Is Brexit stirring troubles for Northern Ireland?

Nothing is left of the Killeen army checkpoint on the road running through the green countryside dividing Newry, on the southern edge of Northern Ireland, and Dundalk, just across the border with Ireland. Once a stop for crossborder travellers (and a major target for IRA extremists), this checkpoint, along with dozens of other border posts scattered along the British side of the 499-kilometre border, disappeared after 1998’s Good Friday Agreement, which marked the end of the Troubles that shook the whole of the UK for 30 years.

Since then, every day thousands of people have quickly and easily crossed the 30 kilometres that divide the two border towns. But phantoms of the past are resurfacing in the minds of many who fear that Brexit will reverse the achievements of the peace process by reinstating a tangible border.

Border concerns

“No EU frontier in Ireland. No hard border. Respect the Remain vote,” urges a billboard halfway between Newry and Dundalk, echoing the sentiment of 54% of Northern Ireland voters that backed the Remain argument in June 2016’s Brexit referendum.

Unlike in the past, the issue goes well beyond relations north and south of the border. The frontier is the only land border the UK will share with the EU in a post-Brexit scenario. As such, it sits at the core of the Brexit negotiations unfolding in Brussels between UK Brexit secretary David Davis and his European counterpart, Michel Barnier. Both parties are refraining from the idea of returning to a hard border, not wanting to risk reviving old animosities between Northern Ireland’s unionist and nationalist communities.

Nonetheless, they have yet to find a way to uphold this principle in a post-Brexit order shaped by the UK government’s fundamental assumption that the UK will leave the single market. Meanwhile, Northern Ireland’s assembly is gripped in a political deadlock that is preventing the formation of a new devolved executive and leaving the future of key business reforms, including a devolved corporation tax of 12.5%, hanging in the balance. Amid the current uncertainties, local investment promotion authorities and businesses are left temporarily alone in their efforts to weather the Brexit storm.

“Our inward investment proposition has not been impacted by the Brexit decision,” says Alastair Hamilton, chief executive of InvestNI. “People are not coming to Northern Ireland to gain market access, by and large. Some of them may service the UK and European markets, but the main reason for them to be here is that they can find very talented people.”

Still a draw

InvestNI attracted a record 22 new investors in 2016 – more than half of them after the referendum – and this contributed to the creation of 2200 new jobs, according to the company’s annual report. Overall, the country attracted greenfield FDI of $1.15bn in the 12 months following the referendum, up from $826m in the same period a year earlier, according to figures from greenfield investment monitor fDi Markets.

Foreign investors are particularly attracted by the country’s pool of human talent, according these figures, with about 16,000 annual graduates and postgraduates coming out of Belfast’s major universities every year. Another lure is the aggressive incentive policy developed by InvestNI that in the past (also oiled by EU funds) could bring in £18,000 ($24,200) per job, though the figure now stands at about £7000 per job, according to Mr Hamilton.

Both factors, combined with competitive operating costs in a western European context, make Northern Ireland a hotspot for FDI in sectors such as software development, particularly cybersecurity, and IT and business process outsourcing solutions. Major financial firms such as Allstate and Citigroup employ thousands of people locally, mostly in back-office functions.  

The capital, Belfast, is central to the region’s fast-growing services industry. After the lost decades of the Troubles, the city is capitalising on the social and economic recovery it has experienced in recent years. “Over the next 20 years we want to increase our population by 67,000 [the current population is about 300,000] and create 46,000 jobs,” says Donal Durkan, director of development at Belfast City Council. “Given the recent success of the city in terms of business starts and attracting FDI, we are confident that we can achieve those targets.”

Tax reform delay

If Brexit has not affected Northern Ireland’s current investment proposition, it has indirectly delayed its development. The referendum heightened the divisions between its two main political parties, the unionist Democratic Unionist Party (DUP) and nationalist Sinn Féin. This eventually led to the collapse of the power-sharing executive in January, following a scandal related to a renewable heat funding scheme that involved high-profile members of the DUP, and Northern Ireland has been without an executive since.

A new round of local and national elections failed to re-establish a devolved government, and even prompted Westminster to threaten a return to direct rule. The current political impasse is delaying devolution reform, expected for April 2018, culminating in the introduction of a long-promised 12.5% corporation tax rate.

“We have the ambition to retain the current proposition based around cost centres, but also add to it a proposition that is focused on profit centres. [A 12.5% corporate tax rate] would allow us to get in that marketplace. Clearly the challenge now is that we don’t have a devolved government in place to bring in the necessary legislation and have the necessary budget... There is a fair amount of opportunity there, but clearly no company is going to invest until I can tell them that we have legislated for it,” says Mr Hamilton.  

A 12.5% corporate tax rate “will make Northern Ireland a more attractive option with respect to investment location decisions relative to all G20 countries’ tax regimes in 2015” and second only to neighbouring Ireland in terms of effective average tax rate, according to a March 2016 paper by the Centre for Business Taxation at Oxford University. However, it is an uphill road to reform without an executive, and the national corporate tax rate of 19% will continue to apply to businesses in Northern Ireland until a power-sharing government is reinstated.  

Trade disruptions

Despite the deadlock in Belfast, the eyes of local businesses remain focused on the talks unfolding in Brussels. “[The tax reform delay] is a minor disappointment, but it slipped away from our minds in front of the prospect of a border,” says Michael McKeown, head of Newry’s chamber of commerce. “Everything comes down to this word: border.”

Total trade volumes between Northern Ireland and Ireland in manufactured goods grew to $3bn in 2015, up by 20% on 1998 figures (when the Good Friday Agreement was signed), according to data from InterTradeIreland, the all-Ireland body responsible for trade and business development under the Good Friday Agreement, with most of the increase made up by a growth in Northern Ireland to Ireland trade flows. While the risk of a tangible border is widely perceived, only big firms seem to be adjusting their strategies accordingly.

“Some are holding off investment decisions waiting for more clarity; others, such as Almac, are speeding up these decisions,” says InterTradeIreland’s strategy and policy director Aidan Gough. Northern Irish pharmaceutical company Almac has announced plans to open a factory across the Irish border to keep a foot in the EU.

Other than isolated cases such as Almac, InterTradeIreland estimates that 98% of Northern Ireland’s companies, its core of small and medium-sized enterprises, are not taking steps to prepare for any Brexit outcome that includes some sort of border. They mostly lack the resources, or sometimes the will, to devise feasible contingency plans, preferring to hang onto the hope that nothing will change.

“The idea of a frictionless border is a joke for people living at the border,” says Mr McKeown. “We love Brexit – as long as we don’t have a border.”