Friday, October 05, 2018

Why the EU should soften its stance on the “Irish backstop”

Published on CapX


After the Conservative Party conference, the Brexit negotiations have picked up pace. EU diplomats are reported to be more optimistic a deal can be reached, with some of them even thinking they are “very close”.

This optimism is thanks to ever stronger indications of a possible fudge for the Northern Irish border, which I described in my previous CapX piece and which was first brought to light by The Telegraph’s Peter Foster, in the middle of the Summer. The UK government is, however, still working out the details of its backstop proposal. 

Apart from the precise role of the EU’s top court, the so-called “Irish backstop” is the main reason why there still isn’t a deal on the divorce part of Brexit, which will be agreed in the “withdrawal agreement”. This is a fallback arrangement that aims to avoid a hard border in Ireland in case there is no deal on the future relationship between the UK and the EU on January 1, 2021, at the end of the so-called “transition stage” during which Britain would keep full access to the EU’s market in return for becoming a full rule-taker.

The British government agreed last December on the principle of having a backstop, but the content of it still needs to be agreed. In February, the EU proposed creating both a customs border and a regulatory border between Northern Ireland and the rest of the UK. Again, this is a fallback option. It’s not meant to be used, but in case there is no FTA between the EU and the UK, it will regulate trade between the UK and the EU from 2021 on, together with WTO provisions.

Britain has been open to discussing regulatory checks within its territory. After all, there are already regulatory differences between Northern Ireland and mainland UK, due to devolution. The UK government has however been very clear that it was opposed to carving up the UK’s customs territory. Trade policy and tariffs will be a central UK government competence after Brexit.

The UK government’s insistence on the integrity of a UK customs territory , something which is shared by the Labour party, surprised the EU this Summer and EU leaders were also surprised to hear Theresa May repeating in Salzburg that the UK could not agree a customs border within the UK.
At an Open Europe event at the Conservative Party Conference, Brexit secretary Dominic Raab specified that if there would be regulatory checks in the Irish Sea and that there could not be new regulatory barriers. He thereby echoes the Democratic Unionist Party, which he wants to grant an effective veto by giving the Northern Ireland Assembly, where the DUP has a blocking minority along with the other Unionist parties, a say on the matter.

Can a regulatory barrier in the Irish Sea be fudged? Perhaps. One could think of a scenario whereby some Labour MPs would  abstain, making up for the no-votes of Eurosceptic Tories and perhaps the DUP. But this is unlikely.

Theresa May is reportedly thinking about pushing the legislation through Parliament at the beginning of December. That vote will be shaky almost regardless of what the final deal looks like, but a customs barrier in the Irish Sea would make the Parliamentary arithmetic even more challenging.
The UK’s proposal, outlined in the Chequers agreement in June, is for the whole of the UK to remain under the EU’s customs regime after the transition stage, but only for a limited period. This would create a new deadline by which a deal with the EU needs to be reached to avoid customs checks on the Irish border.

In the meantime, and during the transition stage itself, Trade Secretary Liam Fox would be able to negotiate trade deals with third countries, even if those deals could then only enter into force at the end of what could be called the second transition stage for customs only. It’s a compromise. But one that recognizes the time needed to adapt customs systems and negotiate trade deals, including securing the continued trade access Britain enjoys thanks to trade deals concluded by the EU.
The EU isn’t biting yet, however. The good news is that the Irish government and some in the EU are open to the whole of the UK remaining under the EU’s customs regime. That isn’t that surprising given that will be the case during the first, agreed on, transition phase.

The bad news is that Ireland and EU negotiator Michel Barnier refuse to put a time limit on this arrangement. And they don’t want any “second transition stage” written in the withdrawal agreement. They would rather it were included in a non-binding declaration on the future relationship.  For now.
However, we should be optimistic about the prospect of a deal, simply because EU member states will follow Ireland's lead on the "Irish backstop", which is the biggest missing piece. Ireland would pay a high price for a no-deal outcome.

However welcome the signs of flexibility on the Irish and EU side, it’s important to consider why the current EU stance on the “Irish backstop” is not reasonable and should be softened:

Carving out a part of the UK’s customs territory only makes Brexit even more complicated

The key problem is that the EU genuinely seemed to think that offering to carve up the UK’s customs territory was reasonable. Why did the Irish government not warn its EU partners not to do this?
Sure, the Canary islands aren’t a part of the EU’s customs territory, and parts of Austria were part of the EU’s customs territory before the country joined the EU, but these examples don’t feature the same sot of political sensitivities as Northern Ireland, where a part of the population fears one day ending up in a united Irish republic as a small minority.

Some on the EU side seem to realise that their offer was less than reasonable. But an insistence that the EU is not asking to carve up the UK’s customs territory will be unpersuasive as long as it flies in the face of the facts.

For example, the chairman of the Brexit committee in the Irish Senate has stated "we don’t want to see any border in the United Kingdom" and Polish MEP Danuta Hübner, a member of the European Parliament's "Brexit Steering Group", wrote that EU proposals for the backstop “have nothing to do with potential emergence of a new border in the Irish Sea.”

A customs border in the Irish Sea border may well violate the Good Friday Agreement
Irrespective of Brexit, to isolate Northern Ireland from the UK’s customs regime could be a breach of the peace accord reached in the 1990s. Theresa May is among those that have made this point. So the UK government and Parliament should not impose a customs border in the Irish Sea even if they want to, given that the consent of a majority in Northern Ireland is required.

A customs border in the Irish Sea is undemocratic

Fundamentally, there is also the issue of democracy: Northern Ireland’s population would fall under the EU’s trade regime, including possibly higher tariffs than the ones negotiated by the UK, without enjoying a democratic say in EU trade policy. That would be taxation without representation. 

A permanent backstop would hand the EU a veto over UK regaining trade policy

If indeed the whole of Britain would stay under the common customs regime in case there is no deal by 2021, but then permanently, unless an EU-UK trade deal is concluded, it would mean that the UK would only be able to let trade deals concluded with the US, China, Indonesia India or anyone else enter into force under the condition that there is first a trade deal with the EU.

The EU – or basically Ireland -- could hold up this EU-UK FTA by claiming that it wasn’t good enough to avoid a hard border in Ireland. Surely, Ireland must realise that requesting a veto over the UK regaining trade sovereignty is an excessive demand. And yet, it is the key issue now holding up a deal.

Reuters reports today that there is a "plan in the making" where by "the EU would get assurances that the emergency Irish border fix would be indefinite" but it isn't clear to what extent the British government is engaging with this, let alone how it could get through Parliament.

A permanent backstop might violate the EU’s own treaty rules

Under Article 50, the EU is only allowed to agree a treaty with a member state that is leaving the club to sort out the aspects of the divorce. A future trade arrangement needs to negotiated on another legal basis.

As part of designing a transition, sorting out some trade aspects is possible, but it needs to be temporary, as otherwise it could no longer be seen as being part of the divorce aspect but of the future relationship. It is far from clear that Barnier and his colleagues could justify an interminable Irish backstop under the terms of Article 50 if it creates permanent arrangement for trade flows between Northern Ireland and the EU.

To take the British proposal off the table makes customs checks more likely

The British government has suggested a solution, dubbed the “facilitated customs arrangement” or “FCA”. This would avoid customs checks, therefore solving the Northern Ireland problem but would also avoid a heavy burden on big manufacturers like Airbus, Honda or BMW that continuously ship parts and supplies back and forth from the UK to Europe’s mainland.

The solution involves the UK government collecting EU-level tariffs on any good entering the UK. It would then send the receipts through to the EU. British companies could then claim back some of the tariff paid if they could prove that the product they imported has not gone to the European Union and if the UK tariff is lower. Given that we’re only talking about tariffs and not about regulatory checks – where the UK would also be happy to align – there is no risk that if this system doesn’t work in an optimal way that there would be unsafe products entering the EU.

The only risk would be that the EU would lose some money, something the UK government could simply insure the EU against, for example by promising it would financially compensate for any losses as compared to the current income. Either way, we are not talking about huge amounts.
Unfortunately, the EU dismissed this proposal almost without consideration. Brussels claims that it can’t outsource its customs to third countries, even if in 2009 it agreed to trust a non-member’s (Switzerland’s) customs checks as equivalent . Again, Ireland hasn’t  been very helpful here.
Another argument is that the EU doesn’t want to change its own rules, for example the “Union Customs Code”, which can take a while, simply because a member is leaving. That argument overlooks that Brexit is more than a member leaving the club.

It resembles more something like a break-up of the EU club, as the UK economy is equal to the 19 smallest economies of the European Union. Just like in a divorce, it may not be very fair for an abandoned partner to have to make changes to his or her life, but it’s an inevitability. (In this case, both parties are to blame for the breakup.

If “FCA” is no longer an option to avoid customs checks between the EU and the UK, the only alternative is “maximum facilitation” or “max fac”. That basically entails employing technology to minimize disruption. It’s something that surely can go a long way, but it won’t be perfect.

In Switzerland, big companies seem to be able to deal with customs bureaucracy, but smaller firms find it more difficult. Perhaps the Irish government should look again at FCA. All of this is, of course, still separate from the possible need to align regulations in selected areas for the UK to keep market access and avoid regulatory, non-custom related border checks with the EU.

***

It is important that a hard border in Ireland is avoided, but how responsible is it for the EU to make all kinds of unreasonable demands that unnecessarily complicate an already challenging Brexit negotiation?

It is high time for the EU side to accept that the backstop to avoid a hard border in Northern Ireland cannot be a backdoor to keeping the UK under the EU’s customs regime. Lack of flexibility is only making no deal more likely, and the first victims here would be along the Irish border.

Britain has made some imperfect suggestions to avoid customs checks. These entail that the EU will need to make some internal changes as a result of Brexit. If the EU doesn’t like that, it should regret not having listened to longstanding British complaints about the EU’s direction, which are only  becoming more mainstream on mainland Europe.