Brexit & spectre of cross-border trade

Irish producers of beverages source non-beverage inputs from Britain and Northern Ireland. Irish producers of beverages source non-beverage inputs from Britain and Northern Ireland.

Reduced drinks exports, reduced tourism and increased cross-border shopping would see businesses here - and government -  lose out on a number of fronts according to a recent Drinks Industry Group of Ireland report.

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30 November 2018 | 0

In its recent report on Brexit, the Drinks Industry Group of Ireland points out that, “Twenty-seven months have passed since the UK voted to leave the EU. Precisely what shape our neighbour’s departure will take remains unknown.”

With this in mind, while recognising that there’s much about Brexit that’s out of the government’s hands, in areas where the government can make a difference, “policy-makers must show initiative” urges the report.

For example – with supporting analysis from DCU economist Anthony Foley – the DIGI recommended prior to the recent Budget that the government adopt a three-point plan to offset the worst impacts of Brexit and protect the drinks and hospitality sector:

 

  • Reduce alcohol excise tax
  • Maintain the 9% VAT rate for the hospitality industry
  • Secure EU ‘Brexit funds’

 

After all, as DIGI Chair Rosemary Garth points out in her forward to the report, any reduction in excise would only be a “reversal of the emergency excise increases in 2012 and 2013”.

Her forward concludes, “Failure to act on these recommendations would worsen the impact of Brexit and abandon a crucial provider of employment, revenues and entrepreneurial spirt to an uncertain future”.

Alas it was not to be. In the event, the government did not reduce excise tax and did raise the VAT rate from 9% to 13.5%. This is likely to realise the DIGI’s contention in regard to tourism competitiveness and cross-border shopping.

 

Cross-border shopping

In its report the DIGI states, “On the assumption of a resumption of 2009 levels of cross-border shopping and a pro rata increase relative to national consumption growth since 2009, the current level of cross-border purchasing would be €503 million per year. This would suggest an annual alcohol cross-border expenditure of €60 million.

“More than ever, amid this uncertainty, our economic future in the short term depends on maintaining our competitiveness.”

The tax differential in spirits is substantial: for vodka it’s €3.60 and for whiskey it’s €3.84 per bottle. The beer tax difference is lower and the tax difference in still wine varies from €1.20 to €1.29 per bottle, but at €4.02 the tax differential for sparkling wine is also large.

“As can be seen, there is a significant financial incentive for cross-border activity, particularly arising from tax differences,” observes the DIGI.

In his own analysis Anthony Foley cited Department of Finance/ESRI estimates of the relative medium- and long-term effects of a hard Brexit.

The report predicts that relative to ‘No Brexit’, exports will decrease by 4% with exports to the UK decreasing by about one-third, which is especially bad for food exports.

 

Value of Sterling

Between May 2016 and May 2018 the €uro appreciated 12.8% against Sterling.

And as the DIGI statement points out, “Exporters to Ireland from the UK also get a strong advantage against Irish producers supplying the Irish domestic market. An item selling for €100 in the Irish market would generate an exporter from the UK £72.14 in May 2015 but by May 2018 this had increased to £87.73 which gives the UK exporter substantial scope to reduce the price in the Irish market and/or improve margins”.

 

Tourism and hospitality

In 2016 British tourists accounted for 41% of overseas visitors, the DIGI points out, “The UK is, by far, our largest national market. In 2017 this share had declined to 38%. Between 2016 and 2017 British tourism to Ireland declined from 3.924 million visitors to 3.729 million, or by 5%. British tourism expenditure declined by 5.1% too. In addition, inward tourism from Northern Ireland has decreased.

“Some regions are very dependent on the British market, such as the Border (40% of international visitors are from Britain) and the South-East, Midlands and South-West, which all have a 38% share. In contrast, the Dublin British dependency is 16% and the West is 14%.”

The DIGI points out additionally that the indirect Brexit effect of a lower valued Sterling increases the attraction of the UK as a destination for Irish domestic tourists relative to holidays at home.

 

Beverage exports and imports

The Irish drinks industry generated exports worth €1.358 billion in 2017 of which €289.8 million, or 21%, went to the UK. Britain accounted for €211.8 million or 73.1% of the UK total and Northern Ireland accounted for €78 million or 26.9%.

“Britain is our second-largest national market for drinks exporters and Northern Ireland is our third-largest,” states the report, adding that the beverages trade surplus with the UK in 2015 was €7.6 million but by 2017 this had declined to a deficit of €56.4 million.

“81.4% of soft drinks exports were sold on the UK market in 2015. The same is true of cider: 70.7% of cider exports were sold in the British market. Beer has a much lower but still high share of its exports sold in the UK market (43%).”

The situation is somewhat different for whiskey and liqueurs.

“Of €443.9 million in whiskey exports in 2015, only €19.2 million or 4.3% was sold in the British market in 2015.”

As for 2018 to date, the DIGI states, “Beverage exports to the UK have performed poorly in the first six months of 2018 when they declined by 10.9% compared with the same period of 2017.

“On the import side, soft drinks accounted for €248.9 million, of which Britain supplied €173.0 million or 69.5% in 2015. There was €233.0 million of wine imports (excluding sparkling wine) of which Britain supplied €14.6 million or 6.3%. Britain supplied €33.6 million of beer imports, or 24.2% of the total of £138.7 million. Whiskey imports were only €15.6 million of which Britain supplied €6.4 million or 41.0%.

“Overall, the British- or UK-sourced drinks imports in 2015 were soft drinks €173.0 million; beer €33.6 million; whiskey €6.4 million; liqueurs €40.0 million; and wine €14.6 million.”

 

Supply chain, pathway to market and transit arrangements

In its report the DIGI points out that:

 

  • 67% of exporters make use of the UK land-bridge to access continental market
  • 57% of exporters said that if transit time through the UK land-bridge were to increase due to additional controls and/or costs were to increase, they would be able to supply using a direct shipping service to a Benelux or other continental port.

 

Bord Bia’s Brexit Barometer Industry Findings (2017) show that 31% of food/drinks companies ship their EU purchases directly to Ireland by-passing the UK while 69% use the UK route.

Some of the non-tariff barriers which were considered for beverage exports to the UK will apply to much of the exports of product not destined for, or originating in, the UK.

For beverage companies with all-island and Ireland/Britain integrated supply and production systems (including canning/bottling and inputs sourcing), the cross-border movements relating to inputs, semi-finished product and finished product can amount to thousands of cross-border movements of goods annually.

Customs checks and inspections on this volume of transactions would add significantly to transport and administration costs.

 

‘Brexit funds’

In exhorting the government to secure EU ‘Brexit funds’ the DIGI points out, “The challenges of Brexit to Irish exports and imports of beverages are not confined to the goods supplied to and sourced from the UK. Irish producers of beverages source non-beverage inputs from Britain and Northern Ireland. Irish beverage exporters use Britain extensively as part of their supply chain channel and as a pathway to other markets. The UK is a very significant part of the transport and distribution system of the Irish economy’s international trade with the world.

“The Irish Government must secure dedicated ‘Brexit funds’ from the EU to combat these negative impacts through both services and development and infrastructural investment.”

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