Speculation is growing about a potential deal between the EU and the UK on the Northern Ireland Protocol following over a year of discussions between the two sides. Our assessment is that, given the technical nature of many of the outstanding issues, a framework rather than detailed agreement is most likely in the short term. Questions remain on how detailed this would be, whether it covers all outstanding issues and how much further technical work remains to be done to put such an agreement into practice.
The UK Government has set out a number of problems with the implementation of the Protocol over the last 18 months. These relate to what was effectively the trade boundary between Great Britain and Northern Ireland particularly around customs, SPS (syto phytosanitary standards) controls and associated paperwork. Issues around VAT rules and how they would apply in the whole of the UK, State Aid rules and overall Governance – code for the role of the European Court of Justice – also need to be resolved. Additionally, there are some relatively minor issues, such as the movement of pet animals and particular products like seed potatoes between Great Britain and Northern Ireland.
However, the issue having the most visible impact in Northern Ireland is the trade boundary where the Protocol makes it more difficult for firms in Great Britain to trade with Northern Ireland. In some cases, this has resulted in certain products no longer being available while in others it has resulted in increased costs and bureaucracy. For consumers in Northern Ireland, the disappearance of some products from retail shelves is a very visible illustration of the failings of the Protocol. The overall effect has left Northern Ireland feeling more distant from the rest of the UK, a particular concern for Unionist communities.
While VAT, State Aid rules and Governance have resonated rather less with people on the ground, they remain politically important if a deal is to be agreed. On VAT, a recent announcement by the UK Government on zero rating VAT on energy efficient products did not apply in Northern Ireland. On State Aid the original ask was for the regime operating under the Protocol to be the same as that in the EU/UK Trade and Cooperation Agreement. This has faced significant resistance from the Commission and the ask is now more focussed on ensuring EU State Aid rules only apply in Northern Ireland, not all companies in the rest of the UK with a relationship with NI based companies. Finally, on Governance, the most politically difficult, the ask is to limit the role of the ECJ in policing the implementation of the Protocol.
A change of tact from the UK Government
Since Rishi Sunak became Prime Minister in the UK last October, there has been a significantly improved atmosphere between the two negotiating teams and, as a result, a noticeable shift in political momentum in the process. With Boris Johnson, who led the Leave campaign in 2016, no longer as Prime Minister, this has helped to reduce tensions between Britain and the EU. This thawing in relations – also seen in a friendlier relationship between President Macron and Prime Minister Sunak on other issues – has resulted in signs of progress over recent weeks. This is, in part, because there is a strong desire on both sides to find a way to enable the Northern Ireland Executive and Assembly to begin operating again.
In a meeting on 9th January, in a joint statement, the EU and UK noted agreement on the issue of EU access to UK IT systems governing the movement of goods between GB and NI. This is an important development as knowing which goods are going where is a key element of any risk assessment/management systems that would need to be in place. It is an issue that the EU negotiating head, Maros Sefcovic, flagged last September as an important confidence building measure. The UK has also, in the last week, put in place the necessary legislative tools to enable them to take responsibility for building Border Control Posts in Northern Ireland. These will principally be to demonstrate that proper checks can be carried out on goods destined for Ireland. However, the fact they are being put in place means they can enable risk-based checks to be carried out on goods going into Northern Ireland, and are seen as another significant confidence building measure. The EU also announced a derogation before Christmas on the movement of veterinary medicines between GB and Northern Ireland for 3 years. The first two steps could have unlocked progress on customs and SPS measures. However, given the technical nature of both, it is likely more work will need to be done to finalise any arrangements.
Where are the signs of progress?
On VAT, on the positive side, both sides agree that VAT is not a “competitive” tax in the way, for example, that corporation tax is. The EU can also see that the UK Government not being able to make decision on VAT rates that apply to the whole of the UK is a problem. That said, any changes to enable greater flexibility on VAT will ultimately require the EU to change its own rules even if there can be a workaround in the shorter term. This will not be straight forward but it is possible if the political will exists.
State Aid and Governance are the most difficult areas that then remain. On State Aid, a reduced UK ask around application of EU rules to GB companies with subsidiaries in Northern Ireland might be acceptable but working through the detail of that and thinking about the implications of UK policy on freeports, means there are still some complicated issues to be resolved. On Governance, it is very difficult to see a way through. The problem from a UK perspective is that the European Court of Justice (ECJ) is effectively an EU Institution. Having an EU Institution as the arbiter in a dispute between the EU and the UK is seen by the UK as unfair. That said, total removal of the ECJ is an absolute red line for the EU. This is something that the UK recognises even if some Brexiteer Conservative MPs and the Democratic Unionist Party still regularly call it. One possibility is for both sides to agree some kind of political statement that said, in terms, the Court would only be used to resolve disputes as a last resort with other routes being exhausted first. Even this would be a significant shift for the Commission so it might be that this issue is one that is returned to in the future after other things that have been agreed have been operating for a year or two.
What is clear is that progress is being made and a framework agreement could be reached in the coming weeks even if some difficult technical work remains to be done. A key outstanding question is whether this will be enough to get the Northern Ireland Executive back up and running. It is difficult to predict what will happen here as it ultimately depends on what the main Unionist Party, the Democratic Unionist Party decides to do. The leader of the Party, Jeffrey Donaldson, is widely seen as someone who might be willing to compromise but there are many MPs and Assembly members who will be harder to persuade. There are some indications that while the DUP may not directly oppose a deal, they may only agree to go back into the Executive after any new arrangements have been operating for a period of time. The UK Government will be working hard behind the scenes at a political level on this. Having two strong Brexit supporters as lead Ministers in Northern Ireland in Chris Heaton-Harris (who is not just Secretary of State for Northern Ireland but also a former Member of the European Parliament) and Steve Baker will be important for this work.
Assuming a deal is done, what does this mean?
There are three key areas where we can expect to see progress in the event a deal is finalised.
- The first is around the upcoming 25th Anniversary of the Good Friday Agreement. There has been speculation that US President Biden could visit Northern Ireland to mark this anniversary. Reaching a deal on the Protocol would help with that.
- The second is around wider EU/UK relations. While collaboration between EU and UK on issues such as the war in Ukraine has been extremely positive, there are many other areas where the EU and UK could work better together including in energy, WTO reform, China etc.
- The third is around Northern Ireland as a destination for inward investment. If the problem around the Protocol is resolved, Northern Ireland would be in the unique position of having access to both the UK and EU single markets and therefore an important destination for investment.
In all three areas, Penta is uniquely placed to advise on how to make the most of these opportunities.