7: Existing Supports to Sectors ............................................................................................ 42 7.1 Introduction ........................................................................................................................... 42 2 7.2 Small to Medium Enterprises ................................................................................................. 42 7.3 Illustrative Sectoral Level Examples ........................................................................................ 43 7.4 The IDA .................................................................................................................................. 49 7.5 Select Summary of Existing Supports from a Government Perspective ................................... 50 7.6 Map of State Agency Activities ............................................................................................... 51 7.7 Brexit-specific Responses by State Agencies ........................................................................... 51 7.8 Recent Budgetary Measures (Budget 2017 and Budget 2018) .................................................... 53 Section 8: Trade .............................................................................................................................. 55 8.1 Introduction ........................................................................................................................... 55 8.2 Trade and the Irish Economy .................................................................................................. 55 8.3 Outlook.................................................................................................................................. 56 8.4: Trade Exposure to the UK Market ......................................................................................... 57 Section 9: Landbridge Issues ............................................................................................................ 61 9.1 Introduction ........................................................................................................................... 61 9.2 Existing Research ................................................................................................................... 62 9.3 Data Limitations ..................................................................................................................... 65 9.4 SME Landbridge Trade Exposure ............................................................................................ 65 Section 10: Regional Dimension ....................................................................................................... 67 10.1 Introduction ......................................................................................................................... 67 10.2 Foreign v Domestic Implications ........................................................................................... 67 10.3 Government Commitments.................................................................................................. 68 10.4 Distribution of Employment outside Urban Areas ................................................................ 68 Section 11: Identification & Illustration of Exposed Sectors.............................................................. 70 11.1 Introduction ......................................................................................................................... 70 11.2 Irish Indigenous SMEs .......................................................................................................... 70 11.3 SME Credit Conditions ......................................................................................................... 70 11.4 Broad Sectoral Outlook for SMEs ......................................................................................... 72 11.5 Vulnerability ........................................................................................................................ 73 11.6 Manufacturing Sector Overall .................................................................................................. 78 Section 12: Conclusion..................................................................................................................... 80 12.1 Overall ................................................................................................................................. 80 12.2 Concluding Remarks............................................................................................................. 82 12.3 Key Dates ............................................................................................................................