Searching for a compromise on the Irish border

Published on CapX

Now that Brexit negotiations have restarted after the Summer break, the scramble to agree a deal by October or later is well and truly underway.

Eighty per cent of the content of the withdrawal agreement has been agreed. The main remaining sticking point is the so-called “backstop” arrangement for the Northern Irish border. This will be activated in case there is no deal on the EU-UK future relationship by January 1, 2021, when the transition period – during which Britain keeps all access to the European single market in return for taking over all EU rules – comes to an end.

The EU’s proposal for this backstop is to simply isolate Northern Ireland out of the UK and keep it under the EU’s regulatory and common tariff regime. This would avoid checks at the Northern Irish border which some fear would endanger the already fragile peace process. Many EU diplomats genuinely believe this was a fair and balanced offer to the UK, pointing at precedents in countries that have a part of their territory under a different customs regime, including, for example, Austria before it joined the EU.

Many in the EU27 were therefore concerned when, in July, an amendment was adopted by the British Parliament which rules out a customs border in the Irish Sea.

Given how hard it is for UK MPs to agree on anything Brexit-related, this is quite telling. Some in the EU may think Britain’s stance is irrational and “ideological”, but, given the fact that a large part of the Northern Irish population fears one day ending up a minority in an Irish Republic, it’s a reasonable insistence.

Importantly, however, British MPs have not voted to rule out a regulatory border between Northern Ireland and Britain’s mainland.

Therefore, perhaps a compromise could take the following form: Britain accepting a regulatory border in the Irish Sea and the EU accepting that at some point there will be customs checks on the Northern Irish border. These will be unavoidable if Britain regains the right to set different tariffs than the EU, at least in the absence of customs checks within the UK.

How likely it is to see such a compromise emerge this autumn?

As reported by Bloomberg, the UK government has have been working on proposals that, according to officials speaking privately, involve keeping Northern Ireland aligned with EU regulations. That would mean putting a regulatory border, but not a customs border, between Northern Ireland and Britain.

Interestingly, Bloomberg claims that Jeffrey Donaldson MP, the Chief Whip of Northern Ireland’s DUP, which props up Theresa May’s government, has “hinted” that the plan could be acceptable. Indeed, he only mentioned “a customs border” as something that would be “unacceptable” to his party. Perhaps this is all over-interpretation, but both UK and EU officials have pointed out that there are already some differences in regulations between Northern Ireland and mainland Britain and that regulatory checks already exist between the two for animal imports, something that EU Brexit negotiator Michel Barnier has been highlighting as well.

Barnier has pledged to “de-dramatise” the EU’s backstop offer by looking at limiting the legal power the EU would wield over Northern Ireland. In particular, this would involve only requiring routine and limited controls and scaling back the powers of the European Court of Justice, which would only be given indirect authority over the UK.

This shouldn’t be that far off what the UK could accept. In its proposals for the future relationship, the UK has suggested an arrangement whereby a joint EU-UK panel would need to refer questions related to EU law to the ECJ and whereby UK courts would need to pay “due regard” to ECJ rulings, even if the UK would be part of a separate jurisdiction.

Even if some kind of “soft” regulatory checks in the Irish Sea were agreed on, the EU would need to concede to customs checks between Northern Ireland and Ireland emerging at some point  — unless it wants to reconsider the UK’s innovative facilitated customs arrangement again.

How likely is a concession on customs checks?

Assuming that different tariffs between Northern Ireland and mainland Britain are a real “red line”, both for the British Parliament and the DUP, demanding to rule out customs checks on the Northern Irish border and thus different tariffs between the UK and the EU is effectively the same as demanding that Britain never recovers an independent trade policy, with the right to set its own tariffs.

Even if Britain did not check that goods crossing the Northern Irish border comply with UK tariffs, surely EU member states would tell Ireland to check if EU tariffs have been paid on goods entering Ireland from the UK.

Irish PM Varadkar may have pledged that not a single one of the 1000 newly hired customs and supervisory officials will be posted at the Northern Irish border, but other member states may ultimately ask him to put them there.

The UK government has proposed a system that is designed to square the circle, combining different UK tariffs with avoiding Irish customs checks on the Northern Irish border. Its facilitated customs arrangement involves the UK collecting tariffs on behalf of the EU for goods first entering the UK but with the EU as their destination.

Many are rightly sceptical about this system, which involves a high degree of trust, but one could think of arrangements whereby Britain promises to financially compensate for the EU in case of unexpectedly low tariff revenues, if that were the concern. There is a precedent here: in 2009, the EU agreed to trust a non-member’s (Switzerland’s) customs checks as equivalent.

Britain also has the second option of a “maximum facilitation” model.  “Max fac” attempts to minimise friction at the border using technology and the imperfect precedents of those other two neighbouring countries that are not a member of the EU’s customs union: Switzerland and Norway.

The head of the Swiss customs service has said that his experience suggests an “invisible border” in Ireland after Brexit is possible. Because only a minority of possibly necessary checks relate to customs matters, this should perhaps be something conceivable for Ireland and the EU.

To convince the EU, the UK could simply suggest that it would apply the same tariffs as the EU for a period after January 1, 2021, meaning no customs checks on the Irish border would be needed for a long time. In effect, as its offer for the Irish backstop, the UK proposed in June that the whole of the UK – so not just Northern Ireland – could remain in the EU’s customs union after the end of the transition.

In a technical paper, Britain suggestss applying a “temporary customs arrangement … between the UK and the EU” that would allow it to sign free trade deals with other countries that would only enter into force when a new, “future customs arrangement” would be introduced, which the UK paper “expects” to be the end of December 2021 at the latest.

This may be a little optimistic, as a lot of work will be needed to adapt UK customs bureaucracy, both for Northern Ireland and the Channel ports, while Britain is likely to need a lot of time anyway to negotiate a trade deal with the likes of India, the United States and Indonesia. Therefore, a longer period may be necessary. Also, many big manufacturers with plants in the UK operate on a “just in time” basis. If there were different tariffs between the EU and the UK, they would need time to make changes to that model.

This would all involve the whole of the UK and not just Northern Ireland staying in some kind of common customs union with the EU for a limited period. Barnier has said he has no objection to a UK-wide customs area “in principle”, also as he’s apparently being pressured to be more flexible on this by “northern trading states”. He has however raised doubts over such an arrangement being “temporary”.

According to Bruno Waterfield, the always well-informed Brussels correspondent of The Times, the current compromise envisioned by negotiators would be for the UK to accept the backstop as drafted by the EU, but the EU also accepting to negotiate a UK-wide arrangement during the transition, so the whole of the UK would be kept under the common tariff regime with the EU until final trade arrangements was ready.

This scheme is being described as the “Siamese twins” of “a bridge for the UK and a backstop for Northern Ireland”. If indeed this were to be the outcome, the UK would remain under a common customs regime with the EU for quite some time, as, again according to Waterfield, the EU has claimed that UK proposals on customs – FCA and Max Fac – require the EU to change its own customs code, which would take “at least a decade”.

Even more troubling is the fact that, short of any other deal with the EU, it might mean that Britain wouldn’t regain its own trade policy. Waterfield adds that “[the EU] and Whitehall both fear that internal Tory politics at [the Conservative] party conference in Birmingham could kill a backstop compromise. [There are] fears that Jacob Rees-Mogg and the European Research Group are “on manoeuvres””.

In any case, some EU flexibility is needed for Britain to recover its own trade policy. Any deal which makes the UK leaving the EU’s common tariff regime dependent on an EU veto won’t be sustainable.

Brexit: What would a 'no deal' mean?

My interview with Euronews

How are the EU27 preparing for a ‘No Deal’ Brexit?

Published on Open Europe's blog and covered by various media, including the Financial Times

Understandably, a lot of the recent focus in the British media has been on UK preparedness for a ‘No Deal’ Brexit but, just as with a negotiated deal, there are many players determining how this scenario could play out. The EU27 as a whole and individual countries are making their own plans as well.

While the impact of a badly handled ‘No Deal’ Brexit would have a greater proportional effect on the UK, the EU also has much to lose from ‘No Deal’, and certain member states, such as Ireland in particular, could be heavily exposed in a ‘No Deal’ scenario.

Below I set out the range of measures (not exhaustive) that governments and firms across the EU27 are taking to plan for April 2019. It must be said that it is not always clear to what extent these measures are being taken to prepare for a ‘No Deal’ or negotiated Brexit, as many are likely to be required under either scenario.

What is clear is that some member states are far more prepared than others and some appear more flexible than others.

Ireland:

•  Each Irish ministry has been asked to identify the potential impact of a ‘No Deal’ split and what resources would be needed to deal with it.  

• Infrastructure at ports and airports will be upgraded, in particular at Dublin and Rosslare Ports. The Irish Taoiseach, Leo Varadkar, has specified that “about 1,000” customs and veterinary inspectors will be hired “over the course of the next year,” to post “at ports and airports,” although none of them will be deployed on the border with the North as checks at the Northern Irish border “is not a scenario that we’re going to prepare for.” He added  that “in the unlikely event of a ‘No Deal’ hard Brexit next March, of course it will not be possible to have 1,000 people in place by then, but we will make contingency arrangements to do whatever needs to be done in the unlikely event that should arise.”  

• The Irish government is drawing up plans to stockpile insulin, vaccinations and other medical supplies because of possible restrictions to import from the UK.  

• The Irish government has also signed off on a plan to remove all of Ireland’s 200,000 tonnes oil reserves from the UK, “for national security reasons.”  

• Other measures include setting up a new system on the Irish stock exchange to settle shares and securities, lobby the EU Commission to relax state aid rules, offerbusinesses a ‘Be Prepared’ grant of up to €5,000 and making sure Irish pensioners with a UK pension continue to receive it.  

• Only 6% of Irish businesses already had a Brexit plan in place this Summer, according to a survey by Allied Irish Banks (AIB). For Northern Ireland, that figure was 5%, despite 70% of firms expecting the UK’s departure from the EU to have a negative impact on Ireland’s economy. The manufacturing, retail and tourism sectors here were the most negative about Brexit. According to another survey, customs and logistics are the single largest Brexit worry for Irish businesses.

Belgium:

• The Belgian government has decided to hire at least 141 extra customs officials. The plan is to hire them this autumn and to train them so they are ready by April 2019. Trade unions representing customs officials have accused the government of underestimating the extra workload and being too late to deal with Brexit, claiming that the Netherlands has been quicker on the ball.  

• The Belgian customs administration has also set up an internal committee which will be responsible for the extra infrastructure and for training the new staff. It has drawn up a list of potential items that may be needed after Brexit, which reportedly includes more luggage scanners, sniffer dogs, manual scanners, drones to survey the coastline, a submarine to examine ships in the North Sea, as well as vehicles, computers, work spaces, and uniforms. There are also plans to coordinate with neighbouring countries, the European Commission, Belgian ports and airports.  

• Special attention is being devoted to the ports of Zeebrugge and Antwerp, which are big re-exporters of goods to the UK. Together with the Dutch ports they account for the majority of total inbound and outbound traffic with Britain’s ports. The CEO of Zeebrugge, which has 46% of its traffic with the UK, has claimed the port will be ready for Brexit. It is building a digital platform to speed up bureaucratic procedures, and thinks it may be better equipped than some competitors, because it specialises in people-free freight.

Netherlands:

• The Netherlands was the first to announce it is hiring extra customs officials, up to 930, to deal with Brexit and a possible ‘No Deal’. This is a 20% increase in staff capacity. According to the Dutch government, this is mainly needed in Rotterdam port. The Dutch Food Safety Authority NVWA also plans to increase its staff numbers with 143 people, to implement checks at ports and airports. Especially veterinarians are needed.  

• The Dutch government is currently drafting a “playbook,” which should be ready by October, to deal with a ‘No Deal’ scenario, following pressure from the Dutch Parliament, which will be briefed on the “playbook” in September.  

• The Dutch government has prepared a €3.9 million budget to help business with Brexit. This includes the possibility to request a €2,500 voucher which can be used for a “Brexit test,” to check how a company would be affected by Brexit.  

• The CEO of Dutch employer federation VNO-NCW has stated he is doubtful whether Dutch companies that are trading with the UK are sufficiently prepared for Brexit, warning them at a special meeting that “on Brexit day you are too late.”  

• The port of Rotterdam, which is the Europe’s biggest port, plans to simulate the worst case Brexit scenario in November, with its Director, Allard Castelein, explaining, “we will do a test whereby we simulate a “real’ Brexit situation. All parties and companies will then feel how it will be…On that day, we hope to discover the problematic issues. Then we still have a few months to prepare ourselves for the real Brexit.” He also warned that “I don’t feel the sense of urgency among government or business to deal with Brexit scenarios.”

Germany:

• The German customs administration is planning to hire 900 new customs officials in the coming year, to be posted at the ports of Hamburg and Bremen, at major airports, such as Frankfurt or Cologne-Bonn, and at DHL’s hub in Leipzig. It has been preparing for all possible scenarios for months. Action plans to minimise upheaval have been drafted.  

• Business federations have been urging businesses to prepare, publishing informationabout Brexit, with the BDI, Germany’s biggest industry lobby warning “many companies simply hope there won’t be hard Brexit.” Especially smaller German companies are not well prepared.  

• Manufacturers, like BMW, are reportedly preparing infrastructure to stockpile parts and training Deutsche Bank has stated it is already prepared for a ‘No Deal’ scenario.  

• Some firms seem to prepare by simply shifting some production away from Britain. In March, it was revealed by the Chartered Institute of Procurement and Supply, based on a survey of more than 2,000 supply chain managers, that one in seven European companies with UK suppliers had moved part or all of their business out of Britain.

France:

• The French government has announced it will hire 700 extra customs staff by 2020, on top of the 250 that are being stationed this year at ports in Calais, Dunkirk and Eurostar terminals in France.  

• French Prime Minister Edouard Philippe has also asked his ministers to prepare “contingency measures that would be necessary…to mitigate the difficulties linked with this unprecedented challenge” of a ‘No Deal’. The measures will be inserted an emergency bill which the French Parliament will be asked to approve and include plans to “facilitate the residency of British nationals already living in France” and to ensure “the greatest possible fluidity of border controls” when the UK leaves the EU.  

• Also, the French government has been suffering domestic criticism for its lack of preparedness. In July, Xavier Bertrand, the president of the Hauts-de-France region, which includes Calais, issued a desperate warning that there was not enough contingency planning because there is no cross-border communication between French and British policy makers, saying, “I don’t think there is enough awareness. Many politicians think it is all automatic and somebody will take care of Calais.”

Luxembourg:

• Luxembourg may be small but its role is not unimportant in Brexit, given the presence of a large asset management industry in the Grand Duchy. The country, which has stressed that keeping financial channels with the UK open benefits the EU, is seen as attractive to certain London-based asset management and insurance firms looking to continue to benefit from an EU passport to provide services once the UK leaves the EU.  

• Asset managers will need to start activating contingency plans by the Autumn according to The Investment Association, a trade body for UK investment managers, Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF), has ordered financial institutions in the Grand Duchy to prepare for a ‘No Deal’ Brexit by taking “immediate practical steps to prepare for Brexit” and to inform their clients of the potential risks.

Other countries:

• In Poland, several ministries have been analysing the potential impact, both on the many Polish citizens living in the UK and on the Polish budget which is vulnerable to a cut in EU subsidies. At the end of July, the government was determining how many additional customs agents will be required and investigating measures to limit the risks to business.  

• Spain’s government has been running an analysis of the different potential outcomes of the Brexit talks, including the ‘cliff-edge’ scenario, based on input from companies and business groups. It has also been working on a plan to shield its tourism industry from any disruption to air travel and will allow UK citizens to use their existing Spanish ID as a post-Brexit entitlement paper, which is a more flexible arrangement than the one France has in mind. Last month, the Spanish government warned the UK that a ‘cliff-edge’ Brexit must be avoided for Gibraltar, as bilateral talks between Spain and the UK are currently ongoing over this issue.  

• The Italian government reportedly does not yet have a contingency plan for a ‘No Deal’ Brexit, as it considers this a remote prospect, according to a senior official, who thinks EU-wide contingency planning may be needed instead, in September or October. Business is however getting nervous, as Roberto Moncalvo, president of Italian farming union Coldiretti has warned Italian agriculture “can’t pay the price of Brexit,” estimating that 800,000 Italian farms may be impacted by possible agricultural spending cuts.  

• The rest of the 27 remaining EU member states have been following quite similar strategies in preparing for a ‘No Deal’ Brexit: identifying different scenarios and developing actions plans (Bulgaria, Denmark, Cyprus, Estonia, Finland, Sweden), increasing customs staff (Belgium, the Netherlands, France and Germany) or not (Portugal, Austria). Some countries (Lithuania) have no specific contingency plans.

The European Commission:

• The European Commission has been preparing contingency plans that would allow the EU to take unilateral measures to mitigate the risks to trade with the UK in the event of a ‘No Deal’ Brexit. The Commission has published a list of pending legislative initiatives on “preparedness” and has also put up a “Brexit Preparedness website.”  

• Apparently there are already disagreements over the duration and range of such arrangements. One concern within the Commission is that it may not be able to act as swiftly as the UK. This is because many decisions would require the endorsement of all member states as well as the European Parliament. Moves would also have to be compatible with European treaties and could be challenged in the European Court of Justice (ECJ).

Conclusion:

Some EU member states have already spent a lot of capital and energy on planning for ‘No Deal’, others not that much. Even the governments that have taken a lot of measures to prepare for Brexit, such as the Dutch, Belgian and French governments, have been suffering domestic criticism from business groups for not doing enough.

Ireland has done most in terms of preparations so far, but the admission by Irish Taoiseach Leo Varadkar  that in any case his government will not manage to put in place all of the 1,000 new customs officials and inspectors by March is indicative of the obvious: it is incredibly hard to prepare for a ‘No Deal’ Brexit and many of the EU27 member states will not be properly prepared for it.

The good news is that this might make the lose-lose ‘No Deal’ scenario less likely.