‘Le Crunch’ but options still on the table

Angela Merkel warned on Sunday that after Brexit the UK would be a ‘potential competitor’ to the EU, alongside China and the United States

So, “Le Crunch” is now on. For weeks there was widespread doubt in Brussels and EU capitals about whether Boris Johnson could really risk trying to seek a genuine compromise with the EU over Brexit and Northern Ireland. That has now changed.

For months his Government contested Theresa May’s pledge that Brexit could not create the return of any border in Ireland, arguing that a border could be managed with technology, or “alternative arrangements”. The EU said this approach was not serious.

Mr Johnson has now dropped that position and, having conceded the need for customs checks in the Irish Sea, he is left searching for a hybrid solution that enables him to simultaneously keep his promise to Unionists that they will not be left in the EU’S customs union. The details are ultra-technical, but broadly there are two positions on how Mr Johnson should turn his concession that customs checks won’t take place on the island of Ireland into what EU negotiators call an “operable” solution.

The EU has argued that there should be a full customs border in the Irish Sea. The UK has resisted this logic since it divides the UK’S own union and internal market and therefore will not be supported by both the DUP and, by extension, the clean-break Brexiteers who are needed to pass a deal through Westminster.

The UK suggestion, taking into account DUP demands that Northern Ireland remains in the customs territory of the UK, is therefore very different and much more complex to administer. It wants a “dual customs” territory regime, based on the “New Customs Partnership” model proposed by Mrs May in her Chequers plan, with different rules and tariffs applying depending on whether a good is heading for the province or the EU.

Under the Chequers-type plan goods that could be “robustly demonstrated” to be destined for sale and consumption in Northern Ireland could attract a lower tariff if one was available as a result of a UK free-trade agreement. Goods heading for the EU, or goods that could not equally “robustly demonstrate” they were not heading for the EU, would attract the higher of the UK or EU tariff but with a rebate applicable later if it could be shown to have finished in a lower-tariff jurisdiction.

The EU has been resistant to this scheme, arguing that it is so unique it could not be guaranteed to work and posed a risk of both creating a back door into the EU single market and providing an unfair advantage to Northern Irish businesses.

But Sam Lowe, a trade policy expert with the Centre for European Reform said that the risk posed to the EU by such a scheme, when applied to Northern Ireland, would be “much smaller” when applied to Northern Ireland than Uk-wide.

“In practice, with a few exceptions, the day-to-day life for people living under a dual-tariff regime would for most just look and feel as if Northern Ireland were in a customs union with the EU,” he added.

Two other issues remain between the sides. The first is how any special Brexit deal for Northern Ireland could gain democratic legitimacy at a time when the province’s devolved executive has not been sitting for two years.

Mr Johnson has accepted that the DUP cannot hold a veto over the deal, and has dropped his original suggestion that Northern Ireland should have a vote on whether to even apply the new rules for Northern Ireland before the end of the transition period.

Among the ideas now on the table are to have a simple majority vote for Northern Ireland institutions, a one-time referendum or potentially delegating the nature of the consent mechanism back to Northern Ireland’s politicians. Also being discussed is whether Northern Ireland should have a “one time” opt-in to the new special arrangements, or a kind of rolling consent – say every four years – in which it would vote on whether to stay or follow the same rules as the rest of the UK.

But the final – and potentially most problematic area now – remains the question of the future trading relationship and its bearing on the viability of the “dual tariff ” customs regime.

Trade experts say this would be made much easier to administer if the UK was in a “zero-tariff, zero-quota” trade deal with the EU, reducing the tariff differentials that the scheme would need to accommodate.

The difficulty is that Mr Johnson clearly has given up Mrs May’s ambition for “close regulatory alignment” with the EU in favour of pursuing a free-trade deal that leaves the UK fully independent to strike new deals around the world. The EU, in turn, has warned however that the UK cannot expect the “zero-tariff, zero-quota” deal if it is not prepared to accept the “level playing field” requirements to stop the UK undercutting the EU on social, environmental and state aid regulations. Even an EU commitment to seek a “zero-tariff, zero-quota” deal with the UK in the non-binding political declaration is likely to require a commensurate UK commitment to abide by the EU’S level playing field.

In a sign of the tensions around this issue, Angela Merkel, the German chancellor, warned on Sunday night that after Brexit the UK will be a “potential competitor” to the European Union alongside China and the United States. The clear implication is that the UK can expect defensive trade measures – whether tariffs or tighter regulations for access to EU markets – from the EU side if Britain is determined to embrace a deregulatory model in order to compete against European business.

If this issue cannot be resolved, sources indicate that there is a danger that it could yet derail the Northern Ireland deal that now looks increasingly close to being agreed – if not by this Thursday’s summit, then before the end of the month. The negotiations remain on a knife-edge.