#Brexit and the potential losses to the UK’s (and Ireland’s) ‘Comparative Advantage’

Dr. Sylvia de Mars, Newcastle Law School and Dr. Aoife O’Donoghue, Durham Law School argue that Brexit would change the basis on which the UK trades regionally and globally and that it would also impact negatively on how Ireland would position itself.

One of the primary reasons cited in support of a Brexit is that it would enable the UK to conclude its own trade agreements, and consequently, to trade ‘more freely’ than it can currently do.

At present, its current trade agreements are negotiated by the EU as a whole, and Eurosceptics believe this process to be intolerably slow and contrary to UK interests.

They believe, in other words, that trade is absolutely necessary – but that the UK is better off pursuing free trade alone.

A key theory underpinning global desires for trade that is as ‘free’ as possible is 18th century political economist David Ricardo’s concept of ‘comparative advantage’.

It suggests that every country should focus on producing/providing what they are best at producing, and trade that product or service for other products or services.

Even where a country is not ‘the absolute best’ at anything, comparative advantage says that countries should specialise in those industries where they have a clear chance at outperforming other countries.

Comparative advantage is not an unchallenged theory—but it is the basis for all global and regional customs and free trade areas.

At present, Ireland and Northern Ireland have slightly differing comparative advantages.

Northern Ireland, as part of the UK, is within a very large market and has ease of access to the City of London, UK government support, and direct access to EU customers and suppliers.

Ireland, on the other hand, currently has a comparatively low corporate tax rate, a concentration of multinational pharma-chem companies and technology firms, and, again, direct access to the EU.

Both operate as English-language entry points to the EU for international firms.

Brexit would change the basis on which the UK, and necessarily Northern Ireland, trades regionally and globally. It would also impact on how Ireland would position itself.

First, Ireland would become the sole English-language entry point (besides Malta) for international firms seeking to do business in the EU. This would undoubtedly represent an advantage as English is one of the world’s main business languages.

Second, on setting up in Ireland or importing/exporting through Ireland, international businesses would only have to comply with a single set of regulations to access all other EU states.

A business setting up in Northern Ireland, on the other hand, would guarantee its access to the rest of the UK under a single set of rules – but not necessarily the EU.

How easy it would be to access the EU market from a post-Brexit UK would be entirely reliant on the trade model chosen by the EU and the UK. This could be based upon the World Trade Organisation, upon the Norwegian or Swiss model, or some third option (like the EU-Canada trade agreement).

However, agreeing to such a model would take time, and the interim uncertainty may make attracting both foreign and domestic investment difficult. Ireland would not face such uncertainty, amplifying the different positions it and Northern Ireland are in.

Take, for example, the support that the agricultural industry now receives. Farmers in Ireland would continue to have unrestricted access to the EU market as well as continuing to receive substantial subsidies.

While, for now, the UK Government has promised to continue agricultural support in Northern Ireland in the event of Brexit, there is no guarantee that this support would continue in the longer run.

But perhaps more seriously, Northern Ireland’s agricultural industry would post-Brexit have to compete with the highly protected industry in Ireland and the rest of Europe.

It would be in the same trade position as countries such as Australia, New Zealand and agriculture-dominated developing countries such as Brazil, Argentina and Kenya.

At the World Trade Organisation non-EU countries have, for many years, been arguing for reduction in agricultural support within Europe and the US, but with very little success.

Given that talks at the WTO are at a standstill (in no small part because of a lack of movement on agriculture) it is unlikely that WTO membership will provide the UK with a more ‘global’ position in agriculture or other industries.

In short, following Brexit, the UK would in theory be free to attempt to establish trade agreements with any country at all. But in practice this is likely to prove difficult.

For a decade, the World Trade Organisation has been at a standstill, and the current trend is toward mega-regional arrangements such as the EU-US TTIP trade agreement, not bi-lateral arrangements.

Indeed, the US has clearly stated that it is not interested in a bi-lateral deal, a position reinforced by President Obama visit where he clearly stated he wished to continue dealing with a UK that is part of the EU.

For all its faults, comparative advantage remains the mainstay of global trade. For Northern Ireland in particular, industry might stand to lose more than it stands to gain from EU independence.

The actual trade ‘winners’ of a Brexit would in all likelihood be Ireland, whose comparative advantages solidify.

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