Business

Sunday 15 September 2019

Richard Curran: 'Irish companies finally wake up to warnings of Brexit storm'

Storm on the horizon: The realities of a no-deal Brexit pose a major threat to Irish business
Storm on the horizon: The realities of a no-deal Brexit pose a major threat to Irish business
Richard Curran

Richard Curran

Brexit is like a major weather event picked up on long-range forecasts. It was due to hit Ireland in March of this year but when it didn't, many concluded that the forecasters had got it wrong. In recent months, the major weather warning alert has been issued once again. Initially, small business owners shrugged their shoulders and thought, it will pass by again.

But there is a tangible change in the air since Boris Johnson's arrival at 10 Downing Street.

Talk to small businesses around the country and they are now really starting to ask questions about how they will be affected by a no-deal Brexit.

The conversation has shifted from speculation and disbelief to a reluctant acceptance of what now appears nearly inevitable.

Questions are being asked by business people in all kinds of sectors.

Right at the very beginning of the bizarre political odyssey that is Brexit, Government agencies commissioned reports on the implications of no deal.

The Punch and Judy show nature of British parliamentary discourse since then, and the huge focus on keeping the Border open with the North, have combined to distract many people in business from the realities of a hard Brexit. But that is now changing. Take the beef farmer protests of recent weeks.

Beef producers know what is coming down the track and have (understandably) used the current drop in prices to get attention and talks started before Brexit makes things a lot worse. And it will.

The key to understanding how a no-deal Brexit will affect a business is in the World Trade Organisation (WTO) rules.

If there is a no-deal crash-out, aside from the administrative chaos and supply chain disruption, trade between the UK and Ireland will revert to WTO terms.

The WTO has a list of products and sectors, and outlines the maximum tariffs that will apply when the UK becomes a third country outside of the EU without signed trade agreements of its own.

Before you go looking up the rates, it is worth noting that the tariffs are set as maximums and not minimums. In theory, both the UK and the EU are free to set tariffs at whatever they want, up to levels specified by the WTO for its members.

A worst-case scenario is where the UK decides to opt for maximum tariffs from day one.

This would involve average tariffs on Irish food exports to the UK of around 22pc, ranging from 14pc on poultry to 56pc on beef, and 70pc on milk.

The British government has already published details of its tariff intentions in the event of a no-deal crash-out.

Instead of putting tariffs up all over the place, it has said it will reduce those which are already applied on goods coming from outside the EU.

So instead of having 80pc of goods tariff-free, it will have 87pc of them tariff-free.

Imports of oranges to the UK carry 16pc tariffs and they will be reduced to zero. The 14pc tariff on televisions imported from outside the EU today will drop to zero.

The same rate would therefore apply to television imports from EU countries.

The sting in the tail for Ireland is the UK's stated intention to impose massive tariffs on beef and lamb. Three quarters of all UK beef imports come from Ireland. Beef arriving from Ireland would be hit with a 45pc tariff, while lamb would carry a tariff of 48pc.

Under WTO rules, the same tariffs would have to apply to beef and lamb coming to the UK from anywhere. So Ireland would end up competing with Brazil and other lower-cost producers in what would become a more expensive market.

The UK's stated plans in a no-deal scenario also include not charging any tariffs on goods coming from the Republic of Ireland to Northern Ireland.

This appears to be completely contrary to WTO rules and not able to stand up to scrutiny.

The British know this and have said the proposed measures are only temporary. But they could just go ahead anyway. What would happen if the UK applied territory-specific tariffs on products, in contravention of WTO rules? Not much is the answer.

The WTO does not have some big investigation and enforcement division. Another member would have to make a formal complaint. Then the UK and the complainant country would have 60 days to resolve the issue. If unresolved, the WTO would begin a formal case. It could take a few years.

Even if the WTO panel looking into it found against the UK, not much would happen then either.

The complainant would be free to take retaliatory action and that is about it. Look at the US/China trade war. The WTO recently gave a ruling in China's favour on an issue of trade with the US which pre-dated the current war.

It basically left China free to take retaliation measures, and the trade war continues.

As a member of the EU, Ireland has no such flexibility. The EU would act as the investigative and enforcement body on breaching rules. The UK could leave the Border in Ireland open and tariff-free, but we cannot.

Aside from the obvious challenges that the WTO brings for Irish food exporters, what about small importing businesses?

We now have lots of small online retailing firms which are selling products out of Ireland to the UK and elsewhere.

In some cases, they are actually importing products before sending them on, while for others, they can dispatch a product from its country of origin to the end customer.

The complications, costs and delays associated with tariffs, customs, regulations and VAT may well spell the end of this business model for some Irish firms.

Or take the motor industry. In recent years, especially since the Brexit referendum was passed in 2016, more and more used cars have been imported from Britain.

Cheaper sterling has facilitated this flow of vehicles from the UK to Ireland.

Importers of the cars have to pay VRT and that is about it. With a no-deal Brexit and WTO terms, the Revenue Commissioners have said tariffs of 10pc on petrol cars and 20pc on diesel cars will apply.

Some small used car dealers have been buying up vehicles in Britain for re-sale here in Ireland. A tariff regime like that could seriously affect their businesses.

But such an outcome wouldn't necessarily spell good news for new car dealerships, where tariffs would also apply. A no-deal Brexit would hit people's spending power, as the economy would falter, which in turn would hit new car sales. Second-hand car prices would simply go up.

How can the UK be prepared to inflict all of this economic damage on itself? It is a good question. By slashing tariffs on many imports to the UK (but not things we sell to it), Britain is running a risk with the tariffs other countries impose on its exported goods.

Britain wants to cut tariffs on imported goods to keep down the cost of living. British government policy tends to support domestic consumers over producers and processors.

In theory, it could negotiate its own free-trade deals with lots of countries, but from day one of a no-deal Brexit, it will revert to WTO terms.

The EU may well go in hard with its tariff regime from the start. Equally, the UK will lose the EU-negotiated trade terms it enjoys with many countries around the world.

Scotch whisky sold in South Korea today, for example, carries no tariffs because of an EU trade deal. After a no-deal Brexit, it will jump to 22pc, until such time as the UK negotiates a trade agreement with South Korea.

Irish business owners who have glazed over headlines about WTO terms of trade are now taking a closer look.

As things stand right now, the big weather event is on its way.

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