On The Border At The Brexit Frontline

01 Aug 2017 | 03.59 pm

On The Border At The Brexit Frontline

How Border businesses view the Brexit threat

01 Aug 2017 | 03.59 pm

Interviews with businesses along the border for the Frontline Project highlights the uncertainty and frustration over the lack of clear information on what Brexit will mean for the border between Ireland and Northern Ireland, writes John Kinsella

 

Nothing short of a political miracle can now prevent the drawing of the EU’s external border from Muff on Lough Foyle to Narrowwater on Carlingford Lough. That’s the view of Fearghal McKinney, who along with Seamus Murphy produces the Brexit Border Blog. The project brings to the fore the challenges being faced by businesses that now find themselves at the coalface as a result of Brexit. Their weekly reporting also highlights the crucial need for more and better information from government and its agencies.

“There is hardly an enterprise on the island of Ireland that will not, sooner or later, directly or remotely, feel the impact of this new partitioning – and it will be overwhelmingly negative,” says McKinney. “Frontline communities within 20-30km of the existing border are already feeling the draught but that is only the immediate currency effect.

“Think of customs duties to be paid at the border on pretty much everything that the north sends south – 36% on milk, 20% on other animal products – and retaliatory tariffs in the other direction. This is what is coming. No doubt London and Dublin can get together to protect the Common Travel Area: that is in their gift. But we have seen no serious study which takes the view that tariffs can be avoided.”

With assistance from the British Irish Chamber of Commerce and Chambers Ireland, McKinney and Murphy recently canvassed the views of 35 businesses and organisations that operate along the border. “These are the people in the frontline who have no choice but to make important decisions right now based on what they are very well aware is utterly inadequate information,” says Murphy.

This ‘Frontline Project’ found that most business responses only began to take shape when sterling dipped below 85p last October, prompting some firms to put expansion plans on hold and/or suspend forward planning. Some businesses focused on ‘natural hedging’ by seeking to increase offsetting purchases and services in sterling, and in January there was an abrupt and radical shift in focus from currency to tariffs and customs.

According to the Frontline research, manufacturing companies have some awareness but almost no knowledge of tariffs. Some felt the double whammy of currency loss and even minimal tariff levels would be enough to knock them out. Tariff discussions brought up the difficulties of diversifying into other EU markets, including potential problems with shipping through the UK and congestion in Dublin Port.

“There is clear evidence of manufacturers considering setting up operations within the UK and some service companies such as transport are following suit,” says McKinney. “Companies say they need sector-specific and even product-specific information on tariffs, and there is a concern in sectors from food to pharmaceuticals that the UK may compete by adopting lower regulatory standards.”

The general advice of state support bodies to businesses affected by Brexit revolves around addressing the competitive factors which are under their control: cost base, best practice, diversification and innovation. However, action in these areas is essentially long-term, while the loss of customers to northern competitors is happening right now.

According to McKinney: “A telling point made more or less across the board is that the pull of lower sterling prices interacts with other competitive disadvantages, because businesses do not control all the factors determining their cost base.

“Many point to the different minimum wage levels north and south, with some relating it to differences in unemployment benefit. However, that is regarded as a sort of base line of difference, upon which all sorts of other competitive disadvantages are piled, from levels of duty, VAT and other taxes to the cost of legal and financial services.”

It emerged from the Frontline interviews that there is a great deal of confusion around the terms ‘soft border’ and ‘hard border’. There is little awareness of the Common Travel Area guaranteeing free movement of people and there is confusion regarding the differences for the movement of people and the transport of goods.

In McKinney’s view: “Even if people can move freely, will they want to do so if there are queues of lorries at customs checks? The broad issue of ‘border nuisance’ is of very deep concern to many, but particularly to the hospitality sector. All are agreed that there are vastly more people crossing the border to work than there were when we last had customs checks. The border nuisance issue surpasses even currency movements in terms of community impact in some places, most notably Clones.”

McKinney adds that among border firms there is annoyance that there is no systematic, official attempt to provide the best level of information available to the businesses that simply have to make fast decisions. “More needs to be done for those who are trying to plan and prepare their business for Brexit. Business people simply do not know what their competitive situation is going to be in a few weeks, months or years,” he says.

 

Tales From The Frontline

PADDY MALONE, DUNDALK CHAMBER OF COMMERCE

“One of my staff lives near Castleblaney and she travels home by the Concession Road (the main Dundalk-Castleblaney Road, which passes through Co. Armagh at Cullaville). She can time her journey now for picking up children but what if we get passport controls? She might be checked twice.

“Then there’s the whole issue of transportation and customs hold-ups. We can all remember the chaos that used to be on the Newry Road as the lorries lined up for customs clearance. People will just stop commuting or crossing the border for any reason and that will do us all long-term harm.

“For smaller businesses, investment in both Dundalk and Newry has been stifled by volatility and you can see the effects on both main streets. Suppose you are developing a cross-border business or one which depends on cross-border footfall. You work out your business plan based on prevailing exchange rates and go in to see your bank about a five-year loan arrangement. The loan managers won’t have reliable five-year rate projections but they can see the volatility of the last five years. They would prefer to place their funds elsewhere.”

 

THOMAS MCEVOY, LOUTH LOCAL ENTERPRISE OFFICE

“While a recent survey indicates that 97% of businesses have no Brexit plan in place, the next two years will see that number change as businesses start to prepare. In the absence of other indicators, it is advisable for firms to take prevailing World Trade Organisation (WTO) tariffs as a worst-case scenario, and at least crunch those numbers to see if they can make it work.”

 

TONY MORGAN, LIPTON’S DISCOUNT STORE, CLONES

“Currently, approximately 50% of our goods are imported from the UK, and we have spent the last 25 years building credit and relationships with about 15 UK suppliers. It would make sense to purchase our goods through the other member states but it just doesn’t work for us. I think it is to do with the closeness of our cultures in Ireland and England, and the special understanding that has developed.

“Another factor is that since the recession it is more difficult to open new lines of credit with new suppliers. But if we have to look to other member states to fill the void post-Brexit in order to remain competitive, it will have to be done. I most definitely am not looking forward to that challenge.”

 

BARRY SMITH, ABCON, CAVAN

Abcon makes industrial abrasives and industrial rubber hose for use in the oil and gas, mining, chemicals and food sectors. About 55% of abrasives go to export, 25% of them to the UK including Northern Ireland.

“Revenues have been hit hard by the currency movements; the dip is up to 16%. We have some natural hedging with offset purchasing in sterling, but we are not large enough to have a full treasury department focused on currency management. The business cycle is five to seven months and the exchange rate could go anywhere in that time. If we build in a safety margin, will we get the job?

“Looking into the future, tariffs in our niche are likely to be 6% to 12%. We know that because we already buy natural rubber outside the EU. That combination of currency squeeze at both the sales and purchasing end and tariffs on top could be really challenging as we look into the future.

“Since the mid-1980s, Ireland doesn’t have a functioning export credit scheme. Commercial credit insurance for non-EU developing countries is very expensive and probably beyond the reach of smaller potential exporters. Other countries either underwrite or provide key supports in this area, which greatly assists export business development. Our government needs to look at this again and put us on a level playing field in this area.”

“There is a whole range of factors constraining general competitiveness in this country which can only be tackled at the macro level. There is a lack of joined-up thinking when it comes to tackling the things that limit our general competitiveness. For example, Abcon can do nothing to control the cost of insurance. We haven’t tackled the vested interests in legal and other professional services and we haven’t addressed the inefficiencies in our public services such as planning.

“These are not abstract issues for us; they are affecting us directly because we have got to pay more – often a lot more – for all these things than our competitors in the UK. Now is the time to fix them. We need to be very clear about this. The UK is the natural market for lots of Irish companies operating on or about our scale. Whilst our ongoing strategy is to sell into a wide range of export markets, we can’t just get past the fact that the UK is a huge market.

“Export market diversification is a medium to long-term process and here we are facing into what will certainly be years of uncertainty. We have got to make a call very soon and for a service-based manufacturer like us, bypassing the UK is simply not an option. We must be open to the idea of manufacturing inside the UK.”

Barry Smith of Abcon 

 

JOHN FOY, SUPERVALU, COOTEHILL

“I sat down with my staff here and showed them the figures – the average all-in hourly cost of an employee when all unavoidable employer costs are added in is above €17. I am quite sure the equivalent cost for Sainsbury’s in Enniskillen is under £10. The businesses along the border have been living with currency swings and roundabouts for decades, but this time it’s another kind of problem.

“The differential that is killing us is not the currency; it’s the huge gap in the cost of overheads. I fully expect that the message that will come down from government is that we have to tighten our belts and reduce costs, but all costs are not under our control. There has got to be some sort of national conversation on coping with Brexit by looking at the overheads which are not under the control of the individual business.”

 

PAUL QUINN, MASTEK, COOTEHILL

“We started out in 1999 making masts for CombiLift and then we diversified into ground-handling equipment for dairy farms. If we are looking at a permanent shift in exchange rates, then hard decisions will have to be made. The British market is crucial for us and that won’t change. We have got to consider registering in the UK with a small manufacturing unit.”

 

MICHAEL TUNNEY, DONEGAL LEO

“It’s very difficult to get small and micro businesses to explore other international markets. The UK is in everyone’s comfort zone. It’s far more than the common language: we all know how England works — pretty much like Ireland – and many of our entrepreneurs have worked there or have family there. But over-dependence on just one customer is never a good business model.”

 

MARY HARTY, SLIGO CHAMBER

“The way things work, we can be pretty sure that the larger companies will have some sort of risk planning in place and many of the smaller companies employing six to ten people won’t. It looks like the SMEs in food and engineering may be the most vulnerable because they are more tied into the British market and could not easily reduce their dependence.

“In general we haven’t felt the pain of Brexit yet but there is a fear factor. There is great uncertainty, especially now that the debate is moving on from currency towards the wider consequences of a British withdrawal. I believe uncertainty is already inhibiting investment and planning for investment. There will be all sorts of consequences which are difficult to predict.

“There is no doubt that there is going to be a steep learning curve for some, particularly the smaller companies. When faced with the possibility of tariffs and steep currency fluctuations, SMEs reliant on the UK market will have to look at alternatives, including moving their production inside the UK. This in turn will have consequences for our local supply chain in Ireland, as sooner or later they will be replaced by UK suppliers who are closer and cheaper.

“Most people probably don’t realise just how much of an ally the UK was for Ireland inside Europe across a whole range of issues. We were on the same side on a lot of issues but they had a lot more clout than us, and we benefitted from that. Now we have to find new allies and that may not be so easy.

“However much we may regret and disagree with their decision to leave, some of the things they complained about were justified. I know from hard experience that there is a huge gulf between the way the EU does its business in Brussels and how the directives and regulations affect people here on the ground. There is a danger that with the British gone, the gap will get wider. If we want to be good Europeans we need to think about that.”

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