The set of unilateral proposals contained in the UK Government’s white paper appear to be floundering with just over three months to the October deadline for a Withdrawal Agreement. The UK’s selective proposals for a single market for trade and agriculture, but not services, is seen as ‘cherry-picking’ and undermines the core indivisible principles of freedom of movement for goods, services, capital and people. The proposal for a ‘facilitated customs arrangement’ raises practical, legal, economic, and budgetary issues. In addition, and of significant concern to Irish tourism, there is still no firm practical proposal to avoid a hard border with Northern Ireland.

The current round of UK/EU negotiations are clouded by concerns about political stability in Britain and its Government’s ability to secure Parliamentary endorsement of an agreement. Meanwhile, across Europe, and especially in Ireland, the implications of a ‘no deal’ Brexit are edging up the contingency agendas of politicians, the business community and regulators.

The EU’s chief Brexit negotiator’s response clearly sets out how the UK’s proposals fall short of a workable future relationship between the UK and the EU. Furthermore, the Irish backstop guarantee has not been satisfactorily addressed and will be the focus of the current round of negotiations in Brussels. Understandably a key focus for Ireland continues to be on the border issue and the UK’s December 2017 commitment to a legally operable backstop. In the absence of an agreement on the backstop there can be no Withdrawal Agreement, and therefore no transition period – a position reiterated recently by the European Council‘s full support of Ireland’s position on the issue. Intensive negotiations are required if the withdrawal terms are to be wrapped up by October, to allow for Parliamentary approval in advance of UK’s scheduled exit in March 2019.

A number of possible scenarios as to the outcome are possible. The most likely from a pro-EU perspective is one in which the UK remains in some form of customs partnership, and possibly remains subject to single market rules, similar to Norway, dubbed ‘Brexit in name only’ (Brino). The stark alternative, driven by hardline Brexiteers in Westminster, is a ‘no deal’ crash exit from the EU. Other possible outcomes could include an Article 50 extension, a lengthened transition period, or even a 2nd referendum.

Last week media reports cited an internal EU document warning all member states to step up contingency planning for the UK crashing out of the EU without a deal next March. The UK’s departure from the European Union, and potentially from both the Single Market and Customs Union, would bring new border controls, additional tariffs, and resulting administrative and technical requirements for Irish based businesses, including the transport and tourism sectors. The Irish Government is reported to be planning for more than 500 additional customs and veterinary inspectors to man air and sea ports and border crossing in the event of a ‘no deal’ Brexit.

From a tourism industry perspective a ‘no deal’ outcome would be very damaging to visitor flows and most likely see a collapse in the value of the pound sterling, further hurting businesses with a dependency on the British and Northern Ireland markets.

Brexit has already impacted significantly on tourism due to the shift in the Sterling/Euro exchange rate. Visits from Britain and Northern Ireland have fallen as Ireland’s competitiveness and value for money ratings have declined.

2016 was shaping up as a bumper year for visitors from Britain on the back of a positive growth trend in demand driven by a strong pound and a new marketing strategy coupled with significant marketing investment on behalf of Ireland. Following the Brexit referendum result sterling took a hit and the consumer confidence wavered in the face of dire predictions of an economic collapse. While the latter did not materialise, Ireland has seen tourism from Britain take a downward turn. Month on month arrivals were in negative territory for six consecutive months from April to September 2017, with a see saw pattern since then. The perceived wisdom is that the downturn can be attributed exclusively to the fall in the value of sterling, which effectively devalued against the euro by an average 12% in 2017. However, latest available data indicates that while the rate of growth in outbound travel from Britain slowed in 2017, visits and expenditure abroad continued to grow at a modest 2% and 3% respectively. This compares to the downturn experienced by Ireland in the immediate Brexit aftermath. The steeper fall off in demand for Ireland and loss of share, as also experienced during the last recession, could suggest a strategic weakness of the positioning of Ireland in the market.

The downturn in British visitors has been felt across all regions, other than in the South West. Revenue earned from the British market fell more sharply than volume in Dublin, Mid West and West regions. The British market is a vital component of the overall tourism demand as it provides the best seasonal and regional spread of visitors across the country.

Dublin saw tourism revenue from Britain fall by €42 million last year, while the South East, West and Border regions each suffered a €10 million year on year loss.

The Border, South East, Midlands and Mid-East regions are relatively more dependent on the British market, accounting for close to 40% of income from overseas tourism in each region. Continued decline in demand from Britain would have serious consequences for employment in these regions.

Apart from the decline in demand and earnings the devaluation of sterling has exacerbated the perception of higher prices in Ireland than in Britain. The latest research from Failte Ireland shows that only 6% of British holiday visitors last year considered Ireland ‘very good’ value for money – down from 12% in 2016 and 19% in 2015. The slide in value for money rating is especially worrying.

Brexit has the potential to severely damage Ireland’s tourism industry. A number of key factors, dependent on the outcome of the final negotiations for the UK’s exit from the EU, will be critical to the industry’s future. The key aspects of the outcome of Brexit negotiations required to safeguard Ireland’s tourism future include:

Avoiding barriers to visitor flows

The maintenance of the current Common Travel Area (CTA) is a priority for the industry’s sustainable growth. It is assumed that whatever the Brexit outcome the CTA, which predates the EU, will continue to operate and facilitate free flow of passenger traffic between Ireland and the UK.

Air transport is the most immediate concern to ensure that flights between Ireland and UK are not interrupted as the UK withdraws from the EU. While it is anticipated that the current liberal regime will at least continue through the proposed transition period, a ‘no deal’ Brexit could severely disrupt air services between the UK and Ireland. Air service links between Ireland and the UK are vital to the country’s economy, and most especially to tourism, with almost two out of every five visitors arriving by air from Britain. The cross-channel air links carry not only 75% of British visitors, but also 21% of North Americans and 32% of visitors from other long haul markets on route to Ireland. While the UK’s Civil Aviation Authority (CAA) has said the UK government “has been clear that as the UK exits the EU, its aim is to ensure continued transport connectivity”, a ‘no deal’ or hard Brexit would threaten a cessation of air services between the UK and the other 27 EU nations, including Ireland. The risk of the UK’s withdrawal from the European open skies agreement may not be high, however clarity is required so that airlines can continue to plan and publish their schedules twelve months in advance. Any uncertainty would damage Ireland’s prospects for 2019. If there is a non-negotiated exit in March 2019, it is assumed that the UK adopts all European aviation laws at the point of exit and the UK continues to mirror EU aviation regulations for at least a two-year period.

A physical border with Northern Ireland would present a real threat to the current free flow of visitors and residents crossing between the two jurisdictions and negate Tourism Ireland’s all-island marketing strategy and investment. Any physical border controls, even if only for goods, would undoubtedly have implications for tourist flows and would represent a perceived, if not an actual, barrier in the eyes of overseas visitors. Hundreds of thousands of tourists cross the land border each year, including an estimated 1.3 million visits by Northern Ireland residents to the Republic. The potential impact would be particularly devastating for Donegal and the Border region, as well as deterring visitor traffic from arriving via Northern Ireland ports. In addition a hard border would also impact supply chains and input costs for the hospitality sector.

Tariffs and other trading costs

The UK’s departure from the EU, and potentially from both the Single Market and the Customs Union, would result in the imposition of tariffs and increased trading costs impacting supply chains and pushing up costs for the end consumer in Ireland. The hospitality sector is particularly exposed as a significant proportion of inputs come from, or transit through, the UK. The Irish food and drink sector, an integral part of the tourism experience, is at risk as Northern Ireland and Britain is relied upon as a source of raw material and as a processing location. A hard Brexit would see WTO tariffs, which are amongst the most punitive, imposed on the food and drink sector. Accommodation, food and drink sales to overseas visitors amounted to an estimated €3.3 billion in 2017, accounting for two thirds of total tourism receipts.

Apart from the food and drink sector other inputs into the tourism industry, including vehicles, parts, and equipment, are imported from or through the UK.

The additional cost of trade barriers on the average household has been estimated at up to €1,360 per annum – an increase of 3% on the consumer basket. (source: Brexit and Irish Consumers, ESRI, March 2018). A conservative estimate of the cost increase a hard border would impose on the tourism sector could be between 4% and 6%.

Regulatory alignment

Any change in the current harmony of EU regulatory standards across the island of Ireland would inevitably lead to market distortion. EU regulations permeate all aspects of business and consumer protection, including health and safety, food standards, the environment and working conditions. Following a hard Brexit it is conceivable that the UK could opt out of some of the European standards and licencing system for products and services, thereby reducing the regulatory burden on its business community and placing Irish tourism enterprises at a competitive disadvantage. Areas of concern, for example, would be the abandonment of state aid controls in Northern Ireland or any easing of labour, health and food safety regulations.

While the outcome is still uncertain, it would appear that, irrespective of a ‘deal’ of ‘no deal’ between the UK and the EU over the coming months, the impact on the sector will not be without cost. The tourism sector is facing into a continuing period of loss of competitiveness in the UK market, due to a weakened pound sterling, and consumer confidence unease. Regions outside of Dublin, most especially in the Border, Midlands and Eastern areas, will continue to be disproportionately affected, with the risk of job losses.

At this point it is prudent to consider a range of outcome and impacts from a relatively benign transition period to December 2020 to a ‘hard’ or ‘no deal’ Brexit. The former dubbed a ‘Norway plus’ arrangement maintaining a customs arrangement similar to the customs union plus market access, while a hard or no deal exit would include a physical border with Northern Ireland. Either is not without cost and impact on Ireland’s tourism businesses.

While it is understandable that much of the discussion is focused on the impact on tourism demand from the UK, the impacts of Brexit can be far ranging on the cost of input supplies for the sector and its competitiveness in the international marketplace. Already due to pressure on costs reflected in rising prices, Ireland is seeing a slide in its value for money rating from visitors from across the Eurozone. Last year saw the very good value for money rating fall across all holiday visitors, not just those from Britain with their weaker currency. Experience of the past two decades has amply demonstrated the price and value sensitivity of tourists to Ireland and the negative impact of any loss of competitiveness on demand.

A doomsday scenario of a ‘no deal’ hard Brexit on March 29th 2019, would be catastrophic for Irish tourism. ITIC estimates that a hard Brexit would directly cost the Irish tourism sector approximately €260 million in its immediate aftermath as a result of a period of one week’s flight disruption, a corresponding loss to carriers, increased costs to the food and beverage sector, and a decline in British tourism numbers. The fallout could potentially reach half a billion euros in lost revenue and additional costs including a negative impact on jobs over the coming years to say nothing of the indirect costs to the tourism sector of increased airport and port customs infrastructure. In addition, the likelihood of a sharp devaluation of sterling, would boost the attractiveness of the UK as a place to visit further hurting tourism businesses in Ireland.

A less damaging intermediate scenario, including a physical border with Northern Ireland, is conceivable and would undoubtedly damage the tourism sector, halting or reducing cross-border travel flows and increasing cost inputs.

Ideally the delivery of the backstop agreement on the Ireland’s land border and a smooth transition period would be the best outcome for tourism, although unlikely to result in an immediate boost to demand from the UK.