2 May 2018

Dr Michael Gasiorek is Senior Lecturer in Economics at the University of Sussex and Managing Director of InterAnalysis. He is a Fellow of the UKTPO.

The red lines laid down by the UK government, and those laid down by the EU, together with the agreement that there will be no ‘hard’ border between Northern Ireland and the Republic of Ireland are mutually incompatible. This was discussed in some detail in our March 2018 Briefing Paper UK-EU trade relations post-Brexit: binding constraints and impossible solutions. In that Briefing Paper, we concluded that: “The current set of the UK government’s overlapping conditions or constraints cannot be reconciled. The solution space appears to be null. The only way of resolving this is to drop and/or relax at least one or more of the conditions.”

The solution space is indeed null and extensive column inches have been devoted to this over the last couple of weeks. The UK has proposed that the issue could be resolved either via a “new customs partnership”, or through the application of “highly streamlined customs arrangements” in goods which would be in part based on a technological solution and behind the border checks on trade. Each of these has been rejected by the EU as unworkable if not magical. Others have proposed that the UK relaxes its objection to a customs union with the EU. This helps solve one important part of the problem which is that border checks would (probably) not be necessary on grounds of rules of origin. It does not, however, obviate the need for checks with regard to regulatory divergence – for example with regard to standards between the UK and the EU. However, a customs union arrangement has been rejected by the UK. So we go round in circles which cannot be squared, and back to the null solution space.

While there may be no solution, there does have to be some outcome on the UK’s departure from the EU. There will either be a fudge / compromise of some sort, or the UK leaves the EU with no deal. The EU is playing hardball and insisting that in the absence of acceptable alternatives from the UK, the backstop solution is that Northern Ireland effectively remains within the EU Customs Union and Single Market. This is neither acceptable to the UK government nor to the DUP who provide the votes for the current government to have a majority. However, it is based on the December 2017 agreement which states that in the absence of alternatives “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”.

So unless either the UK or the EU blinks first it then looks like we are heading for a no-deal scenario. But if the UK leaves with no deal then a hard border in Ireland is necessary anyway, and this is something that none of the parties (the EU, Ireland or the UK) wants. And this is compounded if you also consider the broader economic consequences of no deal.

So while this is a possible outcome, I think it is unlikely. More likely is that some form of fudge will emerge. After all, these are international negotiations, and the EU is well-versed in the art of the fudge. On regulatory / Single Market issues the EU has already signalled that some form of compromise is possible with regulatory alignment being limited to those areas where it is needed, and the distinction drawn between having checks on trade and on having a border. That is by no means a given, and could still prove to be a major constraint to an agreement.

But currently, the key stumbling block would appear to be the customs union issue and differential tariffs between the UK and the EU.  Here I see two possible fudges. The first is that the EU blinks and accepts some variant of the UK’s proposals which would probably be largely around the highly streamlined customs arrangements, as opposed to the new customs partnership. This is a very unlikely outcome, which the EU has already signalled is not acceptable in its current guise. The second is that the UK blinks, and offers an alternative backstop solution. One such alternative is that the UK signs a free trade agreement with the EU but that it commits to applying the same external tariff as the EU on a temporary basis and for as long as it takes to reach further agreement. Presumably, the UK would also need to make similar commitments with regard to regulatory issues for this temporary period.

There would then be a review period allowing for more time for agreement on, for example, the application of alternative customs arrangements, and the development of the appropriate procedures and technologies to support this. It is likely that this interim arrangement will have to last for several years, and there may be some negotiable scope for minor derogations from the EU’s tariff structure. Once there is a final agreement, in the post-review period, the UK will be free to apply different tariffs.

Is this a sensible outcome, or the best Brexit outcome for the UK? No. Is this politically feasible within the UK? This is hard to predict, but it certainly will not be easy.

However, it is a possible outcome. It is one where the UK government can claim that it has maintained its position of no customs union with the EU and in principle has independence over trade policy. It is also one which the EU might just accept. But is less a case of the parties blinking as of their shutting their eyes altogether and hoping for the best.

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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