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Impact of Brexit on Ireland and the EU

Question:

Discuss about the Selection Of An Export Market By Ireland.

Ireland is one of the 28 members of the European Union (EU). EU is an economic and political union which consists of 28 members located primarily in Europe. It has united all the member states through the creation of a single internal market. EU has developed a standardized system of laws common to all the members hence allowing them to trade freely. Policies developed by EU allows the involved countries free movement of capital, people, goods, and services within the internal market. The exit of the United Kingdom (UK) form the EU, had a significant economic implication to the Ireland as well as other EU members at large (Doherty et al., p. 4). Withdraw of UK from EU is commonly known as Brexit. Brexit did not only have an impact on other member countries but also in UK’s economic growth. For instance, it was estimated that the UK’s GDP would decrease yearly, between 1.3% to 5.5% in the short run. In the long run, it would lower the GDP between 1.2%-7.5%. Once the UK withdrew, the impact was felt at once globally. The pound for instance, at one point depreciated by more than 10%. This was the lowest point that the pound had reached for over 30 years (Kierzenkowski et al., p. 9). Brexit caused various uncertainties in the global market, some which could have a lasting long-term effect. This paper, therefore, discusses factors and processes that an Irish based company should consider and implement in the selection of an export market.

Ireland was affected largely by the UK withdraw from the EU as compared to other members. These two countries had a close trade relationship for a long time, and, therefore, UK exist triggered a lot of structural changes which left Ireland’s economy so vulnerable. As such, Ireland had to reorganize itself and strategize carefully on how to choose an export market.

For successful trade relationship between countries, it is important to understand taxation rates induced on goods and services. The subject of tax competition is the most significant policy issues that surround public finance matters in various unions in the world. Different nations have been known to compete for mobile investment, and this leads to a competitive race towards the bottom in taxes (Davies and Voget, p. 5). The result of such unhealthy competition makes countries to under-provide public goods and also distort firm decisions. While the European Union provides free trade barriers for it members, they have resulted instead in the intensification of tax competition. With increased globalization, the ability of countries to sustain tax revenues is diminishing with time. When countries join EU, they are known to reduce their tax rates. However, Crumley (2004:3) believed that it’s not prudent for countries to cut down their tax rates while at the same time asking for aid from other countries. EU members show high tax competition as compared to non-members. When one reduces its tax rate, other respond more competitively. It is crucial, therefore, for Ireland to identify a country that has constant tax rates to avoid inconsistent fluctuations which can affect their trade relationship. Ireland enjoyed a good relationship with the UK due to their proximity. According to the weighting by distance scheme, proximate countries’ taxes usually have greater importance as compared to distant ones. Weighting by GDP on the other side indicates that larder countries taxes matter more as compared to smaller countries. It is also essential for Ireland to consider a vast nation since they are known to be profitable due to numerous consumers. By the fact that the consumers can be served locally, it helps them to avoid trade costs. Additionally, countries which can access other markets easily should be the best option due to their export platform capabilities.

Tax Rates and Competition

Although EU has ensured free trade among its members, there are always issues of costs and exchange rates. Exchange rate volatility and uncertainty usually have a negative impact on trade between countries as well as on local and international trade. Well choosing an export market, it is crucial to consider the exchange rate of the country you want to trade with, for better results. Flexible exchange rates have received enormous criticism due to their volatility which leads to adverse effects on investment as well as on trade. Failure of anticipation of exchange rate movements leads to instability of exchange rate increase which in turn increases the occurrence of risks. When such issues arise, the involved parties reduce their import and export activities and therefore, the market is lost. The countries can as well turn to domestic markets where they reallocate their production. EU however, has tried to curb the issue of volatility by creating groups such as the European Monetary Union (EMU) and the European Monetary System (EMS). They aim at creating a system where there are no fluctuations in exchange rate or misalignment of currencies within the countries of the union. Unfortunately, they have not been able to curb the volatility of the exchange rate (Dell'Ariccia, p. 323) and that’s why it’s crucial to put into consideration such factors while choosing an export market. The EU has tried to implement the use of a partial monetary union, but the solution was not forthcoming. Their idea was to improve trade among the members and divert from the non-members. However, the results were not significant and therefore, exchange rate volatility plays a crucial role in determining the outcome of the trade between countries.

After UK withdraw from EU, Ireland received a great shock. UK is the 5th largest economy in the world, and it was the 2nd largest in the European Union. It had exports and imports to and from the EU amounting to €300 billion and €400 billion respectively in the year 2015. The UK has a strong inter-linkage with the European countries as well as the broader world economy. This what makes the UK be the best export market to choose. However, since UK left the EU, Ireland based companies now have to look for a country with strong ties economically to create a lasting relationship regarding trade and marketing. Ireland enjoyed a good economic relationship with the UK due to the sharing of the land border. Movement between these two countries was smooth with no trade barriers.

Exchange Rates

EU has developed policies that ensure free trade among the EU members. Therefore, trade barriers and tariff barriers have been reduced. However, if a country what to trade with the non-members, then they will face obstacles. Ireland has various trading partners, but the UK remained to be the leading trade partner. They share a land border and therefore, there was a free movement of people amongst the countries. This boosted trade and investment as well as increasing job opportunities and a market for the states. Now that the UK has decided to exit the EU, then Ireland based companies need to focus on how to grasp another export market with lesser tariff and trade barriers or even without (Egan and Guimarães, P. 299). EU offers its members an advantage of free trade agreements with various third parties. If you not a member, then some tariffs govern the trade, such as the most-favored-nation (MFN) tariff. However, it is vital for Ireland companies to ensure their next trade partner does not impose any unnecessary trade tariffs on them.

How government spends can determine the growth or decline of an economy. Fiscal policy involves government expenditure and how it influences the economy. The monetary system, therefore, can affect the exchange rates in various ways through interest rate changes, income changes, and price changes. When a country takes an expansionary fiscal approach, it increases its spending through the selling of bonds thereby raising interest rates. Finding an export market which has high-interest rates would be advantageous to an Irish based company since there will be good returns for their money. On the contrary, a contractionary fiscal policy will lower the interest rates hence pushing down the exchange rates of a country. Although the EU sets standard monetary and fiscal policies for the members, budgetary decisions vary between members (Corsetti et al., p. 11).

Other factors that should be put into consideration include; political stability, geographic characteristics, and cultural factors. Political stability will influence the kind of relationship that the trade partners will have as well as the geographical and cultural factors. It’s therefore, crucial to choose an export market that is stable politically and shares same artistic perceptive.

Since the exit of UK from EU, the success and viability of Ireland companies now depend on how they choose and secure a new export market. It is crucial, therefore, for Irish-based firms to undertake an identification and evaluation process in the determination of a good export market. The process of foreign export identification, thus, involves five steps. That is; export plan creation, research and selection of the target market, marketing of the products and services, target market entry, and getting your products to the market (Leonidou et al., p. 59).

Trade Barriers

The companies should first identify the target market, their goals, and objectives. Creation of an export plan is very crucial in securing an export market as it acts as a map guiding one to the destination. It indicates the course and the purpose of the operation. The export plan is also required by potential partners as well as by the investors.

In determining the best export market, the Irish companies need to gather information about the target market they have identified hence make a sound decision. Well-executed market research gives the companies an accurate picture concerning the political, cultural, economic, fiscal, and monetary policies of the target export market. Market research helps one understand how the target market operates hence save time and resources as well as avoiding the occurrence of possible risks (Kumar et al., p. 35). During this process also, companies should perform preliminary screening, in-depth screening and perform the final selection.

Once they have performed extensive research, they can now market their goods and services and establish a lasting relationship. The companies now need to make their products known to the target market and determine the manner in which the trade will be carried out. Once you have identified your target export market and familiarized with the environment of the market, then the company is ready to enter the market and start the trading process (Hart et al., p.11). It is essential, however, to consider markets that will have a good investment return for your goods and services.

Conclusion

Ireland for quite some time has enjoyed the advantage of being in the EU. The EU has developed policies that creates a single internal market for it members. As such, Ireland and UK because they share a common land border, for a long time they have been trading partners. It is estimated that Irish exports more than 16% of its goods and services to the UK and therefore remains its biggest external market. Now that UK has withdrawn from the EU, Irish based companies have to search for another export market that will provide an excellent lasting trade relationship as they did with UK. In choosing an external export market, however, the companies have to put various factors into consideration to be able to secure a stable market. Such factors include; taxation rates, costs and exchange rates, monetary and fiscal policies, tariff barriers, and social-economic factors. Although the EU is concerned in removing all the barriers in member states, some policies within the individual states vary hence need for critical analyzation before choosing the target market. Selecting a country with strong market inter-linkages offers one an opportunity to establish a long-term relationship. It is also important for Irish based companies to undertake a critical evaluation process before settling on an export market. Extensive research on the target market is crucial in gathering all the necessary information hence make an informed decision.

References

Corsetti, G., Dedola, L., Jarocinski, M., Ma?kowiak, B. and Schmidt, S., 2016. Macroeconomic stabilization, monetary-fiscal interactions, and Europe's monetary union. pp.1-26.

Crumley, B., 2004. “President Sarkozy?” Time, October 3, 2004.

Davies, R.B. and Voget, J., 2008. Tax competition in an expanding European Union. pp.1-38.

Dell'Ariccia, G., 1999. Exchange rate fluctuations and trade flows: Evidence from the European Union. IMF Staff papers, 46(3), pp.315-334.

Doherty, B., Temple Lang, J., McCrudden, C., McGowan, L., Phinnemore, D. and Schiek, D., 2017. Northern Ireland and ‘Brexit’: The European Economic Area Option. pp.1-7.

Egan, M. and Guimarães, M.H., 2017. The Single Market: Trade Barriers and Trade Remedies. JCMS: Journal of Common Market Studies, 55(2), pp.294-311.

Hart, S.J., Webb, J.R. and Jones, M.V., 1994. Export marketing research and the effect of export experience in industrial SMEs. International Marketing Review, 11(6), pp.4-22.

Kierzenkowski, R., Pain, N., Rusticelli, E. and Zwart, S., 2016. The Economic Consequences of Brexit. pp.1-21.

Kumar, V., Stam, A. and Joachimsthaler, E.A., 1994. An interactive multicriteria approach to identifying potential foreign markets. Journal of International Marketing, pp.29-52.

Leonidou, L.C., Katsikeas, C.S. and Samiee, S., 2002. Marketing strategy determinants of export performance: a meta-analysis. Journal of Business research, 55(1), pp.51-67.

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