Speculation is increasing that the UK will trigger Article 16 of the Northern Ireland Protocol in the coming weeks, if not days and that the EU is hurriedly preparing its response.
The Northern Ireland Protocol is the arrangement agreed between the UK and the EU to ensure that goods can move freely between the Republic of Ireland and Northern Ireland, avoiding the need for a hard border. Article 16 allows either party to suspend part or all of the protocol if they conclude that its operation leads to serious “economic, societal or environmental difficulties” that are liable to persist.
The potential implications of triggering article 16 extend well beyond the limited impact of the article itself. Along with additional actions the UK government may take, this is likely to lead to a snowball effect and a rapid further deterioration in UK-EU relations.
While the UK may argue that it is acting surgically, indications are that the EU would see this as a provocation too far, which endangers the Single Market’s integrity and reacts with force as a result.
Businesses overwhelmingly want to meet their compliance obligations, but instability and uncertainty make doing that all the more difficult. How can companies effectively strategize, budget, and implement processes when the goalposts are constantly moving?
Rather than Brexit being ‘done,’ we look to be moving into the next phase…which could well end up looking very much like a previous phase.
What could the EU response look like, and what does it mean for business?
- Suspending or Terminating the EU-UK Trade and Cooperation Agreement (TCA) could be considered the ‘nuclear’ response. There is some suggestion that the EU will immediately look to suspend the TCA, with this taking effect in 2023. This could pave the way for 2022 to look very much like 2017-2019, dominated by a renegotiation with the EU and the return of the “No Deal” cliff edge.
- Applying tariffs – the EU has a proven track record of being very effective at “hitting where it hurts” regarding the tactical application of targeted tariffs in disputes. The EU could look to, for example, re-apply tariffs of 10% on British-made cars, and in so doing, hope to prompt UK automotive manufacturers to apply pressure on the government.
- EU Customs behavior – various administrative tools the EU has at its disposal to make life difficult for UK exporters; this could be in the form of additional checks or licenses or simply taking a more rigorous approach to existing import controls on goods coming from the UK.
- Cease cooperation in other areas – the EU could look to end cooperation with the UK in all manner of areas beyond trade and customs, such as on data adequacy, aviation, and research programs.
The precise order in which the above measures could be implemented or how they may be combined remains to be seen. Still, in sum, they amount to an effective arsenal of weaponry at the EU’s disposal should we see an escalation to an entire Trade War.
What does all this mean for Northern Ireland?
The UK’s political calculation, undoubtedly a risky one, seems to hinge on their confidence that in unilaterally applying their interpretation of the Northern Ireland Protocol, they can prove the EU’s insistence on a burdensome level of Customs declarations and checks to be unnecessary.
If they can show that the threat to the Single Market through Northern Ireland, in reality, is very low, would this lessen the EU appetite for escalation to a Trade War, which ultimately would damage both parties?
If this calculation is correct, Northern Ireland businesses could benefit in the short term from a reduction in red tape, which may bring them on the side of the UK government’s way of thinking.
The dilemma has always been that the UK wishes to trade with Northern Ireland as another part of the UK, without barriers or checks on goods moving in either direction. The EU, recognizing the need to maintain an open border between the Republic of Ireland and Northern Ireland, has agreed to treat Northern Ireland as an EU member, with related free movement of goods to and from other EU countries, particularly across a frictionless Irish land border. While the UK was within the EU, these objectives were fulfilled. However, the UK’s departure from the EU now requires a customs border to control the movement of goods between the EU and the UK, just like every other non-EU country.
In a nutshell, the EU needs to protect its external border, while the UK wishes to have frictionless trade within its internal borders. While Northern Ireland continues to be part of the UK and within the EU’s Single Market, these two key priorities appear incompatible.
Brexit is far from done.