(Bloomberg View) -- No European Union country has more to lose from the U.K.'s departure from the European Union than the U.K., but Ireland comes a close second. Brexit campaigners reckoned that would be reason enough for the U.K.'s small, trade-dependent neighbor to urge its EU partners to grease the wheels for a new trade agreement that would keep barriers to a minimum. Only they miscalculated. Now, especially with reports that an agreement has been reached over Britain's divorce bill, Ireland has become the biggest obstacle to the start of trade negotiations.
The U.K. is the second-largest destination for Irish goods after the U.S. and the biggest source of Irish imports. The Dublin-London air route is Europe's most traveled. That explains why Ireland is so busy preparing for Brexit by encouraging companies to look for business outside the U.K. market (more on that shortly).
Pain from any kind of Brexit is unavoidable for Ireland, but a U.K. departure without a new trade deal in place — a growing possibility if there are further delays to the start of trade negotiations — would be particularly punishing. And yet as crucial as trade is to Ireland, there's a Brexit-related issue that is even dearer to Irish hearts — the status of the 310-mile long border between Ireland and Northern Ireland.
QuickTake QuickTake Ireland's Border Issue
Currently, you'd hardly know it's there. There are no border guards or passport checks, as there were during the sectarian conflict in Northern Ireland that lasted from the 1960s to the 1990s. Some 30,000 people cross this invisible line daily just for work; many more for other reasons.
That flow is important to trade and relations between the two parts of Ireland; 43 percent of Northern Irish exports go to the EU. But it's also essential to the 1998 Good Friday agreement (also known as the Belfast Agreement), which ended over a quarter-century of violence.
The driving assumption of that agreement is that both parts of Ireland would remain members of the EU, so that no border would be necessary. The EU takes its anchoring role in that agreement seriously. For Ireland, it's a vital national interest. There are worries that a return to a physical border between the two entities would jeopardize the peace.
Since any of the 27 EU countries could potentially veto a new EU-U.K. deal, little Ireland has a big voice. Irish Foreign Minister Simon Coveney vowed recently that his country would "never sell out" its commitment to keep an open border with Northern Ireland. His government wants a written guarantee that there will be no physical border. The EU agrees with Ireland and wants Britain to figure out how to police the new EU-U.K. border.
One solution would be to let Northern Ireland remain in the customs union (which eliminates tariffs between members and sets a common external tariff) even as the rest of the U.K. renegotiates its trade relationship with the EU. Another, backed by Ireland, would be to put the border at the Irish Sea, which means checks would be conducted at seaports and airports. Both would be offensive to many British Conservatives, who want the integrity of the British union left intact, and wholly unacceptable to the Democratic Unionist Party, the pro-U.K. Northern Irish political party that is propping up Theresa May's minority government and fears that would be one step toward Irish reunification.
Britain has instead proposed a broad exemption for smaller businesses and wants to deploy technical solutions such as cameras, drones and a system for pre-clearing transported goods. But the details are vague and the EU is skeptical. Some observers argue that smugglers would have a field day and costs would be too high. Irish Prime Minister Leo Varadkhar, who is fighting his own political battle at home, is not likely to compromise, and U.K. Prime Minister Theresa May is running out of time to come up with something better before the next EU summit on Dec. 14-15, where EU heads of state will determine whether trade negotiations can begin. She meets European Commission President Jean-Claude Juncker on Monday and won't want to show up empty-handed.
Ireland is preparing for the worst. Enterprise Ireland, the government-owned agency that is responsible for promoting Irish exports, has been bringing delegations of exporters to North America and elsewhere to look for new opportunities, and is providing advice on finding new markets. One Enterprise Ireland client -- Ken Doyle, CEO of Luzern, an e-commerce company he founded in 2004 -- told me he plans to invest around $6 million over the next three years to find U.S. customers to replace those he expects to lose in the U.K. With around 60 employees and $35 million in revenue, he says his company can't afford to wait and see what Brexit deal emerges:
Up until two years ago, 65 percent of our revenue came from the U.K. Since Brexit, things have become very uncertain. From our own strategy perspective, we realize that as a small company we can't predict the outcome or whether this is going to be hard or soft; we have to make a decision. The U.S. seems a better market for us.
This market diversification strategy predates Brexit, but there's now added urgency. Anne Lanigan, who runs Enterprise Ireland's Brexit team, says that 65 percent of EI's clients that are currently not exporting to Europe plan to start exporting to EU markets in the next 12 months. North America has also gained in appeal. In 2016, exports there increased by 19 percent, compared to 2 percent to the U.K.
That's not nearly enough to blunt the economic impact of the separation. Nearly 40 percent of agriculture, forestry and fishing products are destined for British customers. Many small firms, exporting mainly to the U.K., are more labor intensive, which amplifies the effect on the economy if they struggle. And they are more likely to be in the less developed parts of Ireland.
"For the small guys, diverting to other markets is hard," said economist Edgar Morgenroth, who is part of the Brexit team at Ireland's Economic and Social Research Institute. Brexit could widen inequality in Ireland and leave some rural communities devastated.
Morgenroth was a coauthor of a study before the Brexit referendum that predicted a 3.5 percent reduction in Irish gross domestic product because of Brexit. Even if trade barriers are lowered for goods, it will be hard to achieve the same for services, he added; over 17 percent of Irish services exports are to the U.K., ranging from insurance and financial services to a range of e-commerce resources.
Ireland knows that a small economy in the shadow of a big one is in for a rough time when trade flows are disrupted. And yet, Ireland has learned from the recent past.
From the Northern Ireland peace process comes a deep connection with the EU as an anchor and partner. From the devastation of the 2008 financial crisis and the bitter austerity and change that followed, Ireland learned the importance of diversifying its economy and anticipating shocks.
There's an Irish blessing that goes, "If God sends you down a stony path, may he give you strong shoes." Forget stony paths; the U.K.'s decision to leave the EU has put giant boulders in the way of its small neighbor. Ireland is lacing up the strongest footwear it can find.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Therese Raphael writes editorials on European politics and economics for Bloomberg View. She was editorial page editor of the Wall Street Journal Europe.
To contact the editor responsible for this story: Jonathan Landman at jlandman4@bloomberg.net.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.
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