Boris’ Brexit Breakthrough?

This week the UK government published its plan to finally unlock the withdrawal of the UK from the EU. Whether this will bring an end to the seemingly never-ending Brexit saga remains to be seen.  Even after any agreement is made a two-year transition period will follow.

In the next few weeks the Prime Minister faces a difficult balancing act. Getting any proposed plan approved represents an arduous endeavour, even for an optimist like Boris Johnson. On one side he faces a European Union which has been publicly steadfast in its opposition to any change to the Withdrawal Agreement. On the other he faces Parliament, which has rejected every possible version of Brexit thus far. Moreover, his own party is still very divided on Brexit.

Adding further pressure is the Benn Act (branded the Surrender Act by the Prime Minister), which mandates the Prime Minister must seek an extension from the EU if a deal cannot be struck before the 19^th of October.

What are the main sticking points? To date, the status of Northern Ireland and the future functioning of its border with the Republic of Ireland are the dominant issues. Aside from the technical difficulties, a hard border on the Island of Ireland has been characterised by some as a destabilising entity that would undermine the terms of the Good Friday Agreement.

The ‘border’ issue also has implications for the Republic of Ireland and its relationship with the EU. Not having controls covering movement of goods across the island crosses EU red lines, as the integrity of the European Union rules must be maintained when goods flow from a third-country, i.e. the status UK will possess after Brexit is concluded.

The document released on Wednesday offers solutions for this problem which the UK government hopes will satisfy all parties involved, not least the Irish Government. These are considered below.

The Proposals

1. Goods

Northern Ireland will remain within the regulatory orbit of the EU for agricultural goods even after the end of the transition period in 2021. Thereafter, it will become a part of an ‘all-island regulatory zone’. This means Northern Ireland will remain within the Single-Market for goods, whilst the rest of the UK leaves.

The key points of the UK government’s draft plan are as follows:

• Agricultural and manufactured production in Northern Ireland stick with EU regulations;
• Checks to determine whether goods meet the Single-Market’s regulatory standards will be avoided;
• Goods produced in Northern Ireland to flow freely over the border and vice-versa;
• Agricultural and manufactured goods entering Northern Ireland from Great Britain will face documentary and physical checks before leaving the mainland;
• Goods entering Northern Ireland from the UK will be checked to make sure they match EU rules;
• Northern Irish market trading with the UK will be rule free i.e. the UK will not impose checks on goods.

Resultantly, the arrangements described are claimed to respect the integrity of the Single Market, a key demand of the European Union.

2. Customs Arrangements

Once the two year-transition period has expired in 2021 the draft proposal indicates that the whole of the UK will exit the EU Customs Union. Northern Ireland will then become part of the new UK customs territory.

Afterwards, it is envisaged Northern Ireland will stick to the UK’s new tariff regime. They will also benefit from new trade deals signed by the UK. This could produce new tariff regimes with different countries and after 2021 this is what makes the situation more complicated.

Removing Northern Ireland from the EU’s Custom Union will require customs checks on all goods passing North and South. The UK, including Northern Ireland, will no longer be a party to the EU’s policy arrangements. Thus, different tariffs on goods originating from third countries will apply.

Under the proposal custom checks need not happen at fixed points at or near the border. However, the draft document envisages that cooperation between the customs authorities of both the UK and the Republic of Ireland using simplified customs declaration methods will facilitate. For example, customs declarations undertaken electronically before goods leave their port of origin will reduce the need for lengthy customs checks at border crossing points. This is new and untested. But it is a way forward.

Goods entering the Republic of Ireland from the UK or vice versa, will be linked to a declaration supplied to the customs authorities of either territory. In this way only a very small proportion of traded goods would require physical checks at specified locations or traders’ locations.

3. Consent

Northern Ireland’s institutions must agree to continued membership of the suggested ‘single regulatory zone’. A vote will be required every four years by the Northern Ireland Assembly and Executive. If they do not agree the arrangements will not apply to Northern Ireland after a period of one year.

Additionally, Northern Irish institutions could withhold their consent before the end of the transition period in 2021.

The Reaction

The reaction from the EU has so far been one of caution. They do not want to be seen to be the party blocking a deal with the UK, nor the cause of a potentially hard-border being erected between Northern Ireland and the Republic, something to which Leo Varadkar’s Irish government has been implacably opposed.

However, the plans for a single regulatory zone on the entire Irish landmass and checks on goods entering Northern Ireland from Great Britain are likely to be welcomed. The main impediment to the plan’s wholesale acceptance are the proposed customs checks on goods moving between Northern Ireland and the Republic. The EU and Irish government are likely to view any customs checks inconsistent with  the maintenance of a free-flowing ‘all-Ireland’ economy.

However, it is important to consider the relative values of the trade flows between the protagonists. The value of cross border trade in goods between Northern Ireland and the Republic, according to the Northern Ireland Assembly Research Service is around £5.4 billion. This amounts to less 1% of the total value of trade between the UK and EU, estimated to be around £649 billion

Likewise, the value of trade between the United Kingdom and Northern Ireland amounts to £18 billion, around 3.5 times the value of trade between Northern Ireland and the Republic of Ireland.

In one sense it has suited the EU to put a great deal of emphasis on the border issue. The death knell for Theresa May’s tenure as Prime Minister was the inclusion of the backstop proposal. This would have kept the entirety of the UK within the EU’s Custom Union and regulatory sphere, to avoid the erection of a hard-border between Northern Ireland and the Republic if talks between the UK and the EU on a future trading relationship collapsed. Arguably, this would have reduced the need for the EU to compromise if a deal remained elusive.

At least in raw economic terms, the question of the Irish border, whilst important, is not the main consideration. If cool heads prevail, efforts could quickly turn to the future trading relationship between the EU and the UK.

Conclusions

The draft proposals represent a significant change to previous plans, with the UK government moving on some key issues.

While recognising the importance of cross border trade flows on the island of Ireland, it remains essential to reach an accommodation which prioritises the total value of trade between the UK and the EU.

Risks of an impasse remain, and compromise is required from both sides to ensure an agreement is passed before the end of October.

Please be aware that this communication should not be considered financial advice.