Tuesday, 5 December 2017

Protectionist when we say so

There are now a number of things we know about the Irish border problem. We know that it's politically sensitive and historically significant. We know that the issue is not the fault of the Irish and not the fault of the EU. We know that the reason for the problem is the UK's decision to leave the EU (and in doing so the Customs Union, agricultural tariff regime, Union Customs Code and VAT Directive) and the Single Market. We also know that at the core of the solution must lie a reliable framework for regulatory harmonisation. And we know that something has to give: this government's pursuit of a hard Brexit, Arlene Foster's insistence that Northern Ireland can weather regulatory divergence from mainland Britain or Ireland's preference for a soft border. 

The thing which surprises me most is how so many still do not seem to comprehend the simple factoids at play here. "Why should there be a border?!", the ultras scream, after campaigning for many months for the entirety of the United Kingdom to leave what they call a protectionist racket. The oddity here is that they now pretend the EU oughtn't be protectionist after all. It's okay to refer to the EU as protectionist when campaigning to leave it, but as soon as we begin to contemplate life on the outside and confront complex realities, all forms of protectionism must be waivered. The hypocrisy here is quite stunning. And what is more, technical knowledge is not necessary in order to understand why the EU does not allow members to walk with whatever they want. This is purely a logical position and one we would take ourselves were the roles reversed. 

Of course, common sense will tell you that any regulatory superpower must establish a protectionist culture and trade policy. In fact, all trade policy has protectionist elements. When a country enters trade negotiations, it must ultimately think about its own interests and whether agreeing to a concession or compromise will lead to an undermining of the integrity of the systems they have developed. In this context the EU is no different. Just like China and the United States, it must stand up for what it has created. Success will depend upon how effectively the EU avoids creating precedents for countries seeking improved access into their markets. Especially in an age where, increasingly, Free Trade Agreements (such as CETA and EU-Korea) have embedded within them MFN clauses, which are slowly building a level playing field amongst countries on FTA-based relationships with Brussels. 

The border issue between the Republic of Ireland and Northern Ireland captures this very problem quite sweetly. Two of our most prominent ultras, Jacob Rees-Mogg and Nigel Farage, seem to think that the solution to the issue is to do nothing with it and leave it to our negotiating opponents. "Unconditionally offer a free trade deal", Farage said on LBC last night. Rees-Mogg appears to be following along a similar line of argument, telling folks at the Adam Smith Institute Christmas party this evening: "We simply say to the EU 'there is no border, we are not patrolling it. You can do what you like." On the face of things, these sound like very appealing solutions to the border conundrum. The problem, though, is that both men are demonstrating a failure to understand how the EU operates as regards its commitment to functional and economic integrity.

It is true that there is nothing stopping the UK from abandoning its border commitments in Northern Ireland. This will have some considerable easing effect. It is often easier to walk away from a problem and pretend that it does not exist. We can drop our tariff walls completely (which will leave us with less leverage for FTAs with emerging markets), we can refuse to build new Border Inspection Posts (BIPs - for the purpose of carrying out SPS checks on agricultural produce) and we can simply sweep aside customs burdens by not implementing technological infrastructure or hiring staff. There is nothing stopping this from happening, so far as my understanding is correct. The WTO would monitor this behaviour closely, but it is unclear whether we would face any equal treatment-relevant complaints.

But this does not solve the border issue. Borders are shared, there are not two of them. There is one, with each country sitting either side of it. Given that the UK is leaving the Single Market, the EU will not be able to reciprocate . I therefore see a level of friction inevitably mounting between Dublin and Brussels. BIPs are uniformly imposed against third countries, which we become on the day of leaving. This is because third countries enjoy different enforcement and surveillance strategies and do not submit themselves to inspection by the Food and Veterinary Office (FVO) to assess compliance with standards. Agricultural consignments will face physical inspection. The question is therefore one of rigour: what percentages of consignments will be checked?

With other goods, much the same picture can be painted. Ordinary customs checks (different from SPS checks, which are separate) will be reintroduced. Documentary inspection will be reimposed regardless of the maturity of the Good Friday Agreement. If they are not, the entire world will see a backdoor into one of the most prosperous and well-protected markets on the planet. This is the point of protectionism. Large markets are weakened when precedents are exploited. I would love to be wrong, but I simply do not see such a gaping precedent being tolerated by Brussels. We cannot rely solely on goodwill and if Northern Ireland does indeed leave the Single Market, something will have to give.

Back on our side of the border, though imports will remain relatively unimpeded, there are still issues. When we leave the EU we leave the aegis of the 2006 Council Directive on VAT. It is possible that some kind of fudge will be worked out during phase two of the Article 50 talks, but Brussels will demand ECJ oversight and we have no leverage at all to work with. We may well end up like Norway, where according to the EU, VAT must be payed in order for a good to be released at the border. There could also be potential problem posed by organised crime, one of the world's major growth industries. My fear with unilateral suspension of checks is that without the same integrated information-sharing systems, we could find ourselves at risk of importing more sub-standard goods.

A border is a hard border if at least one side imposes controls. That is a matter of fact. The lack of customs procedures in the north will not be mirrored in the south, even in spite of Dublin's desire to avoid a hard border. On the Irish side, devices will be suggested as a means of easing pressure on customs protocol and consultative processes measures will take place to allow the island to fudge through its difficulties. But the Commission will not accept an undermining of the preferable structures it has spent decades constructing. There is a reason why we call it a protectionist racket. 

But in truth, many of these hurdles do not need to exist. Even with bespoke and specific solutions for the Irish border we may not completely prevent border friction. And simply abandoning our own patrols is not the silver bullet it may look like. The ultras, I suppose, have a clever way of masking their ignorance and accusing those who frustrate their political ambitions of treachery. From the beginning, they have not appreciated the balance of power and the EU's default advantage and inherent immovability. Yesterday's brick wall should have been the wake up call they were in desperate need of. I fear it has only exacerbated their antics.

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