It is clear from the Salzburg summit that the Irish Border issue is now at the very centre of the Brexit talks. The summit was so tense largely because no progress has been made on this key issue.
The Irish Border is now the key sticking point in this phase of the Brexit talks. Below we outline the reasons for the impasse and examine why the issue is so hard to solve.
Evidence given by EU's deputy chief negotiator, Sabine Weyand, to a recent UK parliamentary committee helps to explain the problems that have been there from day one – and are still there. She brought the whole issue down to shrimps from Asia, bicycles from China and VAT. And that is a useful way of looking at it.
1. Why is Irish Border so central to Brexit talks?
The Irish Border is one of the issues on which a deal is needed before a withdrawal agreement under which the UK would leave is finalised.
Specifically, the EU and UK are trying to agree a backstop – a way to prevent the return of a hard Border on the island of Ireland if future trading arrangement between the EU and UK do not solve the problem.
That is tricky for two reasons. The first is that there is no easy solution if the UK leaves the EU trading bloc, as it insists it will.
The second is that the nature of the future trade relationship between the EU and UK will not be solved until later negotiations.
While a political statement must be made as part of the withdrawal process on how the future relationship between the two sides might look, detailed negotiations will not start until after the UK leaves next March.
The trade talks may, in time, solve the Border conundrum – but we won’t know before the UK leaves and so the backstop becomes necessary.And the mood music from the Salzburg summit does not suggest that there is an easy solution via a future trade deal of a kind which Theresa May will find easy to accept.
Reports from the summit also show how the issue of sequencing remains key. The EU insists that the backstop must be agreed before entering talks on the future relationship. But the UK continues to argue that the eventual trade deal between the EU and UK is central to solving the Irish Border issue. This sequencing issue is now central, as to survive political fire in London, any backstop would have to be presented as unlikely to be needed because of future trade arrangements.
2. So what are the key issues?
When the UK leaves the EU it has said it will also leave the EU trading bloc, which comprises the customs union and the single market.
The customs union is a free-trade agreement that allows goods to circulate freely and ensures that each country imposes the same import duty on products coming in from outside.
The single market is the wider agreement to have the same rules, regulations and standards so that there can be free movement of goods, people, capital and services.
Michel Barnier, the EU's chief Brexit negotiator, has called it "an integrated ecosystem, which since 1993 has been based on common rules, standards, certification and supervision".
The backstop is intended as a legally operable guarantee that, whatever happens, there will be no new trade Border on the island of Ireland after Brexit.
As put forward by the EU side it would involve the North effectively remaining in the EU customs union and abiding by many of the single market regulations.
The UK strongly objects to this backstop plan– particularly the idea of the North being a different customs territory and the idea of trade barriers between Britain and the North.
On the other side, Ireland and the EU insist that there cannot be checks and infrastructure at the Irish Border.
But once the UK leaves the EU trading bloc, checks will be needed somewhere.
This is the backstop dilemma. And Salzburg showed that very little progress has been made on it in recent months, with the political temperature rising in London in response.
3. What does this have to do with shrimps and bicycles?
In Ireland we tend to see the border issue in the context of the peace process and the Belfast Agreement.
But borders have an economic importance, too. Checks are needed on goods at borders for a range of reasons – animal safety, tax compliance, meeting product regulations and so on.
Technology and streamlined practices can reduce these - but not eliminate them.
To explain the need for border checks after the UK leaves the EU trading bloc, Sabine Weyand first gave the House of Commons committee the example of “an import of shrimps from an Asian country where they treat shrimps with antibiotics, which are prohibited in the EU because they can lead to blindness”.
Say this shipment comes to a UK port, she said, destined both for the UK and EU markets.
“At what moment and how do we check that there are no residues of prohibited antibiotics,” she asked.
The second example was the import of bicycles from China. At the moment the EU imposes import duties – or taxes – of 48.5 per cent on Chinese bicycles, because it holds that they are being sold from China at an unfairly low, below-market price.
After Brexit, the UK could decide to abandon such duties, or change them, as it says it wants to run its own independent trade policy.
“So how can we ensure”, Ms Weyand asked, “that bicycles, arriving in Liverpool again or somewhere else, do not end up undermining the anti-dumping duties that the EU is levying?”
There are other complications – many, many of them – relating to required border checks; some refer, for example, to determining where goods are made, a complicated process in a world where supply chains cross borders.
But the central point is clear: border checks, or more accurately checks on goods crossing borders, need to take place somewhere if the UK leaves the EU trading arrangements.
4. And what about VAT?
Another tricky one. At the moment all EU countries operate a common VAT system, involving a high level of information sharing, meaning border checks are not needed on goods moving between EU countries. But after the UK leaves the EU, how will these checks be made?
The UK, outside the EU customs union, looks unlikely to be granted ongoing access to the EU VAT system. Its new status as a so-called “third country” would mean VAT would need to be applied on goods entering the EU from the UK – and visa versa – and checks put in place to ensure this happens.
There is huge scope for fraud if these systems don’t work and checks are not efficient, for example by attaining VAT refunds on goods which are never exported, or avoiding VAT on goods imported.
5. Surely there is a solution?
The European Commission chief negotiator, Michel Barnier, has been trying to take the heat out of the debate.
He has indicated the EU side may be willing to compromise in designing the backstop.
But this compromise is looking at ways to make the required checks on goods crossing from Britain to the North less intrusive – some could take place at factories, he suggested; technology could help, and regular exporters could sign up for protocols to make it easier.
The Commission has been examining trade flows between the UK and the North and trying to identify the minimum checks needed in the key areas of sanitation (animal health), customs and tax, and regulations. It’s pitch is that the checks would not be intrusive, would mainly involve sanitary regulations and that many would, in any case, take place in Dublin, where many products enter the island and are moved up North.
But from the point of view of the UK government and the DUP, the EU’s backstop is still proposing checks on goods crossing between two parts of the UK and the North becoming in effect a separate customs area to the rest of the UK.And for the Conservatives and the DUP this is problematic – as underlined again by Theresa May after Salzburg.
If the North is in a different customs area, its businesses would face new bureaucracy for trade going between it and the UK. Barnier’s plan might lessen this, but cannot eliminate it. And the North could not be part of many of new UK trade deals with third countries negotiated post-Brexit. The UK has dug in and insisted that the North cannot be in a different customs arrangements than the rest of the UK and this is now a central sticking point.
The Irish Government, meanwhile, with the support of the other EU countries, insists there can be no new trade border on the island of Ireland.It remains to be seen if, in time, there is pressure on Ireland to compromise somewhere. But the Government insists EU support remains strong.
To get around the problem of the border in the Irish Sea, the UK had suggested another way forward – that the entire UK would remain in the EU customs union until future trade arrangements were sorted out.
This would solve much of the problem.
But the EU insists this would give the UK an unfair advantage and allow it to cherry pick membership of part of its trading bloc, at least for a period. It insists that after Brexit the UK must either be in the EU trading bloc– with all the associated responsibilities – or out. Were the UK to remain fully inside the EU trading bloc, there would be no problem – but the Conservatives have said this will not happen.
So, there is no easy way around this and as yet no route to a compromise.
The downside is that the price of failure is huge.
If there is no withdrawal agreement then the UK could crash out of the EU next March in a chaotic fashion. This is the so-called ‘no-deal Brexit’ when the planned transition period - a kind of stand-still on current arrangements between March of next year and end of 2020 - does not come into play.
One way forward, according to some reports, is for some kind of extended transition period under which the UK would stay in the EU customs union for a period after 2021 . EU solutions tend to involve kicking the can down the road and that is possible here, but will be very hard to tie down. Revised proposals on the backstop from London are now awaited.
Meanwhile there is pressure on Theses May to back away from her Chequers plan and aim, in future, for a free trade deal with the EU on the lines of the EU/Canada deal. However explicitly adopting this as policy would not solve the Irish Border issue in the long-term – despite what its supporters say.
The Bottom line
The bottom line is the Irish Border issue is devilishly hard to fudge. Referring to the shrimps, the bicycles and VAT, Ms Weyand pointed out “it is on these . . . very precise and concrete issues that we need to find a solution”.
And precise questions require precise answers. As we head into the next few, frantic weeks, you will be hearing a lot more about the Border question to which as yet no one has a good answer. This is because there is no magic solution.
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