Prior to delving into both the PM’s letter and the explanatory notes that accompany it, it’s worth first of all providing some background on the two key areas of the proposal – a customs union and regulatory compliance.
What is a customs union?
A trade agreement under which two or more countries do not put tariffs (taxes) on goods coming in from other countries in the union. The countries also decide to set the same tariff on goods entering from outside the union.
The EU customs union includes EU member states and some small non-EU members and forbids members from negotiating trade agreements separately from the EU. Instead trade agreements are negotiated collectively.
Free movement of capital is intended to permit movement of investments such as property purchases and buying of shares between countries.
The free movement of persons means that EU citizens can move freely between member states to live, work, study or retire in another country.
The free movement of services and of establishment allows self-employed persons to move between member states to provide services on a temporary or permanent basis.
What is meant by regulatory compliance?
Regulatory compliance mean’s adherence to laws, regulations, guidelines and specifications.
The Union Customs Code (UCC) covers all formalities before a good can be released for free circulation in the EU. These include all the overarching requirements for regulatory compliance. Once a good has completed such formalities, it can be considered a ‘Union good’ and in free circulation.
The UK Proposals for a New Protocol for Ireland/Northern Ireland “A Fair and Reasonable Compromise” (or is it?)
The UK re-emphasised its commitment to the Belfast Good Friday Agreement and long-standing areas of UK/Ireland collaboration.
As was expected, the new proposal for the Ireland/Northern Ireland Protocol, removes the backstop.
The rationale for its removal is provided in two parts:
- The Withdrawal Agreement with the current protocol, has been rejected three times by the UK Parliament.
- A future relationship with the EU in which the UK would be closely integrated with EU customs arrangements and EU laws, is not the aspiration of the current UK Government – Future relationship aspired is a Free Trade Agreement in which the UK takes control of its own regulatory affairs and trade policy.
The letter states that in any future relationship/arrangement with the EU, Northern Ireland will remain fully part of the UK customs territory.
Within the previous Northern Ireland/Ireland Protocol, the UK had committed to maintaining full alignment to the rules of the internal market and the Customs Union in the event that by the 31st of December 2020, i.e. the end of the transition period, a technological solution or a new trade deal, which would allow for a seamless/frictionless border between Northern Ireland and Ireland, had not been found. The backstop would then continue to apply until such time as an alternative method of preventing a hard border has been agreed.
Despite this, the letter reiterates that the UK Govt want to maintain an open border in Northern Ireland, whilst stating that in real terms, NI-Ire trade makes up only 1% of all UK-EU Trade (In 2016, the total value of export sales from Northern Ireland to Ireland was £3.4 billion).
The UK Govt believe that any processes needed to ensure compliance with the UK and EU customs regimes should take place on a decentralised basis, i.e. electronically as the goods move between the two jurisdictions – with a small number of physical checks taking place (based on risk assessments) either at traders premises or at other points of the supply chain.
All of this, it believes, can be enabled via simplifications in existing customs rules.
The UK acknowledge that these proposals will mean changes from the situation that currently exists between Ireland and Northern Ireland. It therefore proposes a New Deal for Northern Ireland to boost economic growth, build NI competitiveness and to support infrastructure projects, particularly those with a cross-border focus.
Whilst Northern Ireland will be part of the internal UK Customs Union, the British Government have proposed that it remains within Regulatory Alignment (for as long as the NI executive and assembly support it) with the EU.
There will be an all-Ireland regulatory zone on the island of Ireland, covering not only sanitary and phyto-sanitary (Plants, Seed and Similar) and agri-food rules (Products of Animal Origin), but ALL manufactured goods.
This will remove any need for regulatory checks for trade in goods between Northern Ireland and Ireland – Dependent on the consent of the people of NI (via the NI Executive and Assembly).
Northern Ireland would align with EU SPS Rules and Agri-foods entering NI from GB would do so via a Border Inspection Post or a Designated Point of Entry, as required by EU law and subject to identity and documentation checks and physical examination as required by relevant EU rules.
Northern Ireland would also align with all relevant EU rules relating to manufactured goods, with checks, as above, implemented at the Irish sea (boundary of the regulatory zone), and supplemented by on-the-market surveillance.
Traders wishing to move goods from GB to NI would need to notify the relevant authorities before entering NI, providing basic information such as:
- Nature of the goods in the consignment
- Details of the sender and receiver of the goods
- Where the goods with depart from in GB and their arrival point in NI
As regulatory checks will take place on goods entering NI from GB, they would not be necessary for goods entering Ireland from Northern Ireland. Equally, the Uk Govt would not apply any checks or controls on goods entering NI from Ireland.
Third country goods arriving in NI would be subject to the same checks and full customs processes as take place today.
Articles 7 and 8 of the previous protocol remain, i.e. Article 7 states that:
“Where a product’s origins must be indicated, the Protocol allows for versatile labelling of Northern Ireland products.
Goods sold in Northern Ireland or in the EU, would be labelled as originating from Northern Ireland. In Great Britain, products could be labelled as either being from Northern Ireland or United Kingdom.”
Articles 7 & 8 make provisions for “the recognition of assessments, registrations, certifications, approvals or authorisations granted by authorities in the UK and the EU”.
This means that no EU approval process will be required to place NI goods on the UK market with both EU and UK approvals recognised for goods to be sold through the UK.
For a Northern Ireland business whose principal market is in the EU, this means that their EU approval will allow them to freely sell goods both in the EU and in the rest of the UK without needing to seek further UK approvals.
All of the above is subject to the consent of the Northern Ireland Assembly and the Executive. Initially at the end of the transition period and then every 4 years thereafter.
If consent is not granted at the end of the transition period, regulatory compliance will not be entered into force. If at the end of each four year period, compliance will lapse in one year from that date.
The UK will be exiting the EU Customs Unions “as a whole” at the end of the transition period.
That means a customs border between Northern Ireland and Ireland.
Whilst Northern Ireland will be in an all-Ireland regulatory zone with the Republic of Ireland, it will also be fully part of the UK’s custom territory. As such, Annex 4 of the previous protocol is removed.
Note: Theresa Mays NI/Ireland Protocol, sets out within Article 12 Annex 4, the requirements to maintain fair and open competition within the single customs territory and a joint commitment by the UK and the EU to good governance on tax, with additional commitments by the UK to continue administrative co-operation and anti-tax avoidance practices, as they stand at the end of the implementation period.
There are further commitments by both the UK and the EU to prevent any reduction in the levels of environment and labour protections as they stand at the end of the implementation period.
The Annex also includes a requirement for the UK to harmonise on an ongoing basis with the EU’s state aid rules, and for close co-operation between UK and EU regulators: For measures that affect trade between GB and the EU, the Competition & Markets Authority will be responsible for enforcement whilst the European Commission would be responsible for measures that affect trade between Northern Ireland and the EU.
The UK govt believe that all customs processes necessary to ensure compliance with the UK and EU customs regimes can take place electronically, but where physical checks are necessary (based on risk assessment), these can be conducted at trader’s premises or at other points in the supply chain.
Proposals to ensure no checks “on or near the border” include:
- All goods movements between NI and Ireland notified using a declaration with electronic systems notifying the relevant customs authority when it has entered its customs territory. *At the same time, the notes appear to then suggest that goods movements between Ireland and Northern Ireland should not require entry or exit declarations?
- Physical checks required only on a small number of consignments.
- Trusted Trader Scheme for businesses which meet agreed eligibility criteria, providing them with access to benefits which make the customs process for goods moving from one territory to another easier to comply with. The explanatory notes go on to acknowledge that this would require authorities in both Ireland and Northern Ireland to commit to applying appropriate schemes that offer benefits to one another’s authorised traders.
- Simplified Customs Procedures
- Temporary Admissions Procedures
The proposal also includes special provisions for small traders to ensure that requirements could be simplified even further, with some small traders exempted from processes and from paying duty altogether. *Any such measures would need to be carefully designed so that they target the traders most in need.
VAT and Excise
The previous Protocol indicated that certain EU VAT and excise rules will apply in NI with respect to the movement of cross-border trade in goods, however, Northern Ireland will remain part of the UK’s VAT area, with HMRC continuing to be responsible for the operation and collection of VAT, and Parliament for the setting of VAT rates, across the UK in line with the Northern Ireland Act 1998.
This new protocol simply states that the UK and EU should continue to apply their own legislation.
It also states that import VAT and excise duty arising on goods moving between Ireland and Northern Ireland would not need to be paid or accounted for at the border, therefore the administration of VAT and excise would not give rise to checks or controls at the Northern Ireland side of the border.
Finally, the compromise protocol announces additional support for customs intermediaries as it anticipates that many traders will use customs brokers, hauliers, freight forwarders and fast parcel operators to move goods.
In a Nutshell
The original Northern Ireland / Ireland Protocol with the backstop, was an insurance policy designed to protect the Good Friday Agreement by preventing a hard border on the island of Ireland at the end of the implementation period.
Whilst there has clearly been some compromise on the part of Boris Johnson’s government (and the DUP) through the proposal for an all-Ireland regulatory compliance zone, it would appear that the result of this compromise is a regulatory border down the Irish sea and a customs border on the island of Ireland, i.e. two borders where none currently exists.
The frictionless border that currently exists between Northern Ireland and Ireland is due to the existence of both the single market and a customs union.
As a result of the customs union, once goods have cleared customs in one EU country, i.e. Northern Ireland and the UK, and the commonly agreed tariffs have been paid, the goods are considered to now be in ‘free circulation’ without any further tariffs applying in any other EU country, i.e. Republic of Ireland.
The single-market part means that there is free movement of goods, services, capital and people and all the members follow the same rules, regulations and standards.
Turkey, for example, has a customs union with the EU, covering most manufactured goods. It is not, however, a part of the single market. As a result, documentation such as export licenses, invoices and transport permits, are needed to cross the border from Turkey into Bulgaria (which is part of the EU). It is far from a frictionless crossing with several kilometre-long queues and (according to an EU report in 2014), a waiting time of between 3 and 24 hours for a lorry travelling from Turkey into the EU.
On the other hand, Norway is part of the single market but not part of the EU or its customs union. Whilst its border with Sweden is one of the most frictionless borders in the world (without a customs union), it still takes around 20 minutes to cross.
The UK appear to be indicating that as trade between Northern Ireland and the Republic accounts for little more than 1% of overall UK-European trade, it should be manageable through a combination of electronic means, simplified procedures, small trader exemptions and reciprocal trusted trader schemes in both jurisdictions in Ireland.
To remove the need for any physical infrastructure, there would have to be very tight and complex alternative systems in place which rely on other means of knowing, for example, when a vehicle has left and arrived at its expected destination (and thus there being no time for changing the freight on the road). This requires registration, data submission, monitoring and surveillance – backed up by targeted inspections – on a scale unknown even during the height of the conflict.
To track cross-border traders in this way would not appear to respect the promise of sensitivity and pragmatism that led the UK government to commit to avoiding a hard border in the first place.