Northern Ireland’s close connections to Great Britain and to Ireland are fundamental to the the stability of its economy, which in turn is essential to the sustainability of the peace process. Without ameliorative measures or opt-outs for NI, the Protocol introduces risks and friction to supply chains that are essential to the NI economy. Furthermore, the requirements for legitimate operation within the UK internal market will be costly; this will not only affect NI businesses but also GB businesses. Overall, this increases the risk of a severe contraction in the NI economy, of businesses being costed out of the market, and of illegal activity.
Will the revised Northern Ireland Protocol allow goods produced in Northern Ireland unfettered access to the rest of the UK internal market;
Unfettered access is not just about a one-way movement. There are supply chains that cross the Irish Sea in both directions. Northern Ireland businesses need to be able to engage in the UK market, process goods in Northern Ireland and send them back. This requires the ability to source raw material from the GB market. E.g. meat brought from Britain for processing in Northern Ireland, and then returned to Britain. This is a UK level concern because NI thus complements GB volumes to deliver on service level agreements for UK meat, to cater for UK customers demanding a UK product. Relationships with suppliers needed to be maintained.
Ferry companies won’t allow goods onto a ferry without paperwork being completed. If the ports need to take a look inside a retail lorry travelling from, e.g., the north of England to Cairnryan, this could cause problems for just-in-time models on which supermarkets rely. Lorries typically arrive 20 minutes before the boat sails. Everything in supermarkets’ 24 hour cycle to shelves relies on catching that boat because they depart only every 3 or 4 hours. If there were delays this would create huge problems with availability and the supply chain would just fall over.
Secondly, there is a conflict between the integrity of the UK internal market and businesses choosing to open a back door for goods from the rest of the world (or EU) into Great Britain via Northern Ireland. NI business does not want checks, but nor do they want a reputation as a means of back door entry. At the same time, they need to protect all-island supply chains. For example, businesses based in Northern Ireland source products from Ireland in order to supply to the Great Britain market. These arrangements predated the EU. Whether or not an FTA is agreed will have a significant impact on them. It needs to be possible to have goods that are legitimately produced in NI to have unfettered access to GB, whilst preventing a loophole that will undermine the integrity of the UK market.
‘Unfettered access’ from Northern Ireland to Great Britain is going to be extremely difficult to manage. It means enough openness to allow the essential movement from NI to GB to maintain supply chains but also enough controls to prevent NI business from being undermined by unscrupulous exploitation of the Protocol by non-NI-based traders. It will be essential for the UK government to negotiate something bespoke for NI when it comes to the requirements for exit summary declarations between NI and GB.
What customs checks, processes, declarations and infrastructure improvements will need to be implemented under the revised Protocol to export goods from (A) Northern Ireland to Britain and (B) Britain to Northern Ireland?
(A) What will be required for movements from NI to GB
Exit summary declarations will need to be made on goods travelling from Northern Ireland to Great Britain as a stock-take of what is leaving the Single Market. By way of comparison, there are 31 data elements (i.e. answers to questions) required for goods moving from Poland to Ukraine. If the typical EU regime applies to NI to GB movement, there will be one form per consignment, including details of the consigner and consignee. This could require 70 forms for a single lorry. These would mostly be delegated to the logistics providers who would be relying on the exporter for information. There is a £300 fine if the current form is completed incorrectly.
It should be noted that Northern Ireland has comparatively low levels of export, ranking 11th among regions of the UK. Come 1 January 2021, a raft of businesses will suddenly have to comply with new rules and procedures for moving goods to GB. A lot of training around customs and export document certificates is needed in NI because many businesses have no experience of this area and are nervous. While large companies are generally prepared, SMEs don’t have the staff and they don’t know how to brief them properly.
(B) What will be required for movements from GB to NI
The EU’s assumption is that the Irish Sea border will be the same as other EU external borders, i.e. they would expect the same rules to be applied in Belfast as in Calais. But what moves across the Irish Sea is very different to the EU’s other external borders. If one took the Turkish/Greek border as an example, a truck would typically move one item across the border, and a single customs and export declaration is then absorbed into the business model. Retail covers 70% of crossings of the Irish Sea. Currently, there can be hundreds of different items in any one retail lorry coming to Northern Ireland from GB. These are dropped at a regional distribution centre, rebuilt and put out to the shops.
For goods coming to Northern Ireland, this would mean customs paperwork and export health certificates (which can cost £200 each). An entry summary declaration with 45 questions will have to be completed (the burden is on the retailer to complete this). Goods will require certificates of origin to ensure they can enter the EU market tariff-free. These and export control certificates and sanitary controls will have to be pre-lodged before shipments leave GB. This could get particularly complicated if separate forms were required for each destination, given that there can be several ‘drops’ per truck arriving from GB. In addition to paperwork, veterinary and professional standards checks will be required.
A recent case study saw a lorry carrying 1392 different items crossing the Irish Sea. Each item, post-transition, will require a different tariff code, without which the lorry wouldn’t get on the boat. This includes over 500 products of animal origin, each of which would require an export health certificate.
The challenge is that businesses have to operate legitimately, yet these requirements for GB-NI movement seem far beyond what seems plausible as a business model. If you imagine that kind of friction, if costs are higher than profit margin, without derogations or exemptions, products will become unviable to sell in Northern Ireland. On 1 January 2021 there will be a sharp shift in Northern Ireland to a jigsaw of requirements and a sliding scale of friction. This will mean more paperwork, staff hours, new systems and new hurdles for compliance. Ultimately it will mean less choice for consumers and higher prices.
Preparation in Northern Ireland is one thing; there are particular concerns about how prepared businesses in other parts of the UK are for dealing with Northern Ireland in the future and for these changes to the UK internal market.
Does the UK have sufficient (a) customs agents, (b) customs officials and (c) veterinarians to facilitate the new customs arrangements?
The Protocol means that customs preparation and training will be required even for businesses who only businesses trade within the UK internal market, i.e. NI-GB and GB-NI.
For the Protocol to be operational by the end of 2020 it would involve running a tariff system with a rebate system, plus SPS, VAT, rules of origin and standards checks. It would be a Herculean task to complete this work in 8 months. The biggest retailers will need completely new computer systems. There are not enough customs officials. Applications for UK trusted trader accreditation typically take a year for approval. Such accreditation would be three months late for the start of the Protocol even with a magic wand for the creation of IT systems. Besides, a new type of AEO status may be required for NI unique position.
As regards sanitary and phytosanitary (SPS) checks, the Government’s economic impact assessment for no deal had a table showing a 50% physical inspection rate for dairy products and 20% for beef. Physical checks require a product to be taken off the lorry, opened, inspected, tested and quarantined until deemed legitimate. Fresh products would not be so fresh after such a process and these checks will be disruptive. The more the UK diverges, the more problematic this would be. If third country goods are circulating in the UK, there will be a greater frequency of inspection on GB to NI movement.
What effect will the new customs arrangements have on the (a) volume and (b) profitability of (i) West-East and (ii) East-West trade between Northern Ireland and Great Britain?
Supply chains need to be as smooth as possible. Northern Ireland has extensive cross sea and land border supply chains. About 13,500 lorries cross the land border each day. Around 2,500 lorries cross the Irish Sea between Great Britain and Northern Ireland each day. The more friction in these border crossing, the greater the costs/risks and the lower the profitability.
In order to qualify for tariff relief, goods need to be delivered to and consumed in NI, with a process involved to ensure this is the case. Goods on supermarket shelves should be covered (e.g. through AEO scheme), but there is a question mark over intermediate processes. This could be dealt with through an FTA, through Protocol waivers or rebates, or through flexibilities within the Union Customs Code. ‘Inward processing’ relief could be useful but there is a question as to whether it can be applied in a way that is viable for sectors with a 1-1.5% margin, on top of other SPS costs. Such costs may be prohibitive.
What potential economic effects will the revised Protocol have on Northern Ireland?
If it is easier to do business in Scotland or Ireland because of potential new burdens in Northern Ireland, they will do that. It is a matter of simple equations. If there are new costs in terms of tariffs, paperwork or staff hours, and if costs exceed the product margin, then the product or business model becomes unviable. Supply chains will always take the path of least resistance and businesses seek to reduce unnecessary uncertainties and risks.
For movement south across the Irish land border, the Protocol enables free movement of goods but does not provide assurances about the capacity to move them because services are not included. There is still a question as to whether transport providers could drive products down across the border, and there may need for a bilateral UK-Ireland deal on haulier services to enable busses, trucks and lorries to move goods around the island.
What are the other issues and challenges arising from the implementation of the Northern Ireland Protocol?
Changes to VAT rules
Movements between Northern Ireland and Great Britain will be eligible for VAT purposes (it is clear from the Taskforce UK) but there is still a need for HMRC to clarify how the VAT provisions will be interpreted.
There will be changes in the way that VAT is handled in GB/NI trade. Northern Ireland-Great Britain trade is to be zero-rated for export. Businesses receiving goods in Great Britain from NI will need to declare it as an import. (Another change from what currently happens). Duty is normally paid at the point of arrival unless VAT and duty are different, but this involves a big working capital requirement. There is a risk that the cashflow impact could create negative trade flows unless the UK runs a system of deferred accounting. This had been talked about in a no deal in the Article 50 process but whether this is possible post-transition is unknown. A system of deferred accounting is required long after the end of the transition period.
Disadvantages vis-à-vis other FTAs
Even if there is a deep and comprehensive UK-EU deal. Northern Ireland won’t have access to EU trade or association agreements, so it will lose access to import tariff rate quotas. E.g. If the UK decides to set tariffs at zero, which seems likely, Northern Ireland will still have to pay tariffs for goods coming into Northern Ireland from outside the UK and EU. Unfettered access to the EU market is very valuable, but in an FTA, Northern Ireland would be at a competitive disadvantage because it would have to bear tariff costs on goods coming into Northern Ireland. They will need to set up complicated customs procedures for trade into GB to claim back EU tariffs paid on inputs for goods manufactured for the UK market.
Access to labour
There is a risk of differential immigration systems on the island of Ireland being exploited by criminal gangs. The majority of referrals regarding labour exploitation concern eastern European workers. The responsibility for ensuring the operation of the points-based system will be pushed onto the employer. This would place a burden on NI businesses to ensure the integrity of their employment practices. It is estimated that only 50% of those in Northern Ireland who were entitled to benefit from the EUSS scheme had done so
In some companies, 50-60% or more of those employed are EU migrants, who arrived without skills or English, but are now trained up. Without them, the businesses would fail and thus the local employees would be out of a job. Such businesses would look enviously across the Irish border to a more flexible system, where unskilled EU citizens could work on a legitimate basis. This is a serious commercial disadvantage for those in NI.
The UK’s plans regarding migrant workers will increase the risk of exploitation, the collapse of legitimate businesses in areas key to NI economy, and the increase of competitive disadvantage for NI business vi-à-vis those in Ireland.
20 April 2020