Guinness stout and Baileys cream liqueur can help explain why Ireland is set for a colossal headache after Brexit.

Since the British referendum, the concept of a hard border between Northern Ireland and the Republic of Ireland has emerged as a huge commercial risk. At the most basic level, Irish companies would struggle to sell to the all-important U.K. market thanks to tariffs and customs checks.

But products such as cheese, butter and alcoholic drinks offer a perfect illustration of why the situation is even worse than many realize. The supply chains north and south of the border are so intricately interwoven that raw materials often travel back and forth across the border several times during processing, packaging and bottling. In short, goods never intended for export to the U.K. must still pass in and out of the U.K. during their manufacture.

Take Baileys: Six million cases of the whiskey liqueur are produced at manufacturing sites every year on both sides of the border. Baileys produced in Dublin is sent north to be bottled at a manufacturing hub in Mallusk, Northern Ireland. It then travels back south for export.

The production chain begins in dairies in Cavan and Kilkenny and ultimately undergoes some 3,000 cross-border journeys per year. This is to say nothing of additional trips from glass and packaging units in Northern Ireland to shipping containers in Dublin.

"The real harm would be to smaller companies and farms, many of whom are part of our supply chain" — Oliver Loomes, Diageo Ireland's country manager

Early figures from contingency planning at Diageo, which makes Baileys and Guinness, show delays of up to one hour for every truck journey between Ireland and Northern Ireland could cost the company up to €1.3 million in additional costs a year. That doesn’t factor in tariffs.

Guinness is also highly vulnerable to a supply crunch over cross-border processes. Every year there are about 10,000 truck journeys to transport Guinness brewed at Dublin’s St. James’s Gate to packing units in Belfast before the stout is sent back to Dublin for export.

St. James’s Gate accounts for 35 percent of Diageo’s global beer production. That amounts to 1.2 billion pints per year, of which 70 percent is exported to over 130 countries.

Frontier fears

Oliver Loomes, Diageo Ireland’s country manager, argued that the hard border would be “very unwelcome” but stressed that many victims of shattered supply chains would be hit harder than his giant multinational.

“The real harm would be to smaller companies and farms, many of whom are part of our supply chain,” he said. Loomes said the numerous small businesses and farms that supply Diageo with milk and barley for its liqueur and beer would face “enormous disruption” and very significant additional costs that could threaten jobs and livelihoods.

The effects of these broken trade lines are of huge concern in Ireland, where rural areas are still struggling to pick themselves up from the country’s brutal financial crisis. Politicians are keen to avoid an economic shock that could stir up organized crime and political violence. Fifty-six percent of people in Northern Ireland voted to stay in the EU, and campaigners against a hard border argue that vote should be respected.

Irish Prime Minister Enda Kenny last Thursday described the border as one of Dublin’s chief political priorities in Brexit talks and called for any final Brexit deal to include a united Ireland clause if the Northern Irish majority were in favor.

The implications for the rural economy are, indeed, dire. Diageo uses 5 percent of the Republic of Ireland’s total dairy output every year in Baileys. That amounts to 275 million liters of milk, from 40,000 cows on 1,500 Irish farms.

The pain stretches far beyond alcohol. Roughly 90,000 tons of mature Irish cheddar depends on British demand. Tariffs under the EU’s schedule are €1,671 per ton of cheddar. That would result in a tariff bill of approximately €150 million a year, according to Conor Mulvihill, director of the Irish Dairy Industries Association.

“With little appetite for mass cheddar in other markets, producers can only sell with steep discounting should they try to enter new European markets,” he said.

Companies such as Ornua, which makes Kerrygold butter, Beo milk and the Dubliner cheddar cheese brand are in a particularly precarious position. The U.K. accounts for roughly a third of Ornua’s sales from Ireland.

Bonfire best avoided

Ibec, Ireland’s leading confederation of businesses and employers, has been working for months on contingency plans for companies that stand to lose out the most from Britain’s departure from the EU. It has discovered through its own research that at least half of Ireland’s businesses have yet to draw up their own contingency plans.

No sector has more need for such backup plans as Ireland’s dairy sector.

Companies such as Carbery, Glanbia, Kerry, Lakeland and LacPatrick all have manufacturing infrastructure in the U.K. where Irish milk is processed. Although only 3 percent of Glanbia’s business revenues stem from sales in the U.K., officials at the company are watching developments closely.

“We’ve set up an internal process to monitor and assess the Brexit negotiations and I’m confident that we’ll be well able to manage whatever that process throws up,” said Mark Garrett, director of communications for Glanbia. “Our main concern is that U.K. and European leaders can keep the period of uncertainty to an absolute minimum.”

The EU’s chief Brexit negotiator, Michel Barnier, has said he is working on a deal between Ireland and the U.K. that would preserve the success of the Good Friday Agreement, a peace pact struck in 1998.

"This idea of a bonfire of EU regulations is making some people very nervous" — Irish diplomat

James Brokenshire, the U.K.’s secretary of state for Northern Ireland, underlined the stakes.

“The production of milk aptly illustrates how open the land border is: About one-third of the milk produced on Northern Ireland’s farms — nearly 600 million liters — goes to Ireland for processing,” he said. “An example product journey would be milk from a farm in Northern Ireland going over the border for processing and pasteurization. That milk then returns to Northern Ireland for processing into cheese, and then to a distribution center for sales to the Northern Ireland, Great Britain and Irish markets.”

Brokenshire said he was confident of the British government’s ability to maintain freedom of movement for people. But he admitted that the movement of goods presented “a separate challenge.”

“I agree with those who say that this presents one of the most complex challenges in our preparations for exit,” he said.

But there is suspicion of the British position in Ireland. One particular concern is that the British enthusiasm for cutting free from Brussels could create regulatory, as well as physical, barriers to trade. The U.K.’s farming and environment minister, Andrea Leadsom, has promised a “bonfire of EU regulations” after Brexit. Different regulatory standards would throw cross-border trade into chaos.

“This idea of a bonfire of EU regulations is making some people very nervous,” said one Irish diplomat. “Once the U.K. leaves the EU it becomes a third country and changing rules on food safety is no joke.”