Welcome to Backstop Country

Dec 17, 2018

“Welcome to Backstop Country” said my colleague when I called into our Belfast office last week.  Up to a few short months ago, most of us didn’t know what a backstop was.  Judging by the circus in the House of Commons this week, many British parliamentarians still don’t know what a backstop is.  At its simplest, a backstop is a physical barrier to prevent an unintended consequence.  Most backstops are created for practical reasons to protect against accidents.  The Brexit Withdrawal Agreement backstop is not like that.  Rather it is a child of mutual distrust.

A Brexit Withdrawal Agreement is needed because the Article 50 mechanism, the legal process by which any country may leave the EU, is not providing sufficient time to unravel over 40 years of cooperation between London and Brussels.  That 40 years of cooperation, expressed in formal treaties, agreements to collaborate and even unformalised mutual understandings has to be replaced by some kind of deal. 

Article 50 allows for two years to sort matters out in the first instance.  The Withdrawal Agreement in effect extends the sorting-out period until December 2020, or a little further if necessary.  In the absence of good and proper sorting out, the backstop arrangements take over.

The backstop exists because neither the EU nor the UK trusts the other to sort out arrangements on the island of Ireland to ensure there is no border.  Because the Northern Unionists don’t trust the UK government, the backstop arrangements have to cover not only Northern Ireland but also Britain.  In that way, Northern Unionism apparently thinks it can ensure that there won’t be a border down the Irish Sea. 

Because the EU doesn’t trust the UK to deal adequately with the north-south border, Brussels is insisting that the UK cannot leave the backstop unilaterally.  Because the UK does not trust Brussels, Prime Minister Theresa May cannot get her Withdrawal Agreement through Parliament.  And because in international trade talks, nobody trusts anybody, the UK will not be able to negotiate its own trade deals until the backstop is finally resolved.  Yet again, Donald Trump is right.  No country could negotiate trade deals in good faith with the UK until it is clear where the U.K.’s own trade borders start and stop.

The only redeeming Brexit development this week was the creation of another mechanism for the British to defer the inevitable.  Before Monday, there had been just two mechanisms available to the British political system to defer the hard decisions on the Irish border.  One was to enter into the Withdrawal Agreement.  The other was to approach the European Council for a two-year extension on Article 50.  Now the much maligned European Court has offered Britain a third way, which is to unilaterally rescind the notification to withdraw.

 

The trouble is that the UK political system could be offered a dozen more ways to delay or defer, but at present is totally unable to seize any of them.  No one it now seems, not even the Prime Minister despite her victory this week, has any power to make decisions.  No one has taken back control.

Can this circle now be squared?  A hard border cannot be avoided on the island of Ireland unless both sides of the border participate in the EU customs union (and ideally the single market).  To do so, Britain would have to surrender what it perceives as one of the key Brexit advantages of independent trade negotiations. 

The backstop is being spun as an Irish problem by some politicians and commentators.  It is not an Irish problem.  Were it not for the British decision to leave the EU, “backstop” would not even be in the political lexicon.  The need for a backstop won’t be solved by 29 March 2019, if ever. 

Therefore Irish businesses north and south must now prepare for hard Brexit.  Many have already done so; those who have not will have to start.  Business is resilient, but these challenges are different to the challenges posed by the great recession a decade ago.  When money is tight, business can cut costs and margins and prices and hopefully survive in a difficult market.  The 2008 recession closed off money supply, but Brexit will close off markets. 

There are two things the Irish government can do which are now of critical importance to Irish industry.  The first will mainly assist Irish exporters.  The Common Transit Area arrangements, which among other things allow Irish industry to export to the continent using Britain as a land bridge, must be preserved.  The Common Transit Area is a separate arrangement to EU treaties, and its continued operation will be critical to Irish exporting business.  It won’t solve all problems – for instance it doesn’t address live cattle exports – but it will help. 

The second measure will help Irish importers from the UK.  We need a system to defer the payment of VAT on imports, so that much of the upfront tax cost of future imports from the UK can be spread over the trading year.  That won’t eliminate the tax, but it should make the process a little less unaffordable.  It can be introduced unilaterally by Ireland, and it already exists in many other EU countries.

Northern Ireland may well be backstop country.  That has implications for all of us, North and South.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland