Northern Ireland Shilly-Shally has Experts Fearful of New Trade War

The UK’s disentanglement from the European Union has been a source of instability in international trade, and is now giving rise to a more serious concern: the possibility of a trade war.

Unrest has escalated since the UK government tabled legislative reforms in mid-June. If approved by Parliament, the proposals would allow Westminster to unilaterally disregard parts of the Northern Ireland protocol that was agreed in 2019. This has prompted a backlash from Brussels, with officials losing faith in the trust and credibility of the British government. The resulting uncertainty has quickly spread to the business community.

“We are hugely concerned that the introduction of the government’s Northern Ireland Bill risks significant harm to businesses in London and right across the whole of the UK,” said Richard Burge, chief executive of the London Chamber of Commerce and Industry.

In a statement issued after the proposed legislation was published, he said the bill “means we are now teetering on the brink of a trade war with the EU” and warned of “further economic pain and falls in investment”.

In terms of trade, the UK government’s primary concern is the difficulty of moving goods between Great Britain and Northern Ireland. The protocol requires that customs controls are applied at ports in Northern Ireland, to avoid the need for checks or infrastructure on the land border with the Republic. This compromise was reached to respect peace-keeping measures set out in the 1998 Good Friday Agreement, while minimising the risk that goods could enter the European Single Market without controls.

The problem with this arrangement is that all goods moved from Great Britain to Northern Ireland are treated as if they are being imported into the EU, unless the importing company can prove they will remain in Northern Ireland. Regulatory controls apply to some goods, such as agri-food products, regardless of the destination market. Traders are required to make detailed customs declarations for what is essentially intra-UK trade.

The UK government says the result is “burdensome bureaucracy and paperwork” on businesses — including those that do not trade with the EU.

There is a strong economic incentive for Westminster to ensure smooth trade. Ireland is the UK’s sixth-largest trading partner, with UK companies exporting goods worth £21.8bn to the country in 2021. Imports from Ireland totalled £13.9bn over the same period. Of those totals, just 14.7 percent of UK exports originated in Northern Ireland, while 20.4 percent of imports were to Northern Ireland.

The UK proposal, as outlined in a paper published alongside the draft legislation, would result in the introduction of “green” and “red” lanes for goods. The green lane would be open to approved members of a trusted trader scheme, overseen by UK authorities, and would allow goods due to remain in Northern Ireland to be moved without controls. The red lane would apply to goods exported into the European Single Market, and would provide for EU customs and regulatory checks.

Officials hope that easing the burden for businesses moving goods across the Irish Sea could offset some of the impact Brexit has had on the UK’s trade flows. A report by the Centre for European Reform (CER), a Brussels-based think tank, estimates that post-Brexit goods trade was down 13.6 percent. By comparing the country’s economic performance to a model economy based on a basket of comparable nations, CER suggests Brexit resulted in a 5.2 percent hit to Britain’s GDP last year.

For the EU, the UK’s proposed changes to trade arrangements is unpalatable. In a statement delivered two days after the UK government published its draft legislation, European Commission vice-president Maroš Šefčovič characterised the move as a unilateral breach of international law.

“There is no legal, nor political, justification whatsoever for unilaterally changing an international agreement,” he said. “Opening the door to unilaterally changing an international agreement is a breach of international law as well. Let’s call a spade a spade: this is illegal.”

EU officials say the immediate impact of the UK’s decision has been an undermining of trust and credibility. Šefčovič noted that Brussels negotiated in good faith, acknowledging practical difficulties in implementing the Northern Ireland protocol and offering flexibility in certain areas without the need for changes to the agreement itself. Proposed measures included cutting customs paperwork, reducing sanitary controls, and simplifying certification processes for vehicles carrying goods.

The European Commission has been specific in some of its offers. Proposals set out in October 2021 would allow British sausages — generally prohibited for import into the EU — to enter Northern Ireland with certification. Products of animal origin, such as cheese or chicken, would have physical checks reduced by 80 percent, while trucks transporting a range of different food products would be permitted to provide a single document for all goods on board.

Alarmingly for businesses, the EU has retaliated with legal action. Infringement proceedings initially brought in March 2021 but shelved six months later are now being revived. Two new charges are being brought against the UK: failing to carry out legally mandated checks on goods arriving in Northern Ireland, and failing to provide trade statistics deemed essential to the workings of the Single Market.

The confrontational tone has accelerated talk of a potential trade war. The UK’s Institute of Export and International Trade has launched a survey to ascertain the potential impact that would have on its members. It cites possible actions as the imposition of tariffs on goods exported to, or imported from, any European Union member state, as well as increased certification standards.

Punitive trade-related actions against the UK would be a drastic option. Officials are reportedly reluctant to escalate the conflict, citing the need for a united European front against Russian aggression. The UK and EU have been aligned in imposing sanctions following Vladimir Putin’s invasion of Ukraine. There is little appetite to punish EU businesses reliant on access to the UK market at a time when the continent faces soaring energy and food prices.

By initiating a trade war via tariffs, restrictions or tougher certification standards, the EU would in effect be breaking the Withdrawal Agreement signed in January 2020. Throughout its negotiations with the UK, the EC has emphasised the primacy of the rule of law, specifically the importance of internationally agreed texts. Even in his shot across the bows after details of the UK’s draft legislation emerged, Šefčovič emphasised the need for a negotiated solution.

To abandon that stance could risk ceding the high ground.

By John Basquill