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22 May 2018

Alasdair Smith is an Emeritus Professor of Economics at the University of Sussex and is a member of the UK Trade Policy Observatory.

Not before time, the UK government is giving attention to the ‘backstop’ provision which will be written into the Withdrawal Agreement for Brexit to avoid a hard border in Ireland.  But rather than focussing on how to sell this politically in the UK, the government needs to address the more pressing question of whether the European Union (EU) will agree to the UK’s preferred version of the backstop.

The EU’s version of the backstop, as written into the draft Withdrawal Agreement, has Northern Ireland remaining within an EU customs union and retaining regulatory alignment with the EU single market in goods – CU+GSM. If however, as intended by the UK government, the UK leaves the customs union and the single market at the end of the standstill transition in December 2020, CU+GSM in Northern Ireland would require a customs and regulatory border between Northern Ireland and the rest of the UK.

It’s unacceptable to the UK government (and to the DUP) to have an internal UK border in the Irish Sea, so the government now seems to be floating what many commentators have long said is the only workable alternative backstop: a UK-wide backstop of CU+GSM for the whole UK. This too is politically difficult for a government that is committed to leaving the EU customs union and single market: remaining in a customs union with the EU limits (though, as Sam Lowe points out, it does not eliminate) the scope for trade agreements with non-EU countries, and remaining in part in the single market implies being subject to the jurisdiction of the European Court of Justice (ECJ). The government focuses on the customs union and is silent on the single market, and it emphasises that the backstop comes into play only if the government’s preferred solutions aren’t deliverable before the end of the transition period. Mrs May is quoted as saying the backstop will be in place, if at all, for a limited period of time,  as if she knows that her preferred solutions which will not be ready in December 2020 will become feasible only a few months later.

There’s not much point in the UK government pausing its heated internal debate between two proposals neither of which is acceptable to the EU in order to pursue a version of the backstop which the EU will not accept. It’s widely reported that the EU regards the backstop as being on offer only for Northern Ireland. Simon Wren-Lewis and Sam Lowe have noted, the EU is in a position to dictate terms.  If there’s no agreed backstop, there’s no withdrawal agreement. There would not be a parliamentary majority in Westminster for the UK to exit from the EU without a withdrawal agreement, so the EU can insist on the NI-only backstop and the UK government will have no alternative but to swallow hard and accept it.

If the UK government is serious about a UK-wide backstop, it therefore needs to give less attention to its own political sensitivities and focus on how to persuade the EU that a UK-wide backstop is what should go into the withdrawal agreement. It needs to address the three main arguments reported to lie behind the EU’s resistance to a UK-wide backstop.

1. The backstop is a solution to an Irish problem and so should be confined only to Northern Ireland

The joint EU-UK negotiators. Report of December 2017, states (in para 46): “The commitments and principles outlined in this joint report … are, as necessary, specific to the unique circumstances on the island of Ireland.”  These words should not be taken to imply that an Irish problem calls for a narrowly Irish solution. The Irish border issue is an issue for the whole UK and the whole EU, not just for the two parts of Ireland. Economists should tread carefully on sensitive political ground, but we need to remember that the heart of the Good Friday Agreement was the recognition that the different communities in Northern Ireland have different national identities and different aspirations for the future constitutional status of Northern Ireland, but that each would recognise the legitimacy of the identity and aspirations of the other. Creation of a hard border between the two parts of Ireland would be incompatible with the vision of one community; but the creation of a border between two parts of the UK would be equally incompatible with the vision of another community. The backstop provision should be the minimum required to deal with the Irish border issue in a way compatible with the Good Friday Agreement. An NI-only backstop does not do that, and Theresa May is right to say that no UK government could accept it as a long-term arrangement.

2. A UK-wide backstop would let the UK cherry-pick membership of the single market without accepting freedom of movement of labour

The EU is a club whose members accept a mix of rights and obligations. Historically, the UK has been enthusiastic about free intra-EU trade and the single market, unenthusiastic about the common agricultural policy and aspects of EU citizenship, and ambivalent about freedom of movement of labour. A club has to offer its members a package that overall is attractive to all members, but permitting any member to drop unattractive obligations while benefiting from other aspects of membership will cause the club to disintegrate. The EU is right to be wary of ‘cherry picking’, and the concern needs a response.

The first response is that the UK-wide backstop is not cherry-picking because it involves a serious trade-off: the UK would no longer have freedom of movement of labour, but it also would no longer have membership of the single market in services – 80% of the UK economy would no longer benefit from the single market. The cherry of reduced freedom of movement of labour is picked at a considerable cost.

There’s then the practical problem of what it would mean for Northern Ireland, but not the rest of the UK, to be in regulatory alignment with the EU. The manufacturers of cars, food products, lawnmowers and vacuum cleaners in the UK will surely choose to continue to produce their goods in accordance with EU regulations. The UK government will be responsible, under the jurisdiction of the ECJ, for ensuring conformity of goods in circulation in Northern Ireland with EU regulation so that these goods can be put, without impediment at the Irish border, into free circulation in the whole EU. But the same goods, produced under the same regulatory regime, are not permitted to enter the EU market via Calais? Just as a practical matter, it’s hard to see the difference between regulatory alignment for the whole UK and regulatory alignment for NI alone. Once regulatory alignment with the single market without freedom of movement is agreed for Northern Ireland, it’s a very small step, in principle and especially in practice, to agree it for the UK.

Digging deeper, this objection raises the question of why the EU sees the four freedoms as integral to the internal market. Much of the single market can operate perfectly well without freedom of movement of labour. Specifically, regulatory harmonisation in goods allows free movement of goods whether or not there is free movement of labour. Some aspects of free movement in services require mobility of labour – where the mode of delivery of services requires it – but in the UK-wide backstop, services would not be in the single market, so this argument does not apply.

More fundamentally still, freedom of movement can be seen, as a matter of principle, as a right of EU citizens to live and work anywhere in the EU. However, following Brexit, UK citizens will no longer be citizens of the EU, so this argument that the UK must adhere fully to freedom of movement loses its force.

3. A UK-wide backstop would become the permanent UK-EU relationship and the long-term trade relationship should be negotiated separately from and subsequent to the withdrawal agreement.

Sam Lowe points out that para 46 of the December joint report also refers to the desire not to “pre-determine the outcome of wider discussions on the future relationship between the European Union and the United Kingdom”.  It is indeed true that the backstop may be a strong candidate model for the long-term EU-UK relationship. If no alternative solution is found for the Irish border, then the backstop, whatever it is, has to be the long-term relationship. That’s the nature of a backstop. However, if an alternative border solution is found, a different range of relationships can be explored. It’s right for the EU to want the backstop to constrain the long-term UK-EU relationship as little as possible. The backstop should be the minimum required to do the job. But that doesn’t add anything to the debate of what is that minimum.

Finally, consider the likely course of events if the EU, unpersuaded by the force of these arguments, sticks to the position that the backstop should be NI-only not UK-wide. The UK government will have to accept the weakness of its position and sign up. It will argue (as Mrs May is already doing) that a backstop is just a backstop, pretend that other solutions to the border problem will be achieved before the end of 2020 when the standstill transition ends so the NI-only backstop will not be activated. If Parliament accepts that argument, the crunch is postponed until 2020.

But the EU does not believe that the UK government’s alternative solutions will be ready for 2020, if ever. As the end of the standstill transition approaches, and the NI-only backstop comes into effect, the stage will be set for a major political crisis in the UK, from which the only certain outcome would be many further years in which both UK politics and the UK-EU relationship would be poisoned by Brexit.

 

 

13 Comments

  • Mark Fleming says:

    The easiest backstop to implement would be a ‘Norway plus CU’ , up to and until the technology is ready. This type of all-UK backstop should be acceptable to the EU given that Arne Solberg (PM) has indicated that Norway would be willing to drop their objections . Talk of a ‘limited time all-UK’ backstop makes no sense as a backstop must obviously apply ‘up to and until’ a better solution can be found. When/if the technology is certified as fit for purpose then the UK will be free, but not until then, unless of course it wants to derogate from the GFA. The internal dynamics of the UK parliament can have no bearing on the final deal that will be acceptable to the EU. It’s a terrible deal for the UK, but self-made unfortunately. In fact , the best thing to do would be to suspend article 50 and tell J.C. Junker ‘we will get back to you when the technology is certified – put everything on ice for now’.

    • Alasdair Smith says:

      EEA+CU may well be a sensible final arrangement, but it’s not a candidate as the backstop, because it goes further than needed to deal with the Irish border problem. The backstop has to be the minimum set of measures that avoids the need for a hard border in Ireland or in the Irish Sea.
      Of course, you are right that a time-limited backstop is a contradiction in terms.

      • Mark Fleming says:

        It was always going to be a case of one hard border or the other – as long as UK insisted on leaving SM + CU. Every time TMAY reiterated the mantra of no hard borders PLUS leaving SM + CU , people were left scratching their heads. The minimum backstop would have to be the one envisaged by the EU and essentially signed up to in december, the one the DUP hates ie. Irish sea border. Given that the UK are the ones freely leaving then surely it’s incumbent on them to grasp this nettle, instead of trying to externalise it to Ireland. Once the backstop is secured then work can begin on trying to ensure that it never becomes necessary. This will of course require the UK to ‘Trust’ – trust that Ireland and the EU won’t use the backstop for their own ‘nefarious’ agendae. They won’t , as that would be insanity. They both want and need a positive post-Brexit relationship. Ireland aren’t interested in constitutional change vis a vis N.IRL , and the EU have a huge interest in the best of relationships with the worlds 5th largest economy. But the cart cannot go before the horse. First the backstop , then the free relationship.

  • David Roberts says:

    In my experience (which is rther long) negotuiations are determined not so mucgh be arguments as by interests. Here , however, interestes and arguments point in the same direction. Friction free trade in goods is in the EU interest as well as in the UK’s.

    But would regulatory alignment plus membership of the Customs Union but not membership of the Single Market (on its own or as a member of the EEA) be in the UK interest? The UK has more of an interest in trade in services than in goods, so its interst surely lies in remaining in the Single Market for Good and Services. The objection that is raised to this is that membership of the Single Market implies acceptance of freedom of movement but is it quote impossible to persuade the electorate that freedom of movement is, afterr all, a good thing. What is already becoming clear is that in many areas loss of migrants from the EU simply increases the need for more pigrants from elsewhere and, when these remain constained by inflexible limits on visas the result is and increasing shortage of skills that we urgently need, in particular doctors and nurses. And, although it is possible to have freedom of trade in goods without freedom of movement of labout, this is at the cost of unemployment in countries whose production of goods can’t compete. Complete free trade in goods implies a concentration of production in the place with competitive advantage. This may be good for the public as a whole but it is very bad for workers whose skills are linked to the form of production that has migrated to another place unless they can migrate with their jobs.

    • Lac Dirk says:

      The UK’s trade is dominated by goods and by services that can be traded relatively well on WTO basis (transport and tourism). The idea that financial services is crucial to UK trade is a fiction, crafted by the City. The UK trades less services in the single market than Germany and France, and just as many as the Netherlands, and the majority of those are non-financial.

    • Alasdair Smith says:

      As in my answer to Mark, the EEA may well be more desirable than the mooted backstop, but it is not a backstop.

  • Lac Dirk says:

    “remaining in a customs union with the EU limits (though, as Sam Lowe points out, it does not eliminate) the scope for trade agreements with non-EU countries”

    Here you are mixing “the” CU and “a” CU. Let’s be clear: the NI solution is mainly about agriculture, so it would have to be in the CU and SM for agriculture. The UK as a whole cannot actually be in a CU with the EU that includes agriculture unless the UK is in the CAP. The latter is not just politically unfeasible, it’s also not legally going to work. Or at least not without huge strain on the legal basis of the EU.

    ” it also would no longer have membership of the single market in services – 80% of the UK economy would no longer benefit from the single market. ”

    Please don’t start playing these games. Most of the every developed economy is services, but they are far less important for trade. In terms of trading services within the single market, the UK trails Germany, France and just keeps up with the Netherlands. It’s not that important to the UK economy, and you won’t fool the EU into believing it is. There simply isn’t a chance that the UK gets to eliminate freedom of movement for labour. Please, please stop pretending it is, as it will just make the negotiations go longer.

    “Just as a practical matter, it’s hard to see the difference between regulatory alignment for the whole UK and regulatory alignment for NI alone. ”

    NI monitoring and enforcement can be taken over by RoI bodies, or rather, NI bodies would fit within RoI structures. It’s conceivable to do this without the full political alignment that is usually required because the situation is temporary, NI’s economy is small and its geopolitical situation fragile. The world can make exceptions for NI, but not for the UK.

    “Much of the single market can operate perfectly well without freedom of movement of labour. ”

    First off, it’s crucial for trade in services (education, training, maintenance, etc). Secondly, it’s essential to avoid greater dislocations in the economy. The ability to attract workers to fill spots prevents more relocations. NAFTA does not have this mechanism, which is why so much more US car and food manufacturing plants moved outside the US.
    There is no version of the SM that does not include services. Creating one, just for a transitional phase, is not in the cards. The EP, Council and Commission have been very clear that SM solutions are only off the shelf, take-it or leave it.

    “It is indeed true that the backstop may be a strong candidate model for the long-term EU-UK relationship.”

    Per my previous answers I think that that is wishful thinking. The backstop is the way it is because the EU thinks that NI can be given leeway without causing trouble at the WTO and beyond. That kind of leeway isn’t available to the UK as a whole.
    The minimum required to do the job is what the EU proposed. Bringing the whole of the UK into a vague, easy to abuse and legally shaky situation is not a solution.

    “But the EU does not believe that the UK government’s alternative solutions will be ready for 2020, if ever. As the end of the standstill transition approaches, and the NI-only backstop comes into effect, the stage will be set for a major political crisis in the UK, from which the only certain outcome would be many further years in which both UK politics and the UK-EU relationship would be poisoned by Brexit.”

    Umm, yes. Your proposal would be even worse in that regard. There is simply no way that British euroskeptics will ever be satisfied with a fully legal agreement that’s acceptable to all parties, including the WTO and the EU. Nor will British industry nor the British population accept it as the best possible solution, but it will be virtually impossible to make progress towards the integration necessary to improve trade. At the same time the EU will expect Britain to be happy with the requested status of third country with the best possible trade relations – similar to the ones with Canada or Norway. There simply is no sympathy for the persistent demand by the British to be given exceptions.
    It’s unfortunate, but things will now come to a head. This isn’t good for either side, but the long slide of British political culture, the disintegration of the social fabric and the near-total victory of sensationalist media make this inevitable.

    • Hunter says:

      I agree with this (except for having RoI bodies carrying out monitoring and enforcement in NI; much better to have NI bodies do that in concert with RoI bodies).

      The point about what will fly at the WTO also touches on another point – the EU’s treaty base likely would not allow for an indefinite trade relationship to be negotiated via Article 50. That’s why the Transition Period is being limited after all (that it is being limited to December 2020 or just 21 months is to coincide with the budget cycle, but initially it was being conceptualized as being for 24 months and could in theory be up to 3, 5 or even 10 years). And that’s why there isn’t any draft language about being able to extend the transition period. The new third country relationship between the EU and UK has to be established like with all other third country relationships with the EU and that is under different articles entirely rather than Article 50.

      I suspect this is also why May’s cabinet might be proposing a time-limited backstop because an indefinite backstop that applied to the UK as a whole would run into that legal basis problem. But a time-limited backstop is essentially just extending the transition period from December 2020 to 2023 and removing the free movement of labour from it. Yes, services and capital would no longer be included, but it looks far too much like an attempt to extend the transition period and engage in limited cherry-cake baking to the EU to be acceptable. And an indefinite UK-wide backstop will probably also run afoul of WTO and WCO rules.

      The Joint Report notes that the UK is supposed to ensure no new regulatory barriers and continued unfettered access for NI businesses to the rest of the UK. But that’s an internal British problem and strictly speaking shouldn’t form part of the provisions of an international agreement since the UK is free to determine just how to resolve that issue internally whereas an international agreement would likely introduce constraints as to how the UK can do so.

      My suggestion would be that to keep Unionists in NI and others in GB from seeing this as annexation then the Irish Protocol should simply include a few paragraphs reaffirming that even with the common regulatory area between Ireland and NI, the UK will not have to introduce new regulatory barriers between NI and GB and allow NI businesses continued unfettered access.

      How could the UK achieve that? Well ironically the max fac technological solutions being touted as a solution to the Irish border would work far better, more efficiently, cheaply and less intrusively to monitor and enforce trade between a GB outside the CU/SM an NI in customs union and GSM with RoI than it ever would along the Irish border. If the UK instituted a regime of parallel marketability in NI (like what happens with Liechtenstein which is in customs union with Switzerland but in a Single Market relationship with the EU/EFTA-EEA states) then NI businesses should still have mostly unfettered access to GB. If the UK adopted the same tariff levels as the EU and kept its own standards and regulations for goods (though not agri-goods since a regulatory barrier already exists between NI and GB for plants so the UK could now freely diverge in agriculture/the CAP/tariffs on agricultural goods) then this would:

      1. Ensure that NI businesses can easily put their goods on market in GB and the EU since standards and regulations would be the same

      2. Ensure that whatever future relationship is eventually negotiated between the EU and UK can be as deep as possible in freely trading goods (and possibly services), whether it be an EEA-copy or some form of DCFTA like with Ukraine/Georgia/Moldova.

  • Nick Evans says:

    The GFA provides that the status of NI cannot be changed without the consent of its inhabitants. Would the UK and Ireland be able to enter into a withdrawal agreement that gave NI a different CU/SM status from the rest of the UK without breaching the GFA?

    • Mark Fleming says:

      It wouldn’t breach the GFA. The constitutional status would remain unchanged. The majority of the elected officials in N.IRL would in any case accept some form of regulatory difference from mainland UK and would in fact regard it as in N.IRL’s best interest. (SF +SDLP+ Green+Alliance+1 independent > DUP+ UUP) There are already many differences and these don’t threaten it’s constitutional status . In fact the constitutional status itself is a major difference in that it includes an automatic right of secession, something that Wales, Scotland , City of London etc. don’t have. N.IRL is already a special case and it’s a game of ‘make believe’ to pretend otherwise.

  • vinokess says:

    Yes Massa. Is there something else retarded continentals may do for you? Always at your service. If the UK wishes an opt out in services, which requires a worker present at place, so be it. If the UK wants to harvest capital from the continent, so be it. It’s the will of the people. In the end, the English voted for being the boss of Europe: Unilateral treaty change, whenever the English wish to.

    You are still in Cameron mode and don’t even recognize it.

    You leave the EU! Decisions have consequences!

  • Alasdair Smith says:

    I think you are right that for the UK to remain in a full CU with the EU (and a full CU is need to avoid the border problem) the UK will have to remain in the CAP. Agri-food is a big part of the trade across the Irish border and the area where there’s most scope for illicit activity if there are price differences and the border is not policed.
    About half of UK trade is in services: it is important to the UK economy.
    I think it would be politically hard, to put it gently, for NI to have its regulatory oversight done by the Republic. It would also cause problems for the businesses which currently operate on a UK-wide basis.
    You may be right that agreeing a UK-wide backstop now will precipitate a political crisis this year. But it’s better to have all of this out in the open now and dealt with now than to postpone the crisis until 2020 when options will necessarily be more limited

  • Tom Murray says:

    Well argued but I can’t agree with your glib dismissal of the freedom of movement. It is necessary for the single market if you accept that the right to sell one’s labour shouldn’t be restricted within that market. Why should capital, goods and services be prioritised over labour? It isn’t in the UK’s internal market.

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