The Brexit squeeze on the Irish economy is only just starting

The implementation of the key economic phase of Brexit – the UK's departure from the single market and customs union at the start of this year – took second place in the headlines to the Covid-19 pandemic.

But the UK’s departure means far-reaching changes for the Irish economy. We are already seeing signs of how things may shake out and the really fundamental changes it means for many businesses, for consumers and for trade.

And while the initial panic from new customs procedures may be passed, more, much more is to come in the months ahead in terms of the real economic impact. The Brexit squeeze is only starting.

1. Panic over – but more key dates to come

Customs and trade experts from business advisers like PwC and BDO say that the initial panic in terms of companies learning to deal with new trade procedures is now largely over.

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"January and February were crazy," according to Carol Lynch BDO customs and international trade services partner, as companies came to terms with the new customs requirements and declarations and built the necessary additional time taken by customs and port delays into their supply chain planning.

Now, she says, most are getting familiar with the paperwork and are moving on to longer term planning and figuring how to to manage their trade most efficiently in the long term.

“The first few months were just about getting goods across borders and a lot of trouble shooting ,” said John O’Loughlin, global trade and customs partner at PwC. “From March onwards it has been a lot better.”

He agreed that companies were now starting to look to longer term solutions and underlined they needed to ensure they were applying the rules correctly in areas such as rules of origin. It was essential the companies now got to terms with this, he said, rather than facing a nasty surprise from a Revenue audit in a few years time.

The big changes so far have hit companies importing from Britain. Those exporting to Britain have benefited from some leeway in trade procedures, but these will end.

On October 1st, the UK will require additional certification and pre-notification from food exports entering its market – mimicking the regime which now applies to food and animal products imported from the UK.

And on January 1st next year it will require full SPS health checks at Border posts on food imports. On that date, the UK authorities will also remove the existing leeway which allows many companies selling into its market from the EU to delay the lodgement of customs declarations and customs payments. And so more D-days lie ahead.

2. Trade adjusts

Some trade patterns are already adjusting. The most visible is the movement of a lot more goods directly from Irish ports, principally Rosslare, to continental EU ports, skipping the use of the landbridge through the UK.

"The coming on stream of new direct ferry capacity so quickly has been remarkable", according to economist Professor Edgar Morgenroth from DCU and author of a numbers of studies on the impact of Brexit. This new capacity has been a vital support, according to Paul Kelly, head of Ibec's food and drink federation, though he says the landbridge still remain essential,

“There is a degree of friction there” in trade now, according to Kelly, and companies are seeking to minimise this. It can be particularly problematic in so-called “groupage” transport, where lorries carry goods from a number of companies.

“If five have all their procedures done correctly and one does not, then the whole delivery is still held up,” he says.

Businesses, having got to terms with the initial paperwork, are now looking at how to reorganise themselves in the longer term, according to O’Loughlin of PWC.

Reshaping supply chains is complex, he said. In some case goods would be imported in to the UK and a portion would then serve the Irish market. In some cases these could be restructured, but in others companies do no want the additional cost of warehousing in Ireland.

Some earlier problems have been ironed out, or at least minimised . Carol Lynch of BDO points out that the risk of tariffs applying on goods coming from the EU, through UK supply hubs to Ireland – which famously threatened the supply of Percy Pig sweets to Marks & Spencer in the Irish market – can be avoided, but only by the careful lodging of documents to avail of an existing allowance called returned duty relief .

In some cases, such as the import of goods from the Far East to the UK and on to Ireland, there is a risk of a double hit from tariffs and in some cases companies are restructuring supply chains to avoid this.

3. Tariffs hit

The agreement of a tariff-free trade deal between the EU and UK removed a major threat to Irish exporters – particularly the beef sector – and the risk of sweeping increases in the price of food imports.

However tariffs can still apply on goods coming from the UK under rules or origin regulations, where a significant portion of the input comes from a third country.

One risk area here is flour, with flour milled in the UK facing tariffs of up to 40 per cent due to the use in its manufacture of Canadian wheat. This is the flour used in staples such as the sliced pan and just replacing it with another flour is not straightforward.

As stockpiles run down, there is a risk of this feeding through to prices. Many products are being affected by a mixture of tariff issues and supply chain disruption due to both Brexit and Covid-19. Companies will also in some cases try to pass on the cost of all the new bureaucracy and delays they face – so-called non-tariff barriers – in higher prices.

4. Fishing – an exposed sector

While sectors like beef dodged a bullet from the late signing of the trade deal, the fisheries sector is exposed because of its particular nature.

No deal could have lead to significant fisheries tensions in relation to UK and EU waters. But the fisheries part of the Brexit deal sees a reduction of 25 per cent in the access of Irish boats to UK waters by 2025 , affecting around 70 per cent of Irish boats, with mackerel and prawn boats most exposed.

The sector also complains of existing access by EU boats to Irish waters, now likely to increase as EU boats are diverted from UK waters.

5. The wider economic impact

The trade data for early in the year show a fall in exports to the UK in some sectors, especially food – which recovered somewhat in March – and a sharper fall in imports.

However the longer-term is harder to judge as the initial figures are affected both by stockpiling ahead of the UK’s exit from the EU trade bloc and by the impact of Covid -19.

Excluding volatile pharma, exports to the UK fell by 9 per cent in the first quarter on an annual basis, but the falls were mainly in January and February.

There are signs of some stabilisation in March , but we have still to get a fix on longer-term trends – and what happens as the UK tightens its import controls .

Imports from the UK are showing a really significant fall, down 38 per cent in the first quarter.

The annual drop in March was 21 per cent – but these are really big figures and suggest a significant reorganisation of trade.

Brexit is sending clear signals to businesses – via changes in markets and costs. Morgenorth points to the impact of thing such as the ending of common acceptance of regulatory standards on a whole range of products.

Thousands of decisions will now tilt away from doing trade with the UK, or moving goods through the UK market. Morgenroth says that in the longer term the volume of trade between Ireland and the UK could fall by as much as a third.

6. The Border uncertainty

Interestingly there are signs of an increases in North-South trade, allowed by the open border and free trade guaranteed by the protocol.

In contrast, the DUP is leading to the charge against the protocol in the North, because of its impact on trade between Britain and Northern Ireland.

It is hard to know how this plays out, but it remains the case that the EU will insist that proper checks are imposed on goods entering the single market.

7.UK trade deals:

A final issue to watch are the new trade deals the UK will do and the impact on Irish exporters.

A deal with Australia, now in the final stage of negotiation, will give access to Australian beef exports which will compete with Irish exports.

A future deal with New Zealand could affect lamb and dairy exports. The UK and Ireland will remain key trade partners – but not on the scale they have been.