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An alternative to the Irish Backstop: an All-Ireland “Common No-Custom Area”

An alternative to the Irish Backstop: an All-Ireland “Common No-Custom Area” as a Frontier Traffic Area under Art. 24 of GATT for products originating in the island (“Ireland-Made”), allowing regulatory divergence by the UK in respect of the EU without necessitating a hard border in Ireland

 

 

Giorgio Sacerdoti (Università Bocconi) and Niall Moran (Università Bocconi)

Summary:

 Up to now it has been impossible to bridge the respective “red lines” of the UK and the EU in such a way that, as reaffirmed by the Boris Johnson government, after Brexit the UK –would be able to (a) regulate freely its internal market, diverging possibly from EU regulations, without distinction between the regime applicable to Northern Ireland (NI) and that of the rest of the UK, and (b) pursue an independent trade policy with third countries. The EU for its part seeks to preserve the unity of its single market and prevent the UK accessing it as a third country “à la carte”. No solution has yet been found that would allow coexistence of these two divergent requirements without establishing border controls between NI and the Republic of Ireland (RI), which both parties intend to avoid in order to preserve the Good Friday Agreement. The “backstop” does not solve this dilemma because in order to avoid a hard border in Ireland it prevents the UK from pursuing objectives (a) and (b) by tying the UK in a custom union with the EU. Rejection of the backstop with no alternative arrangement in place or a no-deal would, on the other hand, require a hard border to preserve the integrity of the single market.

 To resolve this conundrum, this comment proposes the alternative of establishing a “Common No-Custom Area” in Ireland – parallel to the Common Travel Area – applicable only to products originating in either part of the island (which represent a major part of intra-Ireland trade). This special regime conforms to the Frontier Traffic exception of Art. 24 of GATT/WTO and finds a “precedent” in the regime established by the EU in 2004 for trade between the Republic of Cyprus and Northern Cyprus. These products, duly labelled or certified as “Irish-made” under the authority of a Mixed Commission that would manage this special regime, would circulate freely as domestic products in both parts of the island. Products originating from outside the island, made in the rest of the UK or imported therein from third countries, entering NI but destined to the RI (or vice versa with respect to the EU and RI), would instead undergo the usual controls and custom duties for imported products, where such imports from outside the EU are currently cleared, thus not at the RI-NI border. Recent overtures of British officials that they would be willing to create a “single regulatory zone” covering all of Ireland for certain products go in the direction of what we propose. Their new flexibility has however been found by the EU Commission to be inadequate to protect the single market and to avoid a hard border, a requirement that our more comprehensive proposal would satisfy.

The situation envisaged under the Backstop

Let us first recall briefly the terms of the issue.

In November 2018 negotiators representing the UK and the European Union (EU) defined the withdrawal agreement (WA) on the terms of the UK’s withdrawal from EU membership in accordance with Art. 50 of the Treaty on the European Union. Accompanying the draft WA was a political declaration (PD) setting out the framework for the future EU/UK relationship after a transition period extending from the withdrawal date (which has been extended from 29 March to 31 October 2019 as things currently stand) to the end of 2020 with a possible extension up to the end of 2022.

The WA has not been formally signed to date, having been rejected three times by the UK Parliament in 2019, ultimately leading to the fall of Theresa May’s government. The most controversial part of the WA is Protocol no. 2 addressing the Irish border. The Irish border question concerns the resolution of two conflicting aspirations: preserving the integrity of the Good Friday Agreement of 1998, implying an open border between the UK and the Republic of Ireland (RI), on one side; and satisfying the UK “red-lines” to leave the EU’s customs union, and be able to conclude trade agreements with non-EU countries without necessitating a separate regime for Northern Ireland (NI) in respect of the rest of the UK on the other.

Protocol no. 2 on Ireland/Northern Ireland to the WA, which together with its ten Annexes accounts for 173 of the 585 pages of the WA, sets out the so-called “backstop” solution for avoiding a hard border between Ireland and Northern Ireland. In principle, the solution to the Irish border question is devolved to the future EU-UK arrangement negotiated under the political declaration, but if the EU and UK were to fail to agree a solution in line with the requirements of the Good Friday Agreement by the time the transition period expires, the “backstop solution” would come into place. The backstop means substantially the whole of the UK remaining in a customs union with the EU , thus preventing the UK from pursuing the above mentioned aims.

In fact, the single customs territory envisaged between the UK and the EU entails not only the movement of goods on a duty and quota free basis with low levels of administrative obligation at the border, but also a deep level of integration between the UK and the EU. Article 6 of the Protocol stipulates that a very large part of EU law, as defined in Annex 5, shall apply to the single EU/UK customs territory. Annex 5, which runs to close to 70 pages, is a list of the EU legislation on general matters (such as trade and customs, or the marketing of products) and specific matters, from animal health, to food safety, to motor vehicles to chemicals and pesticides. All these rules should be applied first of all “to and in the United Kingdom in respect of Northern Ireland” but necessarily also to the rest of the UK if the setting-up of a separate regime for NI is to be avoided and no controls being established in the sea between NI and the rest of the UK. Moreover, preserving the unity of the EU internal market excludes custom regime differences or checks between the Republic of Ireland and the rest of the EU.

Other annexes specify the UK’s external trade policy regime vis-à-vis non-EU members, commitments on state aid, on environmental protection, on labour standards, and on fair taxation so to avoid divergences with the EU.

Our proposed alternative arrangement: an All-Ireland “Common No-Custom Area” for Irish-made products as a Frontier Traffic area under Art.24 of GATT

The core of our proposal is to establish an area of free circulation covering the whole of Ireland limited to products originating in either part of the island: industrial and agri-products made in NI would be admitted freely in the RI, and vice versa. Free circulation without border controls would be facilitated under this scheme given the significant proportion of intra- Ireland trade that is represented by local Ireland-made products, provided that the standards applicable to most of them remain equivalent in NI and in RI. Minor divergences of NI products in respect of single market requirements applicable in RI (which would remain an integral part of the EU single market) could be resolved through equivalence and mutual recognition.

This proposal ensures free trade with no controls within Ireland, without tying the whole of the UK to the EU custom territory’s regulations, while respecting the basic parameters of not breaching the unity of the UK market on the one hand, and the EU custom territory and single market on the other.

Such freedom of circulation for agri-products originated in either part of the island and destined to the other would be greatly facilitated by the maintenance of the current EU SPS regime in the whole of Ireland, which would make certification of covered products superfluous, as the UK government has indicated recently it would find acceptable.

On the contrary, products originating from the rest of UK (or imported therein), brought into NI with RI as destination and transferred commercially there, would not enjoy this freedom and would be subject to the usual conformity controls and custom duties at existing custom offices in NI and RI. The same would apply for EU products entering RI and destined for NI.

Establishing a special regime for the free circulation of Irish products throughout only the island of Ireland is legally admissible under the GATT/WTO, as we explain hereunder. The nature of intra-Ireland trade, highlighted above and in Table 2 hereunder, will make the absence of border controls in Ireland compatible with the potential divergence between UK and EU in regulatory standards provided certain appropriate common regulations are put in place that would reflect the nature of the products most traded products within Ireland.

We take into account indeed that, since the UK will be able to establish its own internal market rules and standards, not being bound by a custom union with the EU, divergence of standards on certain products, both manufactured and agricultural may develop in time.

In order to exclude from free circulation such “non-conforming products” made in NI according to UK standards (and vice versa), a Mixed Commission set up to manage the “Common No-Custom Area” should be empowered to make checks at production and destination sites and deliver marks of origin and certification allowing free circulation for conforming products, which would be expected to represent the bulk of the intra-Ireland trade.

Thus, an “Ireland-made” (including “Ireland-grown”) product would be considered as “domestic” in both parts of the island (“all-island passporting”). On the other hand, imports from outside the island into either the RI or NI destined to the other part of the island do not correspond most of the time to normal commercial transactions. They may be driven by fraudulent behaviour in order to profit abusively from the special regime of the “Common No-Custom Area” reserved for Ireland-made products. Appropriate controls and prohibitions would therefore be fully warranted. Controlling circumvention and fraud, or normal controls on goods in transit and final custom duty payment for goods destined to continental EU or vice-versa to Great Britain (the rest of the UK, but not NI) need not be carried out at the border but before products reach their destination, through labelling, marks of origins and so on. Adequate sanctions and prohibitions should be enforced in both NI and RI.

A specific provision of GATT permits such a regime without requiring its extension to other WTO members as would normally be the case under the most-favoured-nation (MFN) principle of Art.1 GATT. This is Art. 24.3 according to which the GATT “shall not be construed to prevent: (a) Advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic.” Other WTO members could thus not invoke for their exports the reciprocal exemption from custom controls and other restrictions of trade applicable to products originating in one part of Ireland and exported to the other.

There is no definition of “frontier traffic” in the GATT, so a regime covering an area as large as the whole of Ireland could be admissible, although extending beyond the traditional concept of local commerce adjacent to a border.

The Northern Cyprus “precedent”

This would not be the first instance where the EU has adopted a special trade regime for local commerce in a border area such as the one we propose in Ireland. This is the case of imports into the Republic of Cyprus (RC) from Northern Cyprus (NC) which is de facto beyond the EU custom territory. In the Regulation relating to the accession of Cyprus to the EU in 2004 it was agreed that products from NC are to be admitted freely into RC ”on conditions that they are wholly obtained in [its territory]…or have undergone their last substantial economic justified processing or working in an undertaking [there]”. They “are not subject to custom duties and charges having an equivalent effect nor to a custom declaration”, subject, if applicable, to EU prescribed veterinary, phytosanitary and food safety requirements and checks before entering RC. Furthermore, these goods destined for consumption within RC are considered as RC domestic goods, that is having an EU origin, thus enjoying free circulation in the whole of the EU. The EU could extend unilaterally this benefit to NI products entering RI under the Common No-Custom Area regime.

Examples

Some examples may clarify the operation of the regime we propose.

  • Let’s suppose that the UK-EU reciprocal custom duty on bikes is 10%. Under an all- Ireland “Common No-Custom Area” bikes manufactured in Dublin and sold in NI would be exempted from such a duty, and would be considered as domestic products in NI. There would be the same treatment (exemption from EU custom duty) for bikes made in Belfast and sold in RI. Ireland-made bikes would thus freely circulate throughout the island with no need for controls, this special regime being the very premise that underpins the concept of a Frontier Traffic area, that it is meant to favour local commerce irrespective of and across a political
  • In contrast, bikes brought into NI from the rest of the UK, whether manufactured there or imported from a third country (irrespective of whether they paid the UK custom duty of 10% or were exempted under a Free Trade Agreement of the UK with the exporting country) and destined to the RI would not enjoy all-island passporting. They would have to pay the 10% EU tariff on bikes (either in advance or at destination since there would be no custom at the intra-Ireland border). The same would be true for bikes made in France and imported to NI through
  • If the standards for bikes were to diverge between the UK (including NI) and the EU, then bikes manufactured on the island would not qualify for an Ireland-made label and would not enjoy free intra-Ireland circulation as per the explanations Contraventions would be prevented and sanctioned by controls at the place of the destination and abusive sale.
  • Similarly, except if a common epidemiological SPS area aligned to the EU was maintained throughout Ireland as recently proposed), one could envisage that the UK might authorize production in the UK (including NI) of some GMO products which are not authorized in the EU, hence also not in the RI (or vice versa). These products, although originating from the island, would not enjoy passporting. They would not receive the certification required from the Mixed Commission and thus could not circulate in the other part of the island, just as would be the case with similar non- conforming products from outside the

To facilitate such circulation, each party should enact product standards or negotiate tariffs relevant for those products with an eye on the All-Ireland agreed free circulation regime in mind. Lists of conforming products could be agreed that would be admitted to free circulation. Products not originating from the island, would be subject to duties and other regulations on imports with designated modalities when transferred from one part of Ireland to the other. The limitation of free circulation to original products is a key feature, typical of Frontier Traffic areas under Art.24 GATT. First of all to ensure WTO-conformity; secondly to avoid creating a loophole in the future UK custom regime.

The circulation of products would be in line with Table 1 below. The fact that a product would transit through RI towards NI or GB, or through NI towards RI and EU26 does not exempt them from customs controls, away from the border.

 

Table 1

                           To RI                        To NI                           To GB                      To EU 26

From RI              NA                       CNCA*                       CC*                        EU single mkt

From NI             CNCA                   NA                             UK dom. Mkt         CC

From GB            CC                        UK domestic mkt    NA                          CC

From EU 26      EU single mkt      CC                            CC                          NA

*Common No-Custom Area

*Customs controls (away from border)

 

A quick agreement on an All-Ireland “Common No-Custom Area” is feasible also in case of a no-deal Brexit

The proposed solution could be agreed promptly, even before the withdrawal date (at the time of writing 31 October 2019) in an additional protocol to the Withdrawal Agreement that would replace or supplement the Protocol on Ireland/Northern Ireland, (containing the backstop). Further details could be agreed subsequently during the transition period.

It could also be cast in the form of a “default” solution, that is to enter into force if no alternative agreement is concluded by a certain date (perhaps the date of the end of the transition period).

Finally, in a no-deal scenario, (that is, in the absence of the WA or some variation thereof being signed) with the UK immediately pursuing its own trade and regulatory policy, the Common No-Custom Area could be agreed between the parties as a means of avoiding a hard border.

Conclusions

We believe that in view of the current conundrum surrounding the backstop set forth in the WA and the lack of accepted alternatives our proposal would reconcile these various differences and offer a practical solution. This proposal would grant freedom of external trade relations to the UK and would not entail custom barriers between Northern Ireland and the rest of the UK: products from the rest of the UK would go on entering NI freely and vice versa, but would not benefit from freedom of export to RI (nor from there on to the rest of the EU) under the special conditions of intra-Irish trade.

British officials have indicated recently their willingness to consider Northern Ireland as a special economic zone and possibly create a “single regulatory zone covering the whole of Ireland”. The UK government has expressed its desire to keep Northern Ireland “politically in the UK but with easy economic access to the Irish (and therefore EU) market”. Meanwhile DUP leader Arlene Foster has indicated that she would accept Northern Irish-only solutions “provided they did not infringe the region’s constitutional status within the UK.”. The EU has not however found these proposals to be an acceptable means of protecting the integrity of the single market from fraud, a problem which could in our opinion be taken care on the basis of our proposal.

The overtures the UK government and the EU Commission have recently made towards some flexibility as to the future trade and regulatory regime (NI v. the rest of the UK) and the carrying out of some controls in and around Ireland in order to facilitate an orderly withdrawal make our proposal more realistic. The same cannot be said in our opinion for suggestions of more limited frontier areas within Ireland or the establishment of “economic zones”. These would not go far enough in making divergent regulations in the UK and in the EU compatible with avoiding a hard border.

 

Table 2

  1. NI produced food and drinks destinations (2016) – £ million

Total sales 4.364 – External (not RI): 3.301

Within NI  1060      To GB 2193     To RI 645     To Rest EU 341    To Others 120

2. NI external sales of life animals (2018) – £ million

Within NI ?             To GB  37          To RI 61       Others EU 13         To Others 0

3. Northern Ireland trade of goods with Ireland in 2018

Exports: £3.2 bn – Imports: £2.2 bn – Trade balance: £1.0 bn – Bilateral trade: £ 5.4 bn

Ireland was the 1st largest export market for Northern Ireland (36.1% of Northern Ireland exports) and the 1st largest import market for Northern Ireland (28.2% of Northern Ireland imports) for goods in 2018.

Breakdown by the top 10 sectors (exports):

Food and live animals £1.0b

Machinery and transport equipment £529.8m

Manufactured goods classified chiefly by material £470.4m

Miscellaneous goods manufactured by article £361m

Mineral Fuels £254.7m

Chemicals and related products £243.7m

Beverages and tobacco £154.1m

Crude materials £134.4m

Animal and vegetable oils £20.2m

Commodities/ transactions not classified elsewhere in SITC £13.4m

 

Giorgio Sacerdoti is Emeritus Professor of International Law, Università Bocconi and Niall Moran is a Ph.D. in Law from the Università Bocconi

 

 

 

 

 

 

 

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