The EU Commission and UK have agreed a new Protocol for Ireland/Northern Ireland and a new Political Declaration in respect of the future relationship. It is expected that the Council will endorse it at the summit this week, and UK Parliament will vote on it on Saturday.
The main body of the Withdrawal Agreement is unchanged so financial settlement, citizens’ rights, the transition period (TP), and dispute settlement (including reference of matters of law to the European Court of Justice (ECJ)) all remain in place.
What has changed?
The Irish Protocol is no longer a backstop. It will operate as a fixed arrangement so rather than the TP being used to try and negotiate alternative arrangements to avoid a backstop coming into effect, the time will be used to operationalise the new arrangement for NI and negotiate the future relationship for the whole UK.
The NI arrangement is subject to a democratic consent mechanism, whereby there will be a vote in the NI assembly after 4 years. If they reject the arrangement at that point there would then be a 2 year cooling off period, during which presumably everyone will be dusting off their old copies of the Alternative Arrangements Commission Report…
If they accept it it will continue and be subject to recurring votes every 4 years to confirm (unless it is accepted by a cross community majority in which case the period will be 8 years).
Because this new Irish Protocol covers NI only, there is no UK-wide backstop. If negotiations during the TP fail, NI will be covered by the Protocol arrangements, and GB will be out as a third country (but see below for why this is complicated). Because there is no customs union at all, there are no ‘level playing field measures’ (LPF) to prevent the UK from benefiting from undercutting the EU on competition, state aid, environmental, tax and labour laws while enjoying the benefits of being in a customs union. This applies to NI too, except for state aid.
The political declaration no longer envisages a customs union type relationship for the future either. Where the old PD referred to building on the arrangement in the backstop and avoiding rules of origin, the new PD is firmly oriented towards a free trade agreement with advanced customs cooperation and regulatory arrangements.
LPF is referenced as a matter for negotiation to “ensure open and fair competition”. Specifically:
“…the precise nature of commitments should be commensurate with the scope and depth of the future relationship and the economic connectedness of the Parties. These commitments should prevent distortions of trade and unfair competitive advantages.To that end, the Parties should uphold the common high standards applicable in the Union and the United Kingdom at the end of the transition period in the areas of state aid, competition, social and employment standards, environment, climate change, and relevant tax matters.”
It still includes ultimate reference to the ECJ as being part of the dispute settlement process.
What is happening in Northern Ireland?
For regulatory matters in relation to goods, NI will adhere to single market regulations as under the old backstop and Boris Johnson’s proposal from last week. The negotiated solution for customs matters is very complicated and novel. Although the DUP oppose it, it could be considered to be a negotiating win for the UK, as it is very non-standard for the EU.
NI will be in the UK customs territory but will apply EU customs regulations for goods entering NI. In fiscal terms, no duties will be payable on goods coming from GB to NI unless they are at risk of onward transit to the EU. If a good is considered to be at risk, and EU tariffs are paid on its import, then the importer proves its final destination was NI, and can claim the duties back. If a good comes from a third country, the UK tariff will apply, unless the good is at risk of onward transit to the EU, in which case the EU duty will be payable and a reimbursement of any difference will be payable if the importer proves the destination was NI. Any EU duties that are ultimately paid may in any event be reimbursed to the importer by the UK government, subject to state aid limits. All duties are paid to the UK government and not remitted to the EU.
What is considered to be “at risk” is to be determined by the Joint Committee during the TP. The UK is responsible for implementing and overseeing these arrangements in NI, but the EU institutions are still involved and the ECJ will have ultimate jurisdiction.
This means that NI will be included in the UK for third country trade deals – its exporters and importers will benefit, albeit the importers may have to go through an extra hurdle of reclaiming any differential where the EU has a higher tariff than the UK. NI can’t benefit form regulatory liberalisation that the UK agrees for GB.
On VAT, NI remains in the UK VAT area, but similarly to customs, will apply EU regulations to smooth cross border trade with Ireland.
Evidently this is quite complicated and, at present, uncertain – but would be even more so in the absence of a free trade agreement between the UK and the EU that would make much of the above academic, in fiscal terms at least. It is also uncertain what formalities will apply for trade between GB and NI – will full customs declarations be required? On the face of it, they would, otherwise how could the risk and fiscal implications be checked. Together with the regulatory formalities this could mean that GB traders will be deterred from serving NI, which could have much greater economic impact on NI than a customs border with Ireland would have had.
From a free market perspective, this is vastly preferable to Theresa May’s deal. It resets the negotiating dynamic that her deal had set up, where the UK would have been compelled to accept a customs union and all the EU laws the EU wished to hold the UK to, or accept splitting the UK customs territory in perpetuity.
The new deal does involve differences between GB and NI and serious new burdens on trade within the UK, but so did the May Withdrawal Agreement, without enabling the potential benefits that Boris Johnson’s deal could bring.
If Parliament votes for this deal on Saturday, a Withdrawal Agreement Implementation Bill will need to be passed and the European Parliament will need to approve it.