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Photo of Emily Lydgate7 December 2017

Dr Emily Lydgate is a lecturer in Law at the University of Sussex and a fellow of the UK Trade Policy Observatory.

How can the UK uphold its commitment to leaving the EU Single Market and Customs Union while also preserving the invisible intra-Irish border? Leaving aside crucial questions of political feasibility, this post looks at some of the options and their trade and border implications. Notably, there are limits to ‘flexible and creative’ solutions that involve turning a blind eye to customs and regulatory checks solely on the intra-Irish border: trade rules leave little room for such ad hoc approaches.

Option 1: Regulatory divergence between Northern Ireland and the rest of the UK

Northern Ireland could diverge from the rest of the UK, forming a customs union with the EU and continuing to harmonize its domestic regulation with EU regulation and standards for goods and services. Arguably, such full integration is a necessary condition for maintaining the open border (though note that Turkey, which has a customs union, and broad regulatory alignment with, the EU, still faces border checks).

There are models for Northern Ireland to maintain formal independence from the EU while gaining the benefits of an invisible border. Close to home, we can look to the Channel Islands. As ‘Crown Dependencies’ they are not EU Members nor strictly part of the UK; they have judicial independence and the right of self-government. They voluntarily follow EU standards and legislation, and are part of the EU Customs Union. Their Single Market participation is limited to free trade in goods, and does not extend to services or people.

Yet the situation in Northern Ireland is more challenging than just maintaining formal independence: it requires preserving political unity with one country, the UK, whilst forming a customs territory and regulatory union with another, Ireland (and the EU). In theory, such a model could preserve an open intra-Irish border for goods – and services, if extended further – and allow Northern Ireland to maintain integration with the rest of the UK in some areas. But it is difficult to see how the United Kingdom could continue to function as a union. In order to preserve the integrity of the EU’s Common External Tariff, the EU would likely require Northern Ireland to align all of its Free Trade Agreements with those of the EU – rather than the UK. Northern Ireland would also likely be bound by European Court of Justice rulings pertaining to EU regulations which it has incorporated, thus limiting its ability to have an independent judiciary.  As has been well noted, such divergences in customs and regulatory regimes would also necessitate border checks between Northern Ireland and the rest of the UK.

Option 2: Regulatory ‘alignment’ between the UK and the rest of the EU

David Davis MP, Secretary of State for Exiting the European Union, has ‘clarified’ the position that the UK as a whole – not just Northern Ireland – will align its regulation with the EU, stating that:  “Alignment … isn’t having exactly the same rules. It is sometimes having mutually recognised rules, mutually recognised inspection – that is what we are aiming at.”

It’s a curious word choice: in the recently-concluded EU-Ukraine Association Agreement, ‘regulatory alignment’ means that Ukraine is expected to incorporate the EU acquis, its body of law and regulation, in covered areas. Determining whether it has fulfilled this obligation is down to the EU.

This is quite different from mutual recognition, which Davis then advocates. The Mutual Recognition Agreements the EU has concluded are limited in scope and application. They allow companies in a sub-set of sectors to certify that their products meet EU standards at the point of production (mutual recognition of conformity assessment), thus obviating the need for checks to happen twice.

This is a far cry from an invisible border. It does nothing to prevent border checks resulting from tariff barriers and rules of origin checks. Davis notes that mutual recognition would only happen ‘sometimes’ such that border infrastructure would need to be in place for non-covered sectors. Which leads us to….

Option 3: Sectoral alignment

Northern Ireland could identify sectors in which regulatory alignment was particularly useful– say, health care, transport, environmental regulation and agriculture. In these areas it could align with Ireland and the rest of the EU, departing from the rest of the UK.

Indeed, Northern Ireland has some regulatory divergence from the rest of the UK now. Yet, for reasons noted above, this would not lead to the conditions necessary for an invisible border (see our recent briefing paper: Can A UK-EU Free Trade Area Preserve The Benefits Of The Single Market And The Customs Union In Some Sectors?). A sectoral approach could even lead to two sets of border checks: between Northern Ireland and Republic of Ireland, and between Northern Ireland and the rest of the UK.

Bonus section: Ad hoc solutions to achieving frictionless trade

But what if the UK, desperate for a solution, decided to simply look the other way – not worrying about lost tariff revenue or accepting goods that did not meet UK standards? Under any of the models considered above, turning a blind eye would facilitate frictionless trade. This would give goods coming in from Ireland – the UK’s only land border – a de facto special status. Aside from the other problems that this would create, the UK would run into problems with WTO rules.

Turning a blind eye would necessitate admitting goods from Ireland tariff-free. The Most Favoured Nation (MFN) principle prohibits the UK from giving special tariff rates to one WTO Member that it does not extend to all of the others. There is an exception for Free Trade Areas, in which tariff barriers are eliminated for substantially all trade. Thus such an arrangement would only be possible as an extension of a zero-tariff UK-EU Free Trade Area; otherwise it would violate WTO MFN obligations.

Another WTO obligation, GATT Article X, would also prove problematic. In the words of the WTO Appellate Body, it ‘establishes certain minimum standards for transparency and procedural fairness in the administration of trade regulations’. It also requires that there ‘uniformity’ in the administration of trade-related regulation. In other words, countries should not treat some goods – or some countries – much differently than others in the administration of customs procedures. There are a dozen or so disputes focusing on this requirement. A light-touch approach applied only on one border could certainly prompt another.

Article 7 of the Trade Facilitation Agreement, which recently entered into force, also obligates each WTO Member to ‘apply common customs procedures and uniform documentation requirements for release and clearance of goods throughout its territory.’

On the other hand, Article XXIV of the GATT Agreement, which applies to Customs Unions and Free Trade areas as well as territorial application and frontier traffic, seems to provide some scope for differential treatment of goods coming through the land border. Article 3(a) states that:

The provisions of this Agreement shall not be construed to prevent:

Advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic.

There is no case law clarifying this provision and what is meant by ‘frontier traffic’. Yet even if there were no WTO complaints, such an approach could turn the intra-Irish border into a ‘smuggler’s paradise.’ Nor would it eliminate border checks unless the EU participated as well – and it is notoriously protective of its internal market.

In sum, leaving aside the political challenges associated with each of these flexible and creative options, they still fall short of re-creating the invisible intra-Irish border – and create a number of subsidiary challenges. However, if all Parties are willing to accept the introduction of a ‘hard’ intra-Irish border, there are some options that can help soften it – such as the UK aligning with EU regulation. The harder the Brexit, the harder the border.

 

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.

December 7th, 2017

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17 October 2017

Steve McGuire is Professor of Business and Public Policy and Head of the School of Business, Management and Economics at the University of Sussex. He is a Fellow of the UKTPO.

Bombardier has found an elegant solution to its trade problems with the United States: sell a controlling stake in the programme to a company with deeper pockets to defend itself – and with a US production base immune, by definition, from US tariffs. (more…)

October 17th, 2017

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17 October 2017

Lower-income households would be disproportionately affected should the UK revert to WTO tariffs

Exiting the EU without a trade deal and reverting to WTO ‘most-favoured nation’ (MFN) tariffs with the EU would lead to significant price rises across a range of goods, with low-income households facing the biggest cost pressures. This is according to a new joint-report published by the Resolution Foundation and the UK Trade Policy Observatory at the University of Sussex. (more…)

October 17th, 2017

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27 September 2017

Steve McGuire is Professor of Business and Public Policy and Head of the School of Business, Management and Economics at the University of Sussex. He is a Fellow of the UKTPO.

As Bombardier is bombarded with a 220% tariff increase on exports to the US, the UK needs to wise up. There are two key points from the Boeing-Bombardier dispute that have implications for Brexit. First, leaving the European Union will not affect the sovereignty that national governments already have to dish out state aid for key industries. This will not change. Second, and this is the critical point, trade is bound up in broader political calculations. (more…)

September 27th, 2017

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Michael Gasiorek27 September 2017

Dr Peter Holmes Reader in Economics and Dr Michael Gasiorek is Senior Lecturer in Economics at the University of Sussex and Director and  Managing Director of InterAnalysis respectively. Both are Fellows of the UKTPO.

With respect to the post-Brexit period, the UK needs to sort out its trade relationships not just with the EU but also with non-EU countries. In regard to the EU, Mrs May’s stated objective is for an “implementation” period during which “access to one another’s markets should continue on current terms”,  such that “businesses and public services should only have to plan for one set of changes in the relationship between the UK and the EU”.  However, for this to be possible, the UK will also have to deal with the relationship with non-EU countries.  In this blog, we focus on an important aspect of Free Trade Agreements (FTA) which centres around something which is a bit technical and often not well understood – called “Rules of Origin” (RoOs).[1] (more…)

September 27th, 2017

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Image of Alan Winters21 August 2017

L. Alan Winters CB, Professor of Economics and Director of UKTPO.

Economists for Free Trade (EfFT) are back, offering the Introduction to an unpublished – and hence unknown – report that claims £135 billion benefits from Brexit. It not only repeats the previous claim that GDP will increase by 4% if the UK adopts free trade, which I characterised  as ‘doubly misleading’ in April, but it adds in an extra 2% from ‘improved regulation’, 0.6% from our net budget contribution to the EU and 0.2% from removing the ‘subsidy to unskilled immigration’. It also promises faster growth as well.

I’ll come back to free trade, but, first, what regulations will be improved? We are not told. Similarly, what subsidy to immigration? Who knows? The budget contribution to the EU may be saved, but we will need to spend much of it on providing replacements for various EU regulatory bodies such as the European Medicines Agency, on negotiating new deals on things like airlines or nuclear isotopes, supporting farmers (which EfFT apparently accepts), on customs formalities on trade with the EU, on managing alleged unfair trade and on trade disputes, etc. Until we see the details, you have to doubt these numbers. (more…)

August 21st, 2017

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16 August 2017

Dr Peter Holmes Reader in Economics at the University of Sussex and Fellow of the UKTPO

The UK government has just issued its official position paper on the issue of the customs union and Brexit. It emphasises a desire for the “most frictionless trade possible in goods between the UK and the EU” and proposes two ways of achieving this in the long term, while making it clear that the UK will leave the EU’s customs union when it leaves the EU.

The first option it proposes is a “streamlined customs arrangement” which sounds like a form of free trade agreement (but there is no mention of this as an aim). It involves keeping in place a number of the existing customs arrangements and using (untested) electronic technology to ensure the smooth processing of all documentation. The stated aim is to keep border arrangements as close as possible to what they are now to maintain continuity for businesses. (more…)

August 16th, 2017

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14 August 2017

After Brexit, the UK will have to leave the EU Customs Union (CU) and become a legally separate customs territory. It might then, however, seek to create a new Customs Union with the EU to cover their mutual trade.

The UK Trade Policy Observatory at the University of Sussex (UKTPO) has produced this short animated video that explains what this entails, and what kind of an agreement the UK and the EU would need to establish in order to achieve the same level of trade costs as we have now.

Ultimately, the video explains, a Customs Union will not produce ‘frictionless’ trade without re-creating several aspects of current EU membership. With Brexit negotiations already underway, it emphasises that maintaining a customs union is just one part of the story; and not, by itself, the be all and end all for achieving a smooth trading process.

 

August 14th, 2017

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30 May 2017

The UK has accounted for a major share of the world’s wine imports for centuries, and wine currently accounts for more than one-third of UK alcohol consumption. Its withdrawal from the European Union (Brexit) will therefore affect not only UK wine consumers, producers, traders, distributors and retailers but also suppliers of those imports.

Based on a model of the world’s wine markets, in their Briefing PaperWill Brexit harm UK and global wine markets?’ Professor Anderson and Glyn Wittwer determine the impacts of various alternative Brexit scenarios through to 2025, involving adjustments to UK and EU27 bilateral tariffs on wine imports and any changes to UK income growth and the value of the pound over the period of adjustment.

Their research indicates that for wine markets, the impact of the UK leaving the Customs Union is likely to come not only from tariff changes but also from slowed growth of UK incomes and devaluation of the pound. (more…)

May 30th, 2017

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18 May 2017

Compiled by Fellows of UKTPO

Brexit will leave many areas of UK policy open to change. International trade policy is among the most important of these for UK prosperity and also among the most immediate because the status quo cannot simply be extended. This is the second in a series of blogs reporting what the major political parties say about trade policy in their 2017 manifestos, as they become available.

The UK Trade Policy Observatory (UKTPO) has set out a series of issues that it believes should be considered in any election manifesto that might form the basis of the UK’s future trade policy. The table below checks whether or not the Liberal Democrats’ Manifesto mentions these important elements explicitly or implicitly. Following that we offer a brief commentary on the treatment of trade policy in the manifesto.

The central plank of the Liberal Democrats’ manifesto is remaining in the single market and the customs union. This implies no change to current trade policies and hence little need to discuss them in the manifesto. Thus their coverage of trade policy is rather sparse. (more…)

May 18th, 2017

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