03 May 2018

UK Trade Policy Observatory: Backstop v2: A solution to trade with the EU post-Brexit

[...]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. [...]

Full article on UK Trade Policy Observatory

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