The European Commission (EC) and the UK Government reached an agreement, on 17 October 2019, on modifications to the Withdrawal Agreement and accompanying Political Declaration they had first concluded in November 2018, but which failed to pass UK parliament. The modifications are less revisions than they are a form of recalibration on the way various trade offs are addressed. These include one set of political trade-offs: between the UK government’s commitments to its self-imposed red lines, on one hand, and maintaining a unified approach to Brexit across the whole of the UK, on the other. And a set of economic trade-offs between the ambition of pursuing an autonomous trade policy, on one hand, and the risks of a weaker partnership with the EU. A risk it seems also accepted by the EU.
Revisions to the withdrawal agreement.
What has not changed
Though most attention has focused on the protocol regarding Ireland and Northern Ireland, it is important to recall that most other aspects of the withdrawal agreement remain untouched. This includes the provisions regarding rights of residency and the payment by the UK of its remaining financial contributions.
Importantly it also includes the transition period out to end -2020 (extendable once) under which the UK remains within the EU single market and customs territory, while having the ability to negotiate trade agreements with non-EU partners. Importantly, the transition period does not secure continued preferential access for the UK to partners outside the EU it currently has a FTA with via its EU membership, except for those cases in which the UK has negotiated replacement arrangements.
Ireland: backstop to the future?
A bit of recent history might be in order. The reason the Irish border issue came into play was because of the inconsistencies between the UK’s self-imposed red lines (no free movement, regulatory autonomy, independent trade, and specifically customs, policy), on one hand, and the commitments made under the Good Friday agreement. The EC’s initial response to that position was to suggest an arms-length Free Trade Agreement (FTA) of the type the EU has with Canada, and a border down the Irish sea in order to safeguard the Good Friday agreement.
At the time the UK Government declared that the proposal for a border in the Irish sea to be unacceptable, and made its own proposals via the July 2018 White Paper. This proposed a Facilitated Customs Area in which the UK would selectively apply the EU’ customs regime and rulebook to avoid the need for border checks. That proposal was deemed to be too untested by the EC, which then developed, on the basis of the UK’s proposals, new backstop arrangements. It considered these to be secure, in particular because it was based on a concept of a single customs territory which could be recognised under trade law. These arrangements were part of the November 2018 withdrawal agreement, which the then UK government accepted.
With the failure of the November 2018 Withdrawal Agreement to pass muster, both the UK and the EC seem to have reverted to something closer to the EC’s original response. The new compromise is to clarify that Northern Ireland is part of the UK’s customs territory, but that (i) EU customs law and single market regulations will apply to Northern Ireland insofar as it affects trade between Northern Ireland and the EU. (ii) there will be no physical border infrastructure checking the movement of goods or persons between Ireland and Northern Ireland But instead checks will be implemented between Northern Ireland and the UK. Point (i) is intended to ensure that there is no leakage into the EU via the UK of goods that are not subject to EU customs duties and/ or subject to EU regulations. The situation negotiators have in mind is one in which the UK could sign a free trade agreement with non-EU partners that do not have themselves an equivalent agreement with the EU.
Setting aside the politics, the economics of the arrangement carries some risks.
- The advantage of the November 2018 backstop proposal was that, if applied to the UK as a whole, it provided a safety net by limiting potential trade losses to both the UK and the EU. That has now been removed. The purported upside is that the new arrangements allows the UK greater freedom to pursue an independent trade policy on goods. But the value of such an independent policy relative to the risks of weaker arrangements with the EU needs to be critically assessed. Under most plausible assumptions of what FTAs with the rest of the world would look like, the gains from these are unlikely to significantly mitigate, let alone offset, losses from a weaker arrangement with the EU.
- The new arrangements rely on untested proposals on customs administration. The UK will need to implement the EU customs code, including tariffs and antidumping duties, on goods entering Northern Ireland which are deemed to be at risk of entering the EU. Under the provisions of the agreement, the presumption is that this risk is present. It will be up to a joint committee to draw up the criteria that allows the UK to determine when there is no such risk. This approach is administratively complex.
- The proposals may also be legally uncertain in terms of international trade law. The November 2018 backstop proposal relied on established concepts, such as a single customs territory, and also made several references to GATT provisions that govern the operation of such arrangements. The new proposal relies could be closely scrutinised. For instance, under GATT Article I – the basic building block of trade law – countries are required to implement the same types of customs procedures to all trade partners. They can implement looser ones only if they are part of a free trade agreement. Since the special arrangements between Ireland and Northern Ireland are more likely to kick in precisely in the absence of such an agreement, they could be open to challenge.
Revisions to the political declaration mirror the motivations behind changes to the Ireland/ Northern Ireland protocol. References to building on the single customs territory are removed from the new article 23. Article 17 replaces generic references to a free trade area with one to a Free Trade Agreement (capitalised) . The formulation rests on the distinction between a Customs Union (which requires a common external tariff), and a Free Trade Agreement that allows parties to set tariffs independently. Again, the aim is to reassure the UK that it will be able to pursue its own trade policy in goods.
In our analysis of November 2018 version of the political declaration, we observed that it proposed a dual pathway for goods and services. On goods, the approach would be essentially EU-minus, while on goods it would be WTO plus. The new approach is to follow a WTO-plus approach across the board. In practice this allows for a wider range of possible outcomes, from an arms-length Canada-type FTA to a deeper form of integration as pursued by, say, Norway.
Where on the spectrum parties end up depends on how key quid pro quos evolve. The main ones are:
- Commitments on the free movement of people and access on services. As we observed elsewhere, the UK adopted the position that it would be willing to leave the single market for services in return for leaving single market provisions for the movement of people. The politics of that position need to be set against the economic costs to the UK both of losing access to skills, and increased restrictions on services trade.
- Level playing field stipulations and market access. The revised political declaration proposes weaker upfront commitments on level playing field issues such as state aid, social standards and so forth. However, the intention seems to be that the deeper the UK wants to go in terms of market access, the greater the extent of commitments on level playing field issues it would need to take on. This change may reflect a degree of comfort on the part of the EU that the UK would actually want deeper market access commitments.
Various other specific sector issues are also likely to arise, notably regarding fisheries and financial services.
Whether the proposals will pass muster in London and across the EU 27 remains to be seen. One of the reasons that the EC may be comfortable with the original position is that it reasons that the UK will want to develop a deeper relationship. Over the last 12 months, the UK’s outside options have weakened. The United States is increasingly hostile and erratic in its trade policy, and it is unlikely that even a change of administration will lead to a fundamentally more liberal trend. It is unlikely to treat the UK with kids gloves. Indeed, on the same day the revised deal was announced, the US started to implement tariffs on UK exports such as Whiskey as part of its retaliation against the UK and certain other EU member states over the use of aircraft subsidies. At the multilateral level, the WTO may well suffer a crippling blow to its dispute settlement functions from December 2019 onwards because of a lack of appointments to its Appellate Body (appointments being blocked by the US).
This recap also reminds us that the fundamental difficulties lie with continued incompatibility between the red-lines the UK has set for itself, and its commitments under the Irish peace process. This creates both complexity, and uncertainty about the future relationship between the UK and the EU. One obvious way for this to be resolved is for at least some of those red lines – specifically those on free movement and regulation – to shift, at least in part. Efforts to do so by the House of Commons have to date not been successful.
At any rate, the continuing need for both parties to evaluate the trade offs embedded in an arrangement that is itself experimental means that Brexit won’t be done in the near future, and that the issues at hand will continue to play out for a number of years to come.