Mr. Paul Kelly:

Food Drink Ireland is part of IBEC and is the main trade association for the food and drink industry in Ireland. It represents the interests of more than 150 food, drink and non-food grocery manufacturers and suppliers. We work with our colleagues in Dairy Industry Ireland, the director of which, Mr. Mulvihill, joins me today; Drinks Ireland; Meat Industry Ireland; and the Prepared Consumer Foods Council. We welcome the opportunity to appear again before the committee, having done so on the same subject in 2017, and would like to acknowledge the committee's ongoing focus on Brexit as it affects agrifood.

Brexit involves an unprecedented fracture of the Single Market, with Ireland particularly exposed. The food and drink industry remains especially reliant on the UK market and is the sector most exposed to Brexit. While the UK market as a percentage of our overall exports has declined in recent years and now stands at 37%, in absolute value terms it continues to increase and now stands at €4.5 billion, a 32% increase in value terms since 2010. In the case of certain sectors and categories, it is a much higher level of exposure, with 50% of beef exports, 50% of cheese exports, 71% of beer exports, 85% of cider exports and 66% of prepared consumer foods exports going to the UK. This demonstrates the importance of maintaining our market position in this high value, high quality market that has a substantial food deficit and of not relinquishing the market to global competitors.

Irish food and drink exposure in absolute value terms is similar to that of other large exporters to the UK, such as France, Belgium, the Netherlands, Germany and Italy. In percentage terms, however, we are between four and five times higher. Typically, less than 10% of those other member states' food and drink exports is to the UK. This highlights the unique circumstances faced by Irish industry and the need for exceptional mitigation measures. A further €4 billion of exports goes to the other EU 26, with most using the UK landbridge. Protecting our connectivity to continental EU markets is critical. It is also an important trade route for food and drink ingredients and finished goods travelling from the Continent to Ireland.

In the event of a no-deal Brexit and the immediate imposition of tariffs, it is vital the EU institutions and national governments recognise the potential for economic disruption and take decisive steps to offset such risks. Tariffs are in effect a tax on trade and commerce. They would decimate much of Ireland’s food and drink exports to the UK. EU tariffs on supply chain imports from the UK to Ireland, such as the 130 million glass bottles purchased by the Irish spirits industry from the UK, would lead to cost competitiveness challenges for Irish food and drink producers. To support businesses during a hard Brexit, alleviation measures will be needed to support Irish industry. Tariffs flow back to central exchequers at national and EU level and must be recycled into a tariff stabilisation fund to offset serious damage to exports and job losses.

Additionally, a temporary EU state aid framework to support companies through any adjustment period, with funds amounting to 5% of the value of current annual export sales to the UK, will be needed annually for three years from domestic and EU sources to help Irish companies innovate, diversify into new markets, train staff and invest for the future in capital towards enabling technology, carbon efficiency, plant renewal and expansion geared to improve competitiveness. Measures are also needed to ensure landbridge access to continental Europe and the provision of sufficient capacity on direct sea routes.

A no-deal exit would deliver a major shock to the rural economy. Those most vulnerable to job losses already live in areas with fewer opportunities, a lack of other viable employment and lower incomes. The companies most exposed are both capital intensive and low margin. If firms collapse in a no-deal scenario, they will not be easily replaced. Decisive and far-reaching Government intervention would be required to protect jobs and to support vulnerable but viable firms from day one. The risk of no deal remains imminent and action is required, including the following important steps. To save viable but vulnerable companies in trouble, we need to reintroduce an enhanced enterprise stabilisation fund, in the same vein as was available during the financial crisis in 2009. To maintain jobs in viable but vulnerable firms where short-time work is not possible, we need to introduce an employment subsidy scheme. To assist with cashflow in small and medium enterprises, SMEs, we need to accelerate the current SME credit guarantee scheme’s coverage. Finally, to help companies diversify, we need to introduce a new scheme for export credit insurance aimed at companies affected by Brexit and at diversifying them away from the UK market.

Timing, in this regard, is of the essence. Our experience from 2009 shows that it took up to ten months from agreement on a state aid framework at a European level until companies could draw down supports. In a no-deal scenario, if supports were not available until the middle of 2020, it would be far too late to sustain enterprises and jobs in many areas. It is imperative we introduce legislation and have structures in place to administer the schemes as soon as possible. The measures could be partly funded by new tariffs that will have to be levied on Irish imports from the UK.

I turn to the deal scenario. Last week’s political agreement between the EU and the UK has much to commend it, not least relative to the catastrophic implications of no deal. It includes far-reaching and vital provisions to avoid a hard border on the island of Ireland, protects the common travel area, provides a status quotransition period and allows talks to move on to the future EU-UK relationship. Nevertheless, Brexit was always an exercise in damage limitation. The new deal goes some way towards mitigating the potential risks to the all-island economy and supply chains but we will inevitably end up in a worse place than where we are now.

The deal means Northern Ireland will be subject to preferential, but potentially complex, new customs arrangements. Meanwhile, the political declaration on the future EU-UK relationship is far less ambitious than Mrs. Theresa May's previous deal. This could have significant negative economic implications in due course. We have also been left burdened with tight, over-optimistic timelines to agree a future trade deal, which do not reflect business realities.

Any future trading relationship, unless it involves continuing membership of the Single Market and customs union, which it will not, will be sub-optimal to the current arrangements. The extent of tariff and non-tariff barriers faced by agrifood and drink products imported into Ireland is clearly illustrated in the graph included in our submission. That comes from a report published by the ESRI in July 2018. The report was commissioned by the Competition and Consumer Protection Commission, CCPC. While exports to the UK would face a different tariff regime, tariffs and non-tariff barriers would be similarly prohibitive. A future trading relationship may or may not result in reduced or zero tariffs, but many other non-tariff barriers and hence costs would remain. The graph clearly shows a strong correlation between tariffs and non-tariff barriers - the higher the tariffs, the higher the non-tariff barriers will be. Typically, one finds agrifood products near the top of the graph.

Copenhagen Economics, in a February 2018 report commissioned by the Department of Business, Enterprise and Innovation, quantified the impacts on Irish goods exports across various scenarios and these are summarised in the next graph. It quantified the impacts across a range of sectors including the three most exposed food subsectors, which are processed foods, beef and sheep meat and dairy. Looking at each of the scenarios, processed food exports to the UK by 2030 would be 45% below the non-Brexit baseline in a FTA scenario. For beef and sheep meat exports to the UK, it estimated they would be 28% below the 2030 non-Brexit baseline level in a FTA scenario. Dairy exports would be 37% below the 2030 non-Brexit baseline in a FTA scenario. I will not go through the detail, but members can see in the statement the percentages for the various other scenarios, that is, customs union only, EEA and WTO. All of those are significantly more negative compared to where we are now.

Copenhagen Economics also quantified the impacts on production and employment in each sector and repeatedly highlighted that regulatory divergence, specifically common EU regulation on food safety standards, food inspection requirements and common labelling requirements, was the main factor affecting exports. Any future trading relationship will, therefore, still be challenging for the food and drink sector and will require substantial Brexit mitigation measures, such as a temporary state aid framework, enterprise stabilisation, employment subsidies, SME cash flow and market diversification, as I outlined earlier for the no-deal scenario.

The retention of free access to, and maintenance of the value of, the UK market are of critical importance. Any future FTA must include the following elements. All sides must commit to negotiate an ambitious and balanced agreement that prioritises continued tariff and barrier free trade, long-term growth, investment and stability. We must avoid tariffs or other import quota regimes between both parties. There must be the establishment of a mechanism that will facilitate keeping EU and UK food standards under the scope of veterinary legislation as well as under food and drink law in general as closely aligned as possible. We need the introduction of a mutually acceptable food inspection system regarding imports from third countries. Ensuring a continued close relationship between the UK and the European Food Safety Authority, EFSA, is key to continued future alignment of food and drink standards. The objective must be continuing joint risk assessment with a common database to minimise divergence in standards and avoid trade impediments. A similar objective applies to animal health, welfare and the environment. Transitional arrangements of sufficient length for businesses to plan and prepare for any new FTA arrangements will be required to bridge the gap until the future EU-UK agreement enters into force.

The necessary measures to respond to Brexit can be summarised as follows: additional support measures for agrifood and drink in the event of both no deal and deal, particularly in the areas of exceptional state aid supports, market diversification and market access; a comprehensive and frictionless future trading relationship; regulatory convergence, not regulatory divergence; a transition period of sufficient duration.

I again thank the committee for the opportunity to attend and welcome any questions members might have.