Cliff Taylor: What would be the economic impact of the UK triggering Article 16?

What would be the economic impact of the UK triggering Article 16 of the Northern Ireland Protocol?

The potential risks can be put in two boxes. One is the short-term impact – which is unpredictable because we don’t yet know what exactly the UK would do as they trigger the Article, or how the EU would react.

But a key hint was given in the Dáil by Taoiseach Micheál Martin, where he referred in passing to potential difficulties for access of goods from Northern Ireland into EU markets. And the tit-for-tax imposition of measures such as tariffs is also possible.

The second is the long-term impact and the risk that the entire free-trade agreement negotiated so painstakingly could fall apart – or at least face a renegotiation.

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" The main concern for Irish importers and exporters will be are we back to the exact same uncertainty we had in 2020 with all the attendant questions of how to budget ahead for potential increased costs on goods coming from and going to the UK?", said Carol Lynch, partner in BDO and a Brexit specialist.

Negotiations between the two sides to reach an agreement may yet succeed. But the UK continues to threaten to trigger Article 16. So what happens if it does?

1. Triggering Article 16

The key article was inserted into the agreement as a way of dealing with problem issues, but what the UK is – and isn’t – entitled to do is far from clear.

What it says is that " if the application of the protocol leads to serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade, the ( European) Union or the United Kingdom may unilaterally take appropriate safeguard measures" .

The disruption to trade which we have already seen due to checks and delays would increase significantly.

These are restricted in terms of scope and duration to “ what is strictly necessary in order to remedy the situation.”

Nobody is completely clear what this language means and what the UK is entitled to do – reports have said that the UK government is itself seeking outside legal advice on this issue.

In an analysis for the DCU Brexit Institute, Rob Howse, an expert on trade law who teaches at the NYU Law School, said that Article 16 is not the kind of provision designed to trigger renegotiation or even permanent adjustment of parts of the protocol.

“Article 16 is held up as a weapon” , he wrote “, but one gets the sense this is done with little certainty as to just what ammunition the weapon is loaded with.”

His view is that the article gives the party triggering Article 16 limited room for manoeuvre in terms of avoiding the obligations of the protocol. Nonetheless the speculation is that the UK, if it goes ahead, might seek to suspend some or all of the additional checks on goods entering Northern Ireland from the UK introduced as part of Brexit.

The UK must give one month’s notice to allow for negotiations, barring “ exceptional circumstances”.

It could take relatively minor actions, or effectively suspend the checks and procedures under Article 5 and Article 7 of the protocol involving goods entering Northern Ireland from the UK.

The UK could also introduce its own legislation to replace the European Court of Justice (ECJ) as the final legal arbiter of disputes related to the Protocol.

This is a vital issue for the EU, which says that as Northern Ireland is to remain in the EU single market for goods, then the ECJ must retain this role.

The UK has argued that a new regime should involve no checks in cases where businesses self-certify that goods will not move on into the EU market, mutual recognition of standards on both sides and removing export declarations for goods moving from Northern Ireland to the UK.

2. The EU’s response

The EU’s reaction will clearly rely on the way the UK triggers Article 16. Again, the legal ground in the protocol is muddy in terms of what can be done – the EU can take “ rebalancing measures” on grounds the what the UK does creates an imbalance “ between the rights and obligations under the protocol.”

However, it can react quickly with one month’s notice.

The EU could decide to react by focusing on specific measures – tariffs on selected UK products, for example, or – sources suggest – by ending or limiting co-operation in key areas such as data management or research, or stepping up checks on imports from the UK.

There are also not-so-subtle hints that if the UK “ goes big, then the EU will consider setting aside some or all of the free-trade agreement negotiated with such difficulty. Senior EU figures have argued that the protocol and the agreement are intrinsically linked and that it would thus be within its right to do so.

A full suspension would require a year’s notice, while a partial one involving only trade would require nine months. This would effectively spark a period of renegotiation with a new deadline.

“ The EU will be careful and targeted in its response, said one Brussels source, but it will want to send a “ strong message”.

3. Trade wars or more?

So it still isn’t clear how this will play out. If the EU imposes tariffs on some UK exporters in retaliation for its move, then the UK could respond with trade measures of its own.

This is why there is talk of a “ trade war” which could, depend on the products involved, have implications for Irish exports and importers.

For now, says Lynch, all companies can do is watch and wait and consider the implications for their supply chains as news emerges.The legal basis for these moves may be debatable – but by the time arbitration via the structures established as part of Brexit is completed, or any legal cases are decided, the damage would have been done.

If the EU moves to suspend the agreement – giving one year’s notice – then business faces “ a year of uncertainty,” says Lynch. Other business sources agree that this would be damaging, providing a re-run of the no deal fears in the Brexit trade talks.

This brings us right back into the key role of the Irish Border in the Brexit talks.

Were the agreement to fall, then the UK and EU would revert to trade on World Trade Organisation terms. This would involve tariffs on trade in both directions, posing a particular threat to Irish food exporters – notably in the beef sector – and pushing up prices in the shops here.

The disruption to trade which we have already seen due to checks and delays would increase significantly. And for businesses in Northern Ireland, while many of the checks on goods entering from the UK would fall away if the UK implemented its plans, new questions would open up about access to the EU single market.

Manufacturers in Northern Ireland this week again underlined how vital this was, but the EU would only allow full, tariff free access on terms it agrees to – and would need to be satisfied that proper customs, safety and other checks are conducted.

4. Back to the fundamentals

The Brexit trade agreement is fundamental in terms of all aspects of UK/Irish trade.

While trade has been affected by customs checks and rules of origin requirements, the absence of tariffs – except in cases where goods do not meet “ made in the UK” or “ made in the EU” rules – has offered significant protection. It is impossible to predict what would happen if the EU threatens to suspend all or part of the agreement, but clearly the very uncertainty would be corrosive.

The row also raises a fundamental issue for the island of Ireland. Taoiseach Micheál Martin made the following comment in the Dáil this week, referring to the consequences of an Article 16 suspension.

“Trade would be disrupted, ultimately. Access to the single market is important to people in Northern Ireland and to businesses in Northern Ireland . . . It’s having a beneficial impact. Any triggering of Article 16 could ultimately jeopardise, in the shorter term, that access.”

These statement was made in response to questions – and it is not clear of the timescale given the use of “ultimately” and “ in the shorter term” in the same sentence.

But it does underline a key issue were the UK to suspend significant checks on goods entering Northern Ireland. How is the EU single market to be protected from goods crossing the Irish Border and coming into the EU via an open back door?

And while the EU has supported Ireland right through the process, would it – before long – insist that some checks were undertaken to control this?

This brings us right back into the key role of the Irish Border in the Brexit talks.And if goods are not checked there – and it seems very unlikely they would be – would they be checked at French and Dutch ports arriving from Ireland? Or is there some other way to monitor and control goods moving through the Republic ?

This fear is why the Irish Government is trying to do all it can to avoid the row escalating and, if its does, to safeguard the protocol. Because without the protocol – and if the UK simply refuses to conduct the checks – then it is simply not clear how the problem will be solved.