The New Irish Border Deal
This article is going to try and explain lots of different things which all form part of the ‘what’s going on right now’ picture:
The new deal negotiated between Boris Johnson and the EU;
The difference between a Free Trade Agreement and a Customs Union;
How the EU-UK Trade Agreement discussions may impact the Ireland solution; and
Why Level Playing Field Provisions (Labor/Environment) were removed.
I estimate this will take roughly 40,000 words or 2/3rds of a Dominic Cummings post-it note, so beg your patience. As you know, this stuff is complicated and I love the sound of my own voice.
What’s different about “The New Deal?”
Initially, not a lot.
The New Deal begins much like the old one, with a transition period until the end of 2020. During this transition period, the UK will have left the European Union politically but will still be treated as a Member of it in most trade relevant ways. It will be like the UK has left the EU, but remained temporarily within the Single Market and Customs Union, albeit with some reduced rights when it comes to shaping them.
The difference kicks in at the end of the transition period.
Under Theresa May’s deal, the UK and EU were supposed to have spent that transition period negotiating a way to make the border in Ireland work in a way that doesn’t undo the work of the Good Friday Agreement. If they couldn’t find a way to do that, a ‘Backstop’ would kick in. I talk a lot more about why this occurred and why it proved problematic here.
The Backstop would have meant the UK would remain part of the EU’s Customs Union and continue adhering to some relevant EU regulations for as long as it took for a solution to emerge.
Remind me, what’s a Customs Union?
A Customs Union is an agreement between two or more countries. In it, these countries agree to:
Eliminate tariffs between themselves;
Maintain an identical set of minimum tariffs on goods from other places.
Being in a Customs Union means two countries can significantly reduce the screening that occurs on their mutual borders. It is the EU’s Customs Union, combined with some elements of the Single Market, that has allowed it to virtually eliminate internal goods screening all together.
How is that different from a Free Trade Agreement that eliminates all tariffs?
A trade agreement, even one that eliminates all tariffs, doesn’t mean countries can do away with customs checks on shipments from one another. This is because while they have no tariffs between themselves, they may have vastly different tariffs on other countries.
The diagram below illustrates why this could be a problem. In it, Country B has Free Trade Agreements eliminating all tariffs with countries A and C. Country C wants to sell something to Country A, but doesn’t want to pay the 10% tariff. So it sends the shipment via Country B, avoiding the tariff.
To prevent that, Country A needs to maintain a goods border with Country B, to check that any incoming goods are actually eligible to take advantage of their trade agreement (they really come from Country B).
How is there no kickstarter to send me on a graphics design class yet?
If instead of a Free Trade Agreement, Country A and B had a Customs Union, then they would have both agreed to apply the same minimum tariffs to Country C. There would be no way for Country C to ‘sneak’ its goods into Country A tariff free via Country B, so they wouldn’t need nearly so extensive a border between them.
Seriously, send help. Sam Lowe does a better job with a biro and a napkin.
Ok, but Boris Johnson doesn’t want a Customs Union?
That’s right, and he’s not the only one.
When you’re part of the Customs Union, you can’t offer any other country you’re negotiating a Free Trade Agreement with a lower tariff than the Custom Union rate. You also can’t unilaterally lower your tariffs below that rate. Many believe that represents an unacceptable loss of sovereignty for the United Kingdom.
So how did he get around that?
Boris Johnson’s negotiating team had to achieve two objectives:
Prevent the need for the EU to build a border inside Ireland;
Keep Northern Ireland within the UK customs territory, so any future UK trade deals would apply to the entire country.
The solution they arrived at is something of a hybrid. Northern Ireland remains part of the United Kingdom’s customs area, but is treated administratively as if it were part of the EU’s.
“Treated Administratively?”
Yes, I know. I’m sorry. I didn’t invent this terminology I just blog about it.
What this actually means is that while on paper the outer edge of the European Union customs territory will be inside Ireland, all of the practicalities to make that work will actually take place in Northern Ireland, on the shores of the Irish Sea.
Explain, nerd.
The EU needs to be able to control what enters its territory. It needs to know what’s coming in, to confirm that all the tariffs and fees have been paid, and that whatever is entering meets the EU’s rules and regulations.
Under No-Deal, the only place this could happen on the island of Ireland would be on the border between Ireland (the country) and Northern Ireland. Many argue this would be a bad idea, jeopardizing a hard won peace.
Under this deal, these checks will now take place when things arrive at Northern Ireland ports. Goods arriving will be declared, pay the EU’s tariffs, and be checked for compliance with EU regulations. Once they pass all those checks, they can be released into Northern Ireland and from there cross without any further checks or fees into Ireland (the country), and from there the rest of the European Union.
But does that mean..?
Yes, goods moving to Northern Ireland with no intention of going further may still be charged the EU tariff. To offset this, the two sides have agreed there will be certain goods movements that will be exempt, and others for which the owners will be able to apply to the UK for a rebate on their tariffs paid.
That sounds like a hassle.
Hard to see how it could not be.
A lot of the details of this scheme have been left for The Joint Committee and the two customs authorities to work out, but it seems inevitable goods traffic between Great Britain and Northern Ireland will now involve significantly more paperwork and administration than before.
You’ll need to declare not only what you’re carrying, but if you want to avoid paying tariffs on it or receive a rebate, also prove where it’s headed. Not fun.
Update: While the Joint Committee has apparently made good progress in some areas, the Johnson government may be considering unilateral changes to the above.
It has been reported that should the Joint Committee not resolve all the issues, the UK would give its Ministers the right to unilaterally:
Decide what constitutes a good without a risk of moving into the Single Market and thus eligible for entering Northern Ireland tariff free;
Waive the requirement for export declarations (demanded by the EU) for goods moving from Northern Ireland to Great Britain; and
Not comply with sections of the Withdrawal Agreement relating to subsidies that may impact the Northern Ireland goods market.
To quote the great Marie Kondo, for European Union leaders obsessed with the rule of law and preserving the integrity of the single market, this is unlikely to be a move that sparks joy.
Wait, what about stuff moving the other way?
This is even less clear, and the UK government have to date (7 September 2020) been less than fully consistent on what its plans are.
Because the UK doesn’t have to defend the integrity of a giant Single Market the way Ireland does, it can be a lot more relaxed about its border procedures and its risk appetite for smuggling. It may be that at least temporarily, the UK simply won’t actively screen shipments from Northern Ireland, thus accepting the risk they contain goods from abroad that should have paid UK tariffs or don’t meet UK regulatory standards.
In that case, the only paperwork for goods going from Northern Ireland to Great Britain may be that of the European Union, which does require some documentation for goods leaving its customs territory.
Still, this may not prove sustainable in the long term if some UK tariffs remain high and businesses start taking advantage of this gap in the UK’s border.
Will the UK-EU Free Trade Agreement fix all this?
It’s really, really hard to see how.
The current absence of a border in Ireland is underpinned by three things:
The Common Travel Area, which eliminates the need for passport screening;
The Single Market, which aligns all the relevant regulations and standards; and
The Customs Union, which eliminates tariffs and maintains common minimum external tariffs.
The Common Travel Area will remain in place, but the Political Declaration negotiated by Boris Johnson makes it very clear the goal for the future relationship will be a Free Trade Agreement, not a Customs Union.
Even if that Free Trade Agreement eliminates all tariffs between the UK and EU (difficult but possible), and even if it secures full recognition for all the relevant UK regulations in perpetuity (deeply unlikely), it still wouldn’t mean a common external tariff the way a Customs Union does. Therefore, as discussed above, a customs border would still be necessary.
Indeed a Free Trade Agreement can actually increase the paperwork goods require at the border. This is because in addition to declaring what you’re carrying, you have to prove where it was made, and if it was made in a few places, that enough of its creation took place in a country the FTA applies to. This is called “Rules of Origin” it can be a nightmare to both meet and prove, especially for complex goods .
Ok, but Boris Johnson said the trade agreement would replace these arrangements...?
It might, but the overwhelming likelihood is that it won’t or that it will replace them with other arrangements that do functionally the same thing.
So is this a good deal?
That depends on your perspective.
Coward!
I know.
First off, any deal avoiding a crash-out in March 2020 already has that going for it. It gives businesses a more predictable end date, and a more predictable end-state.
If this deal is passed businesses will know the UK is leaving the EU’s Customs Union and Single Market either at the end of 2020, or at the end of 2022. That’s a good length of time to start working out how to adapt, because the uncertainty regarding what may be in a Free Trade Agreement is less than that around whether the UK will leave the EU or not.
However, beyond that point things get murkier.
This deal impacts a greater volume of goods traffic than would a border on the island of Ireland, but it does so in a much more contained way. Additional forms to fill out and fees to pay for lorries getting off ships at Northern Irish ports certainly challenges a perception that Northern Ireland is a part of the United Kingdom. However, in my (very non-Irish) view it does so in a less palpable way than check points, cameras and roving patrols on the island border would. Unionists may strongly disagree with that view.
Further, I think critics of May’s deal were correct in charging that a ‘solution’ to the Irish border might be years in the making. The Backstop might very well have been triggered. If you share the priority of the Johnson government to achieve a maximally independent trade policy as quickly as possible, his deal does that far more assuredly than that signed by Theresa May.
On the flipside, and despite government assurances to the contrary, this deal does for all intents and purposes create a customs border between Northern Ireland and the rest of the nations making up the United Kingdom. That’s a steep price to pay for a set of trade negotiating objectives which to-date, remain largely undefined.
Last Question: I heard Johnson took the “Level Playing Field” provisions out, am I going to have to work double shifts at the sludge mine?
The Level Playing Field provisions in Theresa May’s agreement meant that if the Backstop kicked in, and the UK and EU remained in a Customs Union, the UK would have to keep its labor and environmental standards as high as those of the EU.
Regulations on labor and environment add costs to business. The EU’s concern was that if it’s in a Customs Union with the UK, and thus can’t protect its market with tariffs, it risks having its businesses undercut by UK competitors whose regulations are relaxed. That’s why it needed those provisions.
With the backstop removed, and no Customs Union possible through Boris Johnson’s deal the Level Playing Field provisions weren’t needed any more because eventually EU tariffs will apply to the UK.
However, if the UK and EU really do aim for a free trade agreement that eliminates all tariffs, there’s every chance the EU is going to push very hard indeed to include Level Playing Field provisions there instead.
Thanks for sticking with me, I appreciate that was a slog. If you enjoyed how this blog broke down the complexities of what’s going on, consider our trade policy training courses. If your organization is struggling to communicate complexity, consider partnering with us to help streamline your message for accessibility and impact.