Secret and Personal memorandum by Kevin O’Shiel to each member of the Executive Council with attached memorandum by Joseph Johnston

A Chara,

CUSTOMS ON THE IRISH-BRITISH LAND FRONTIER

1. I send you herewith for your special attention a Memo. prepared at my request by our Economic Adviser, Mr. Joseph Johnston, F.T.C.D. with regard to the forthcoming exercise of our fiscal sovereignty. This Memo. contains suggestions which will, if adopted, have effects of a very far-reaching nature on the North- Eastern Position.

2. Now, that there is no doubt that the fiscal frontier is going up in April next and that our fiscal independence will be exercised, it is well that the new position thereby created should be carefully reviewed with the object of deriving for ourselves the very best results.

From the political standpoint of the North-Eastern Position with which we are dealing, this is the experimental year. Aiming, in the ultimate, for full National Union, political and economic, we look upon all matters at hand arising out of the Treaty of London as cards towards the achievement of this object.

And we are convinced that the Customs Frontier if well used is one of the greatest cards in this policy.

3. It is anticipated and understood that owing to conditions in Ireland caused largely by the criminal action of the Irregulars, we will not be able to use to the fullest advantage the Customs weapon. By this I mean nothing in the nature of an economic boycott of the Belfast Government, but merely the creation and carrying out in the Free State of a fiscal policy in accordance with particular and special wants of all Ireland.

It will take Belfast some time to appreciate that the fiscal policy of the Free State is the policy most natural for them, and one which best suits them in every respect; and that the British fiscal system is based on purely British conditions, which are essentially different from Irish conditions.

When the North-East see across their Border, actually abutting them, a fiscal policy in operation based on natural causes which they share in common with the rest of the Island, it will not take very long for a feeling to develop towards a Customs Union, and thence Political Union.

4. We should not, however, make the big blunder of handing over this concession for nothing. We should do nothing towards a rapprochement on this question (and, of course, nothing against it). It is now for the Belfast Government to make overtures and suggestions to us. We can afford to wait, and, in spite of all that has been said, pro and con, I am of the opinion that a position will presently develop in which they will be most anxious to meet us, and discuss, with a view towards settlement, this and other big outstanding questions.

It is time enough for us when the discussion arises to formulate our terms. (Johnston deals with this well in his Memo.)¹ At any rate, let it be a good bargain on our part as well as theirs, and in accordance with the principle so well understood by Northern psychology, 'nothing for nothing'.

5. It is said that our taxes are likely to be higher than Northern taxes. This state of affairs can only arise over one out of two alternatives occurring[:]

6. Even in the event of the taxation in the two parts of Ireland remaining the same[,] the North-East will be inconvenienced and will suffer to a greater extent than we will. It is quite clear then that if we can alter our taxation in the manner suggested by Mr. Johnston the effect on the North-East will be even more uncomfortable, to put it lightly.

I am strongly of opinion that during this most important experimental year every effort should be made to take the fullest advantages out of this important fiscal weapon along the lines suggested by Mr. Johnston.

[enclosure]

Secret

Suggested modifications of schedules of Customs and Excise Duties.

A writer in the Morning Post of 6th February, 1923, deals with the Boundary Question from the point of view of the fiscal policy of the Free State.

He points out that the present boundary is exceedingly awkward from the customs point of view and urges the necessity of 'a reasonable rectification which would get rid of the more inconvenient salients and make it conform more conveniently to the railway and other great traffic routes.' This means that the North wishes to take the whole of North Monaghan into their territory at least so far south as to include the whole of the railway from Portadown to Clones in their area. They also wish to include Pettigo District Electoral Division and perhaps one or two neighbouring Districts in that part of County Donegal. In East Donegal they quite clearly wish to include at least enough territory to give them the whole of the Great Northern Railway from Strabane to Derry and they would probably take the whole of the Inishowen Peninsula if they got it. As against that they would probably surrender a large part of West Fermanagh and possibly some part of the Clones No. 2 Rural District in South East Fermanagh. They might possibly be willing to let South Armagh go, but less willing to forego any part of South Down.

The effect of such a transference would be to round off the Northern Railway system at the expense of ours. By gaining possession of Clones and East Donegal they would have complete control of the railway system connecting Portadown with Clones, Enniskillen and Derry. But our railway communications from Dundalk via Clones to Cavan, via Clones, Cavan and Inny Junction to Sligo, via Clones, Cavan and Mullingar to Ballina, Achill and Clifden will be interrupted. In fact to get by rail from Dundalk to Connaught or Donegal, without passing through Northern territory[,] would involve a journey to Dublin.

Even if the North obtained such a 'reasonable rectification' of the boundary, although they would have simplified their railway problem, they would still be in most serious difficulties as soon as the new Boundary became a Customs frontier. For the new Boundary would still cut the market regions of Derry, Strabane and Enniskillen to the quick, and would almost certainly be fatal to the latter town in particular. (For the effect of a Customs barrier on market towns see memorandum on that subject.)

The chief interest of the article in the Morning Post is that it betrays a sensitiveness to the possible effects of Free State fiscal policy on the excluded area, an effect which it is dishonestly or ignorantly suggested that a 'rectification of the boundary' will minimise or remove.

It is stated in the article that 'a reasonable Southern Ireland would recognise the necessity of conforming to the United Kingdom Customs and Excise for business reasons.'

In this connection it may be pointed out

(1) That even if the Free State took over the whole of the existing British schedule of Customs and Excise Duties without a single modification, once the Free State begins collecting these duties within its own area the Customs barrier will automatically go up and the effect on the market regions of Derry, Enniskillen and Strabane will be nearly as unpleasant as if there was a considerable difference in the respective schedules of duties and dutiable articles.

(2) As regards the effect of a Customs barrier on the existing market regions of Six County Towns a 'rectified' Boundary is very little better for the Belfast Parliament than the present boundary.

The fact is that if the North succeeds in holding Derry City, Tyrone and Fermanagh, Derry City, Strabane and Enniskillen will be practically ruined by the mere fact of the existence of a Customs barrier.

Free State fiscal policy and North East Ulster.

Fiscal separation, even if we retain the same rates of duty on the same articles as the British, will make the commercial position of these important Six County Towns absolutely untenable. But there are a few changes and modifications which, if introduced by the Free State into the fiscal system, would exercise a powerful leavening influence on the commercial outlook of Northern business men and cause the land frontier to be a much greater nuisance to them and to the British tax-gatherer than to us.

The vast bulk of British and Irish indirect taxation is derived from the Customs and Excise duties on tea and tea substitutes (e.g. cocoa), alcoholic beverages, tobacco, sugar, and 'sugar composite' articles. For example the tax on confectionery, condensed milk, and table waters is really a tax on the sugar contents of these articles. It would be safe to assert that 99 per cent of the revenue derived from indirect taxation is derived from the Customs and Excise taxes on these commodities, their substitutes, and on the composite articles into which one or other of them enters as a raw material.

In present financial conditions it may be laid down that the Free State must consider the fiscal system primarily from the point of view of revenue productions. And, therefore, the taxes on the articles mentioned above must be continued though not necessarily at the same rate as that imposed by the British. It will be undesirable for many reasons to increase any of the rates and if the rate on any one of them is to be reduced the effect on revenue must be kept carefully in view.

The present tax on spirits and possibly also on wine and beer (stout) is probably higher than the point at which a maximum revenue would be obtained. Poteen drinking etc., is notoriously rampant. The effect of a[,] say[,] 25 per cent reduction on the duty on spirits would probably be to cause such a shifting of public demand from 'poteen' to whiskey, as actually to increase the revenue obtained from whiskey without any increase in the total consumption of intoxicating spirit. The social and fiscal evil of illicit distillation would consequently be more easily dealt with. Much whiskey that had paid duty to the Free State would be smuggled across the Border thus increasing the revenue of the Free State and 'making the foreigner pay.' Free State border towns and seaside places would become a popular resort for thirsty 'bona fides' from the North-east and from Great Britain. And all this would help to swell Free State revenue.

The writer in the Morning Post contemplates such action on the part of the Free State and he is good enough to admit that in that event the 'North would be seriously handicapped and would have a huge task in holding its frontier against smugglers.'

Taxes which should be swept away altogether.

During and since the war customs duties have been imposed on certain articles imported into these islands with a view to protecting the corresponding British industries. Such, for example, are the 331/3 per cent ad valorem duty on clocks, watches, motor cars and cycles and musical instruments imported from abroad. Under the Safeguarding of Industries Act of 1921 there us also a similar 331/3 per cent customs duty imposed on an enormous range of 'key industry' goods, e.g., optical glass, theodolites, thermometers, and other scientific glass ware, galvanometers, and other scientific instruments, gauges and measuring instruments of precision, 'of the types used in engineering machine shops,' etc., etc.

In addition there is the 'British Dye-stuffs Acts' under which German or other foreign dyes can only be imported from abroad under a licence.

The object of all these duties and restrictions is frankly protectionist but the industries they seek to protect are confined exclusively to Great Britain. The effect of these duties in Ireland is:

1. To increase the cost of certain instruments and machines used in engineering and shipbuilding works.

2. To increase the cost of the dyes used in the textile industry. This, so far as it goes is injurious to the linen industry, but much more so to the cotton industry on account of the great relative importance of dyes in the latter industry.

3. To add to the difficulty and expense of properly equipping the scientific departments of Irish Universities, North and South. In effect this is a tax on education and we have evidence that its effect in this respect is appreciated by the authorities in the Queen's University, Belfast.

4. To add greatly to the labour involved in the collection of customs revenue at the ports.

5. To hamper and impede business men interested in the import of any of these 'protected' articles in view of the troublesome formalities that have to be complied with.

N.B. It may be stated confidently that the revenues derived even by Great Britain from the taxes on these articles is utterly insignificant and the revenue accruing to the Free State from a continuation of these taxes would probably not exceed the direct and indirect cost of collection.

As the industries 'protected' by the tariffs are not represented in the Free State or in Northern Ireland either[,] there is no earthly reason why these tariffs, devised exclusively in the supposed interests of certain cross channel industries, should be retained by the Free State. 'Northern' Irish industries derive no protection from these taxes either, and in fact suffer from them to an even greater extent than Free State industries do, but no doubt they will regard this loss as part of the price they gladly pay for the privileges of British citizenship!

There is evidence in the Morning Post article referred to that this aspect of the matter is beginning to be appreciated in the North. The writer attributes to the Free State the intention of abolishing the restrictions on the import of German dye-stuffs. He then goes on to say that if the Free State is able to give effect to this 'the effect on Northern Ireland will be inconvenient in two respects. The textile manufacturers of the North will be working under an extra burden as compared with the South in regard to their expenditure on dye-stuffs; and the guarding of the frontier against smuggling from the South into the North of German dye-stuffs will be a heavy task.'

The writer is unable to suggest any direction in which a compensation might be obtained by the North from this incidental disadvantage of British citizenship.

The moral (sic) of the Free State is obvious. Let us abolish not only the import restrictions on dye-stuffs but the whole congeries of taxes on foreign motorcars, clocks, galvanometers, thermometers, optical instruments 'et hoc genus omne' and multiply the problem of guarding the Northern frontier against the vigorous smuggling industry in all these articles which will at once spring up.

In this matter the interests and sympathy of the Northern business man will be with the southern smuggler and against the whole pro-British policy underlying the key industries['] duties. And it will soon dawn on his rapidly developing political intelligence that so far as fiscal policy is concerned the Free State system is more in his interests than the British system.

One of the incidental effects of the successful smuggling of key industry goods into Northern Ireland will be to compel the British customs authorities to keep almost as close a watch on the trade from Northern ports to Great Britain as they would keep on the trade from Free State ports. For otherwise key industry goods will be smuggled not only into Northern Ireland but from Northern Irish ports to Lancashire and elsewhere, where the demand for them is very urgent. The British custom authorities will have to abandon the attempt effectively to guard the land frontier and while conniving at the use of smuggled goods in Northern Ireland concentrate their attention on preventing such goods finding their way into Great Britain from Northern Ireland.

And so, Northern Ireland will have the worst of both worlds for her trade with Great Britain will be watched just as closely as the trade of the Free State while she will not enjoy the legitimate advantages of Free State fiscal independence.

American tariff on imported linen.

At present the linen industry in Ireland as a whole is hampered in its export trade by the American tariff on imported linen. Most of the linen mills and factories are in the Six Counties but there are a few in the Free State, e.g. in Dublin, Drogheda, Dundalk and Castleblayney. I am not aware whether any of these Free State linen concerns export direct to America, but if they do a vigorous effort should be made by our representative in America to induce the American Government to take off the tariff on linen exported to America from Free State linen factories. If Irish-American sympathy could be enlisted it ought to be possible to achieve this.

Political reactions of suggested Free State fiscal policy.

A fiscal system of the kind outlined would lead very soon to a movement among Northern business men for a Customs union with the Free State. The political price in terms of Irish unity which they would offer in the first instance would probably not be very high. If any offer at all is made I think it would be advisable to arrange a Customs Union for one year at the best political price the Free State can obtain for the first year. As a condition of renewal for a second year the political price should be raised, and so on from year to year until we all wake up suddenly to realise that by slow degrees the Free State has in fact reabsorbed the Northern Territory.

This procedure is in accordance with Northern psychology. The Northerner has made the 'splendid gesture' of marching out of the Free State with a flourish of trumpets. His back is now turned to the Free State, but he is quite noticeably taking one or two backward steps in the direction of that Institution. There is a story told of a man who walked backward into a circus and when passing the pay desk tried to avoid payment by pretending that he was going out. This is evidently the Northern attitude and policy. And it is safe to prophesy that he will gradually back into the Free State, that he will pay the political price of reentry, and that the fiscal policy pursued by the Free State, if it is of the right kind, will be the deciding factor in inducing him to return.

But we can have no fiscal policy at all until we decide to exercise our fiscal independence.