Brexit Briefing No.39 - Customs back-flip?

Brexit took a back seat this week as the European spotlight turned to Rome, where a new Italian government emerged after months of negotiations. That government has the potential to cause significant disruption to Europe as it is a coalition of the far right Lega Nord and the anti-establishment Five Star Movement which was formed less than ten years ago. Neither party is known for its admiration of the European Union or the Euro and its early announcements suggest that there could be trouble ahead, particularly for the Euro given the size of both Italy’s economy and its debt.

Rome

On the Brexit front hopes were raised that there could be a breakthrough in the customs impasse. 

Many previous Brexit Briefings have described the customs impasse that has developed over the Northern Irish border questions. 

For months the EU has been pushing a specific regulatory solution for Northern Ireland that would de-facto leave the province in the European Union’s single market and customs union. This is despite the fact that such a solution is politically untenable in Westminster, threatening as it does the integrity of the United Kingdom and the UK’s own internal market. Unionists also see such a proposal as in breach of the Good Friday Agreement.

Part of the reason that the EU has continued to push this line is because the withdrawal agreement agreed in December included text that if there was no satisfactory outcome to the border issue, then a backstop arrangement should come into force between the UK and the EU to solve the Irish border question and protect the Good Friday Agreement.

Ireland Northern Ireland border

Specifically the text states the following: “In the absence of agreed solutions the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South Cooperation, the all-island economy and the protection of the 1998 Agreement." 

The government has been debating its alternatives to avoid the backstop coming into force for the last few months, but the European Commission appears to be working under the assumption that such a backstop would apply only to Northern Ireland. As a result they also appear to be under the incorrect assumption that because the UK agreed to this backstop, the British government is prepared to allow Northern Ireland to effectively be split from the UK. 

This misconception is one explanation for why the two sides are talking past each other on the impact of customs arrangements in Ireland. The Commission may well believe that the UK has already given up on the issue of separate rules for Northern Ireland and is therefore not serious in its threats to oppose a deal that splits the UK. However this is a dangerous misunderstanding because the British government has not conceded anything of the sort. The text agreed was only signed off by both sides because it was ambiguous enough for everyone to take what they needed and to kick the issue down the road, to be discussed at a later stage.  

So this week the UK informed the Commission that it wanted the backstop to apply to the whole UK and not just to Northern Ireland. They backed this up by referring to Paragraph 50 of the withdrawal agreement which stated that in the event of such a backstop being deployed there would be no barriers on trade between Northern Ireland and the rest of the United Kingdom. The UK government is now apparently preparing to propose a solution that will see the UK maintaining alignment with those rules of the Single Market and Custom Union necessary to support North-South and East-West cooperation.

British isles

This strategy plays well for the UK as it would allow the UK to cherry-pick single market access in specific sectors, for the whole of the UK without having to meet all the rules of the single market. It would also ease some of the potential customs problems in Dover and the other ports.

However it is the opposite of what the Commission wants because it has always been opposed to the UK cherry-picking on the internal market. Yet the withdrawal agreement, which the Commission already agreed to, seems to back the UK approach. In fact it is the only way to square the circle of having no hard border in Northern Ireland and no border in the Irish Sea which divides the UK.

As this principle has already been agreed by the Commission in the withdrawal agreement it puts them in a difficult position. At its heart the debate is about two things: what do the words actually mean and what really are Brussels’ red lines on cherry-picking?

Cherry picking

When pushed Brussels admits it is breaking its own strict no cherry-picking rules in its proposals this year for special arrangements for Northern Ireland, but justifies this by stating the unique circumstances on the island of Ireland and the fact the population of the province is less than two million. The problem for Brussels is that the words of the agreement in paragraph 49 from December clearly state the United Kingdom, not Northern Ireland, will maintain alignment and coupled with Paragraph 50, the clear resolution is that the backstop solution cannot allow barriers to trade between Northern Ireland and the rest of the United Kingdom. 

Brussels, Berlin and Paris, and other capitals are wary that the whole United Kingdom aligning with many areas of the internal market and customs union to protect the Good Friday Agreement could allow the UK enhanced access beyond what they are willing to offer, and thereby set the parameters of a future free trade agreement wider than their ambition. Paragraph 46 of the December Agreement also says that the agreement on Northern Ireland should not pre-determine future trading relationships, but of course the Commission’s proposal does precisely that. The Commission is also nervous, as it was about Theresa May’s customs partnership proposals, about a “third country” being trusted to check goods and collect tariffs on the EU’s behalf, it was willing to take that risk for Northern Ireland, but is much more wary about applying that across the UK.  

The UK counter-argument to many of these concerns would be that this cherry-picking is purely to solve the border question, not to gain a competitive advantage, and that this alignment would not cover services, it would essentially deal with goods. This presents its own problems for the UK, which has a deficit in trade in goods with the EU, and a surplus in trade in services, so removing many barriers to goods in one fell swoop would leave the UK with less leverage in the trade talks on the future relationship. The UK is also arguing, for that reason, as well as to quell disquiet amongst some of the more vocal brexiteers, that the backstop solution will be temporary, until the future relationship resolves these questions.

Canary Wharf

However, the Irish government is hugely wary of any time limit on the backstop, fearing that it would not give them sufficient long term protections, particularly as once the UK has left the EU, the EU will have far less leverage. 

So these proposals throw up as many questions as they do answers, however for possibly the first time in the negotiations the UK appears to have taken the initiative and have put the Commission in a tight spot. 

It is worth pointing out that this is a discussion on the backstop position, if all other talks fail and there is no satisfactory customs agreement which ensures no hard border between Northern Ireland and the Republic. However it could be that the backstop arrangements provide a possible path to solving the customs conundrum, because it is looking increasingly impossible for a solution to be found there.

The UK proposals for a customs partnership and for “maxfac” customs facilitation were both rejected by Brussels this week. Given the challenges domestically in the UK in even presenting these two options, it is difficult to see how the two sides can overcome their differences in the coming months. For that reason the backstop proposals made by the UK may end up being the only viable option on the table.

However there is still time for plenty of other options to play out. On Thursday it became clear that the government is going to bring all the Brexit legislation back to the Commons in June where the Lords amendments to the EU withdrawal bill will be voted on. Those votes will almost certainly shape the future of Brexit and will be crunch time for the government’s strategy. If it loses on the key issue of the customs union, it is very difficult to see where its strategy can go. If it prevails and the Commons backs leaving the customs union, the backstop arrangements may become the only game in town.