Covid-19 has distracted us from the looming threat of Brexit

This time last year the economic concern was all about Brexit and the fear of a no-deal exit by the UK from the EU last December. Now, understandably, it is all about Covid-19. But what finance minister Paschal Donohoe referred to this week as the "shadow of Brexit" remains and in all the coverage of the Brexit trade talks between the EU and UK, one key thing is being missed.

It is that whether there is a trade deal or not, the UK is leaving the EU single market next December and this means change and costs for businesses and the economy – on both parts of the island.

As an EU Commission paperpublished this week – Getting Ready for the End of the Transition Period –put it, this "will inevitably create barriers to trade and cross-border exchanges that do not exist today." Here are the key points in relation to what is going to happen:

1. The two types of no-deal Brexit

The no-deal Brexit was the shorthand developed to describe the risk that the UK might leave the EU last December without concluding a withdrawal agreement. This was avoided – and so little changed in January as the UK entered what is called the transition period, which lasts until the end of this year.

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During this time it remains in the EU trading regime and party to most EU agreements. The idea of the transition was to allow enough time to negotiate what happens next – and work out how the EU and UK would trade and cooperate in other areas in future.

Now we are facing the risk of another kind of no-deal Brexit – the UK leaving the EU trading regime without such an agreement. This promises some of the same disruption as the original no-deal Brexit – but it is different. It would worsen the impact on trade between the EU – including Ireland – and the UK, compared to a trade deal being done.

However it would not threaten the return of the Irish Border, as this was dealt with in the withdrawal agreement, as were some other issues, such as the financial settlement in relation to the UK's exit. How the special Northern Ireland protocol will work is the subject of separate negotaitons and despite an announcement on Friday from the British government, much remains to be agreed here.

2. What is at stake?

It is easiest to illustrate this by looking at what happens if there is not a deal. If this happens, then the EU and UK would trade on the basis of rules set down by the World Trade Organisation (WTO).

This means that the EU will trade with Britain in the same way as any other country with which it has no existing trade deal – so as well as customs formalities and checks , customs duties – or tariffs– would apply on many products entering the EU market from Britain. And likewise the UK would apply tariffs on EU imports, which would be similar, though a bit lower in some areas.

Even if the UK and EU do a trade deal, new bureaucracy and costs will arise as businesses trading between the two will have to adhere to customs and tax rules and also varying rules on product standards and food safety. So this is a given.

The additional cost which would apply is that if there is no trade deal, then tariffs or custom duties would also apply. (A trade deal could also be done which leaves lower tariffs in place in some areas.)

3. The implications for Ireland

Irish trade with the UK faces disruption – the only question is how much. Irish businesses need to "forget about the trade talks" and start to plan for the new regime that will apply after the UK leaves the EU trading regime, according to Carol Lynch, a BDO partner specialising in customs and trade.

From January, companies trading with the UK will face new obligations, she said, including filing import and export declaration and ensuring all the necessary paperwork and filings are in place to allow goods to move into and out of the UK market, or through the UK in the case of companies using the landbridge to access Continental EU markets.

In many cases time that would have been dedicated to this at company level has instead gone in dealing with the Covid-19 economic crisis, she says, and companies who are not prepared need to access help from State agencies like Enterprise Ireland, the Local Enterprise Offices or Bord Bia.

A chain of basic steps is needed, for example, for companies exporting to the UK, according to Lynch, including lodging an export declaration with the Revenue, ensuring hauliers have the necessary documentation and the appropriate arrangements are made for VAT registration and payment as the goods enter the UK.

Companies also need to verify the origin of their goods, which can be complicated when inputs are imported. Further complications arise in some sectors – for example food where special rules need to be followed and documentation lodged and other regulated sectors like chemicals.

If there is no trade deal between the EU and UK, then the additional bureaucracy and cost of paying customs duties also comes on the agenda in some sectors – and could be crippling for Irish food exports, particularly the beef sector. But whether or not there is a deal, all the other steps still need to be taken and economic studies have shown that so called non-tariff barriers – form-filling, delays and so on – can be very costly.

4. Northern Ireland - a special case

Under the withdrawal agreement, special arrangements apply to Northern Ireland – this is to avoid the need for border checks on the island. It gives Northern Ireland a unique status: to quote from the latest EU guide, it “will remain aligned to a limited set of Union rules, notably related to goods, and the Union Customs Code, VAT and excise rules will apply to all goods entering or leaving Northern Ireland.”

The North’s businesses have also been promised free access to the UK market. Separate EU/UK negotiations are underway on how this will work in practice – and it is complicated as the EU will want to ensure that goods entering Northern Ireland from Britain which may then move on to the Republic are subject to the appropriate customs checks and, in the case of food and animals, meet the vital safety standards. As there will be no checks at the Irish Border – where goods enter the EU market – the checks must take place leaving UK ports and entering the North.

This becomes more complicated if there is no trade deal, as the additional issue of paying the appropriate customs duties, or tariffs, on goods entering the EU market arises. No duties are payable on products remaining for sale in Northern Ireland – but identifying which products are involved and controlling this all will be complicated and businesses in Northern Ireland complain that time is short to work all this out.

A paper entitled The Unresolved Difficulties of the Northern Ireland Protocol by two customs experts – Michael Gasiorek and Anna Jerzewska – for the UK Policy Trade Observatory says that the key issues for the negotiations to agree are which goods will be subject to checks and how these checks will be carried out to the satisfaction of both sides. "Determining which goods are at risk will be challenging as the final destination of the goods will be unknown at the time of crossing the Irish Sea border," it says. Difference in tariff regimes and standards recognition will make this more difficult, the researchers say.

On Friday the UK government announced a new package of assistance to help Northern Irish companies adjust to the new regime and the promise of a new centralised digital system to help them with the relevant filings. However this system has yet to be developed. And in a series of tweets on Friday, Professor Katy Hayward of Queens University said that many practical questions remain unanswered in relation to how the new regime will work , showing the “immense importance” of the decisions still to be made by the joint UK/EU committee charged with working out how the protocol will operate.

There have been warnings about significant extra costs for Northern Ireland supermarkets, particularly on food products where compliance costs could be significant on shipments containing a range of products. Friday’s announcement by the UK government promises to try to find a way around this, though it has still to be agreed in the protocol talks.

The UK is promising “ unfettered” access for products moving from Northern Ireland into Britain, though how this will work and how the UK will control imports entering via the Republic through the North is not yet entirely clear.Questions also remain about products moving from the North through the Republic and to the UK.

5. The exchequer implications

For the Irish Government, the Brexit threat adds a second untimely threat as it tries to cope with the Covid-19 recession. Last year the Minister for Finance assumed no-deal scenario last January, which did not happen – this did leave extra leeway to deal with Covid-19.

It is not clear whether the outcome of the EU/UK talks will be clear by Budget day this time – sources say September will be crucial and as any deal requires approval across the EU it cannot run past October. Little enough progress has been made to date, but some of the drama and heat of 2019 is absent too, probably largely due to the pandemic.It may be that the Budget will again have to be drawn up with two Brexit scenarios in mind – never mind the complications of Covid -19. Next month will tell a lot.