Brexit and Ireland’s digital sector

Given Ireland’s close economic links with the UK, it is widely acknowledged that two-way trade might be vulnerable to significant disruption after the UK leaves the EU in March 2019. Frontier recently published a report for Technology Ireland that explores Brexit’s potential impact on Ireland’s digital sector.

Ireland’s digitally intensive sector, in particular, is intrinsically linked to the global market and is heavily dependent on trade. For example, Ireland exported over €57bn worth of IT services in 2015. No wonder, then, that post-Brexit trading arrangements with the UK are set to have wide-ranging consequences for the sector.

The digital sector includes producers, such as makers of hardware and software, as well as users, including financial, media and consulting firms. The sector makes up 13 per cent of Ireland’s GDP and has been growing at 12 per cent a year since 2013. Its output, measured by gross valued added (GVA), is estimated to be worth more than €30bn in 2017 and is projected to rise to €44bn by 2020. It also pays well. Wages in the ICT industry are 50 per cent higher on average than in the economy as a whole.

Our work identified five key Brexit-related areas for the sector. They represent both opportunities and risks.

  1. Market Access
    Opportunity: Firms relocate activities to Ireland to minimise the effects of non-tariff measures and regulatory compliance costs.
    Risk:  Customs delays and impositions could increase costs or threaten sales.  For services, the main risk is the imposition of non-tariff barriers.
  1. Regulation
    Risk: Fragmentation may occur unless EU regulation is regularly transposed into UK law. This may limit market access or increase business costs associated with relying on UK suppliers as part of the supply chain.  There is also the risk that Ireland loses a strategic partner in shaping the future direction of EU digital regulation.
  1. Data
    Opportunity: Should post-Brexit data flows between the EU and the UK not be resolved, there is the potential for investment to be diverted to Ireland as digital companies look to ensure ease of access with the EU.
    Risk:  The UK may need to negotiate access to the General Data Protection Regulation (GDPR) or equivalence.  This may affect Irish tech firms given close linkages with the UK.  A hard Brexit would also provide weak or no protection against localisation provisions unless a specific agreement was put in place.
  1. R&D
    Opportunity:  As some R&D activities are substitutable between the UK and Ireland, digitally intensive sectors may benefit from increased R&D in Ireland post-Brexit.
    Risk:  Ireland has close R&D links with the UK.  A large proportion of EU-funded R&D projects with Irish participants have UK partners.  A reduction in funding to the UK, and diversion to other EU member states, could affect Irish R&D and therefore the attractiveness of Ireland to digital sector firms.
  1. Investment
    Risk:  If it does not remain in the single market after Brexit, the UK may be less constrained by EU state-aid rules.  World Trade Organization subsidy rules may allow more leeway to the UK in, say, granting regional development subsidies or broad-based (i.e., non-firm-specific) subsidies.

Viewed together, the potential rewards are likely to be outweighed by the potential risks – if those risks are realised. Perhaps not surprisingly in light of its success, the digital sector’s preference is for post-Brexit trading arrangements with the UK that hew as closely as possible to current rules. We also find that preserving the status quo on data access and privacy, market access for services, R&D collaboration and the application of state aid rules are of particular importance for the sector.

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