What are the economic implications of the Northern Ireland Protocol?

The government’s Internal Market Bill published on Wednesday has raised a hurricane of alarm because, as the Northern Ireland Secretary sensationally admitted in Parliament this week, it threatens to break international law.

This is because the bill would override, or disregard, commitments made by the UK government as part of the Northern Ireland Protocol which was part of the EU Withdrawal Treaty signed by Boris Johnson’s administration last year.

But what was the Northern Ireland Protocol originally designed to achieve? What would its economic effects have been? And what repercussions might the UK government’s unilateral actions now have?

What is the Protocol for?

Its fundamental purpose is to prevent the implementation of a commercial border between Northern Ireland and Republic of Ireland being created by Brexit – something that is vehemently opposed and feared by the populations of both and would, many say, have jeopardised the Good Friday Peace Agreement.

The EU had proposed to prevent the creation of a hard border on the island of Ireland after Brexit by keeping Northern Ireland only within the EU’s customs union and single market after the UK left the European Union.

Theresa May’s government had rejected this proposal, which was described as “putting a border in the Irish Sea”, as unacceptable as it would effectively divide the UK as an economic unit.

However, last year, Boris Johnson, in a stunning move, effectively accepted the EU’s original proposal, with some semantic tweaks, in order to “get Brexit done”. 

The result was the Protocol.

What are the economic implications of the Protocol?

The great economic benefit is that it would indeed prevent the need for a hard commercial border on the island of Ireland, involving checks on goods and tariffs, because the same EU single market rules would apply on both sides of the border and all imported goods would have already been subject to the relevant EU tariffs.

The economic downside for Northern Irish firms is that goods coming into Northern Ireland from the rest of the United Kingdom for onward sale would also be potentially be subject to tariffs and regulatory checks (depending on the nature of any free trade deal agreed between the EU and the UK).

Furthermore, exports going from Northern Ireland to the rest of the UK would have to be accompanied by new paperwork called export declarations, which accompany any good leaving the EU’s customs union. This will have costs for many Northern Irish companies which trade with the rest of the UK.

Around half of Northern Ireland’s exports go to the rest of the UK, versus around a fifth going to the Republic.

A leaked internal Treasury document on the Protocol’s impact last year said that 98 per cent of Northern Ireland’s exporters to the rest of the UK are small and medium sized firms who are “likely to struggle to bear" the cost of the new paperwork.

Another clause in the Protocol states that the UK government would have to agree any internal state aid decisions with the EU when those decisions affect trade with Northern Ireland – which is potentially a significant problem for the UK government if it decides to significantly step up its use of state aid for domestic companies after Brexit,  something it apparently wants to do.

What is the UK government planning?

The government is suggesting that if there is no free trade deal between the UK and the EU by the end of the year it would take unilateral action to safeguard the functioning of its own internal market, which includes Northern Ireland.

In a no-deal scenario the UK would face EU tariffs on exports to the bloc. Under the terms of the Protocol this would mean that the UK government would have to collect tariffs, on behalf of the EU, on goods that enter Northern Ireland from the rest of the UK, which are “at risk” of crossing into the Republic of Ireland.

The government is suggesting that it might not do so – or at least not in the manner as laid out in the Protocol.  

Briefings suggest that the upcoming finance bill later this autumn would allow UK ministers to unilaterally determine what goods are “at risk” and whether they should be subject to tariffs – rather than working with the EU through a “joint committee” to decide.

Wednesday’s internal market bill also spells it out in black and white that the UK would not follow the Protocol when it comes to requiring Northern Irish companies to fill out export declarations when they send goods to the UK. It would also give UK ministers complete freedom to ignore the commitments on working with the EU on state aid that affected trade with Northern Ireland.

Why does this matter for the EU?

If the UK is not monitoring imports into Northern Ireland to the EU’s satisfaction, the EU would see this as a threat to the integrity of its own single market and customs union.  

It’s possible that the EU might feel obliged to impose checks on the Republic/Northern Irish border, creating the very nightmare for many cross-border Irish businesses that the Protocol was designed to avoid.

The UK’s decision to ignore key elements of the Protocol would also likely destroy EU trust in the UK to live by its legal treaty commitments. This could seriously rebound on the UK, by blowing up the chances of EU-UK co-operation in a host of areas vital for the UK economy such as a data sharing and financial services regulation.

But what if there is a deal?

If there is a deal the issue of tariffs on Great Britain to Northern Ireland trade would be moot.  

A broad agreement between the EU and the UK on a framework for policing post-Brexit UK state aid would also render the state aid elements of the Protocol redundant.  

Yet the paperwork on Northern Ireland to Great Britain trade would still be required even if there were an EU-UK deal.