Irish companies to win as UK trade spat thaws
These are historic times not just for the UK and Irish economies but also for businesses across the globe.
The good news flow started early last week with the announcement that the US–Mexico-Canada Agreement, or USMCA, revised trade deal was finally approved by Democrats and Republicans.
This was followed by the dramatic landslide victory for Boris Johnson and his Conservative party in the UK elections, which resulted in an instant rise to the UK stocks and sterling.
Adding lustre to the positive news for global business, the US and China reached an agreement on “phase one” of a new trade deal.
The announcement came just in time to prevent a new tariff on billions worth of Chinese goods. That spurred new gains for US stock markets.
The lifting of the oppressive cloud created by Brexit, while giving the markets a lift for now, still leaves a lot to be done.
Irish businesses will feel the pain when the UK faces restricted access to the EU Single Market.
However, European Commission president Ursula von der Leyen, speaking after the two day EU summit, in keeping with the good mood music, said she wants the EU and UK to enter into an “unprecedented partnership” in which relations will be “as close as possible in full respect of our principles”.
Mr Johnson’s commanding majority should enable him to push through the withdrawal ratification by the end of January and enable full focus to be brought on a free trade agreement with the EU by the end of next year.
But the negotiations will have a number of implications for sterling and raises important questions for Irish exporters which will go unanswered for now.
Sterling is the primary gauge of international investor sentiment towards the economy, and the rise in the currency last week can be seen as an effective vote of confidence by investors who will welcome the elimination of Brexit uncertainty while expressing reliefthat the decidedly left-wing economic policies promoted by the Labour Party have been avoided.
Sterling gave up some of its gains but it is expected to remain stable in the short term, primarily due to decreasing political risks.
Yet, despite all the congratulations to Mr Johnson from EU heads of state, the upside potential may be limited as the forthcoming trade negotiations are likely to be anything but hassle-free. And sterling will be the weather vane.
Also, the UK will face new barriers in many of the third-country markets to which preferential access will be lost as a result of leaving the EU, even if it succeeded in negotiating a favourable trade arrangement with Europe.
There is also the risk that capital inflows would be disrupted, leading to a jarring contraction of the UK’s record-high current account deficit of 7% of GDP. Sterling could take a battering and may return to very volatile territory in the medium term.
There is good reason for Irish exporters to keep an eye on their UK sales — the US and China look a much better bet for sales expansion, particularly now that the first phase of a trade accord has been struck between China and the US, hopefully pointing to an ending of the long-running trade war.
CSO figures issues last week also make a compelling case for not keeping too many trade eggs in the UK basket. In the first nine months of this year, Irish exports of goods to the US increased by around 20% whereas exports to the UK contracted by 3%.
North America may offer a better performance under the USMCA trade deal.
Turning to the Chinese market, export sales from Ireland to the market ha sincreased by a stellar 75% in the nine months to September.
This rate of expansion is now more likely to continue with the trade war truce with the US, which would see Ireland’s exports to China reach €15bn next year, comfortably above the best forecast of exports to the UK.
