14 June 2022

Mattia Di Ubaldo is a Fellow of the UK Trade Policy Observatory and a Research Fellow in Economics at the University of Sussex Business School. Michael Gasiorek is Director of the UK Trade Policy Observatory and Professor of Economics at the University of Sussex Business School.

The UK Government has published its bill on the Northern Ireland Protocol (NIP), making a clear move to try to force changes in the arrangements disciplining the economic regime applying to the portion of the UK that has remained in the EU Single Market post-Brexit. The points of strongest contention between the UK Government and the EU concern the custom and regulatory checks applying to trade flowing from Great Britain to Northern Ireland together with a list of additional issues resulting from Northern Ireland remaining part of the EU Single Market territory: the regulatory regime applying to firms in Northern Ireland, rules on VAT, the use of state subsidies, and the role of the European Court of Justice in overseeing the NIP. In our earlier blog, we frame this issue in terms of the economic importance of East-West UK trade. We note that with 60% of Northern Ireland imports coming from Great Britain, and the largest share being in the ‘checks-intensive’ retail sector, the NIP was bound to result in higher logistical and bureaucratic costs. These effects should have therefore been anticipated. The UK Government is now apparently seeking to unilaterally force changes to the deal it shook hands over with the EU less than two years ago.

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Given its’ stated dissatisfaction with the NIP, the UK Government could choose between (at least) two approaches.[1] It could act under the legal and procedural framework provided by the NIP itself, i.e. invoking Art. 16 and putting the UK in immediate direct dispute with the EU. Or, it could try to bypass the obligations in the Protocol through an internal law, by which it gives itself the power to (potentially) disapply the contentious elements of the NIP.  Presenting its bill in Parliament yesterday, it would appear the Government has opted to move forward with the second option.

To some extent this could be seen as an external negotiating ploy, to try and force the EU to make more concessions without (yet) disapplying elements of the Protocol. But it is also driven by domestic political considerations – to try and shore up support for a somewhat beleaguered Prime Minister, and to boost the credentials of those who might want to step into his shoes.

Two options

Invoking Art. 16 and passing an internal law both imply a unilateral move from the UK Government, with notable differences, however.

Under Art. 16 of the NIP one party (say, the UK) can take ‘appropriate safeguard measures’ in case of ‘serious economic, societal or environmental difficulties that are liable to persist, or a diversion of trade’ that result from the application of the NIP. These measures should be limited in scope and duration, and priority should be given to those that least disturb the functioning of the NIP.  If such measures are adopted, the other party (the EU in this case) can then take some re-balancing measures: these have to be ‘strictly necessary to remedy the imbalance’ between rights and obligations created by the UK. Finally, the Protocol details the steps that need to be followed in this process: notification, consultations, a one-month period from date of the notification before any measure can be taken and, finally, negotiations every three months with a view to reviewing the measures. Taken together, therefore, Art. 16 appears to provide a mechanism to be used, firstly, as a measure of last resort and, secondly, to protect the NIP and the particular position of Northern Ireland post-Brexit. It is not intended as a negotiation tool, to be used by one party to force changes in the overall agreement.

In presenting its bill to Parliament yesterday, the UK Government is threatening to bypass the Protocol procedures altogether. While the Government disputes this (on the grounds of ‘necessity’), most observers as well as the EU consider the proposed bill as illegal, as unilaterally disapplying part of the NIP would be in breach of an international agreement.  The UK Government prefers to describe the bill as legal, and as ‘a trivial set of adjustments’ to ensure trade can flow freely from Great Britain to Northern Ireland without Northern Ireland becoming an unregulated and leaky border into the EU Single Market. The substance of the bill shows that the UK Government is seeking the power to override exactly those parts of the NIP it likes the least. In contrast to invoking Art 16, the proposed bill appears to be part of a negotiation strategy: putting pressure on the EU to make further concessions on the NIP without yet entering into an open conflict with Brussels.

Potential reactions

Presenting the bill is likely to lead to immediate responses from the EU, be this excluding the UK from the Horizon programme, revisiting legal proceedings concerning those elements of the Protocol the UK has not yet applied, or being more rigorous with regard to customs check on UK trade with the EU. These will be damaging to the UK. In the event that the bill is passed, and unilateral action is taken, the EU’s (legal) response will get stronger, with the possibility of retaliatory measures such as higher tariffs on symbolic UK products (e.g. Scottish salmon, or industries located in the Red-Wall districts). Though note, in principle, these will have to be approved by a lengthy arbitration process. There is also the so-called nuclear option – a fully-fledged trade war ending up in the scrapping of the UK-EU Trade and Cooperation Agreement (TCA). This would hurt both sides and appears to be the least likely scenario.  

The NIP undoubtedly created a bureaucratic burden and has impeded some trade from Great Britain to Northern Ireland, but many firms in Northern Ireland have started to come to grips with the new procedures and have adapted to the changes the NIP introduced. Exporters, in particular, have welcomed the solution to Brexit found in the NIP, as they can continue to trade seamlessly with both the EU and the rest of the UK.  Part of the Unionist community in Northern Ireland is clearly still very strongly against the Protocol, but a more pragmatic and less confrontational approach with Brussels would possibly be more welcomed by a majority of businesses in Northern Ireland.

Conclusion

As all potential courses of action are still available to the UK Government, we identify two immediate consequences resulting from this contention:

1. Heightened economic and regulatory uncertainty affecting Northern Ireland to EU, Northern Ireland to Great Britain, and even Great Britain to EU trade. Brexit-related uncertainty post-Referendum has already been shown to have caused a drop in UK-EU trade (pre-2021). The tensions over the NIP risks adding to this, as uncertainty is highly detrimental to firms’ investment and long-term planning decisions.
2. Damage to the international reputation of the UK. The US Congress has already expressed its concerns and threatened to withdraw support for a UK-US trade deal if the UK Government pushes through with its plan to scrap the NIP unilaterally.  At a time when the UK is going around the world trying to strike new trade deals, the negative repercussions of the row over the NIP are likely to reach much farther than the border between the UK and the EU.

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Footnotes

[1] There are clearly more than two options available for the UK Government, such as signing veterinary or conformity assessment agreements. We do not discuss these here.

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