UK, EU may slide into a damaging trade war

If there is a real will to find practical solutions, there are plenty of big trade brains on both sides who can work them out. One possibility is introducing a "trusted trader" scheme to allow supermarkets, which have their own tracing technologies for products, to bypass checks

If all goes well, Boris Johnson will hope to declare victory by the end of year in the "sausage wars," as a growing trade dispute the European Union over Northern Ireland is sometimes called. That would be just in time to celebrate the one-year anniversary of his Brexit trade deal. If things don't go to plan, however, the UK and the EU could slide into a seriously damaging trade war. That would be a failure of statecraft, and imagination.

There are still a number of major steps from a trade spat to a full-on trade war. But it's no accident the term has been bandied about in the past couple of days.

In July, the UK issued a set of demands that the EU radically change the Northern Ireland Protocol, which is the linchpin of the Brexit trade agreement. That agreement provides for checks and controls on goods flowing between Britain and Northern Ireland to ensure that any that pass through the Irish land border into EU-member Ireland comply with EU rules.

It's those assurances that allow Northern Ireland to be kept within the EU's single market for goods — and, therefore, permitting the Irish border to be kept open. That porousness has been viewed by all sides as essential to keeping a fragile peace in UK territory.

But London says the main feature of the Protocol is really its central bug. The government now argues that the deal itself threatens Northern Ireland's prosperity and stability and needs to be changed. Politically, at a time when Johnson is facing an energy crisis and broader economic pressures, throwing red meat to Brexit voters in the form of another EU dispute may seem handy.

Most businesses in Northern Ireland seem to have adjusted reasonably well to the Protocol. However, three-quarters of manufacturers in the province said they had been negatively impacted in the first quarter of the year. And some sectors more than others. Several retailers have changed supply chains to avoid sourcing goods from Britain, which entail extra checks. Medicines and animal and plant products — which EU rules are particularly stringent about — have been affected.

What makes this dispute particularly dangerous is that the government isn't just objecting to the strictness of the required checks. It resents the fact that EU rules (for example, on state aid) can apply to Northern Ireland businesses. The UK also says the role of the European Court of Justice in the agreement is no longer acceptable.

The Democratic Unionist Party — pro-Brexit allies of the Tories — argue that the Protocol's provision for a confirmation vote in Northern Ireland every four years creates instability and undermines foreign direct investment. They want the whole thing scrapped.

David Frost, who negotiated the deal he now wants substantially rewritten, sets out his case on Tuesday. The EU has been preparing a policy response, to be unveiled on Wednesday. It says it's open for discussions — not renegotiation. All signs are that the UK is prepared to reject whatever is put on the table as insufficient.

There are two possibilities here: either both parties, following a war of words, focus on the technical fixes to smooth Britain-Northern Ireland trade, or things escalate. The UK might then, as many Tories are urging, trigger Article 16 of the Protocol, which allows either side to suspend implementation unilaterally if it gives rise to "serious economic, societal or environmental difficulties that are liable to persist or to diversion of trade."

That wouldn't mean a trade war is inevitable, though. Article 16 action must be specific to the area of "serious" impact; and once triggered there is a month-long negotiation, involving the Joint Committee set up to implement the Protocol. The treaty would then permit the other party to take "proportionate balancing measures" — in other words, for every tit there is a potential tat, though it's limited.

The EU has, no doubt, war-gamed this scenario and has multiple levers it could pull. The bloc's weight on the global stage largely stems from its ability to use its trade policy to project power. Micro-aggressions could include a refusal to certify that the UK is compliant with the EU's data privacy regime. But if things escalated, the potential for nastiness is there.

A reimposition of tariffs on UK food exports or cars would seriously hurt. The bloc would look for ways to inflict political damage with minimal impact on EU consumers. That might include imposing tariffs on luxury products, or fungible ones the EU can do without — whether Scotch whisky or English cheddar.

Logic (these are rational people, right?) and recent history (we've been here how many times before during the Brexit talks?) says a compromise will eventually emerge from the current drama. That might have to be put off, however, until after the COP26 climate change summit in Glasgow is over in early November. Government bandwidth is limited. It's also not a good look for the convention host to be prosecuting a trade war over sausages when the planet is on fire.

If there is a real will to find practical solutions, there are plenty of big trade brains on both sides who can work them out. One possibility is introducing a "trusted trader" scheme to allow supermarkets, which have their own tracing technologies for products, to bypass checks. There is already a UK Trader Scheme in place to administer tariffs under the Protocol.

But neither of those technical fixes, nor indeed a broader trade war, will make the central tension go away. If the UK wants Northern Ireland to benefit from the EU's single market, it will have to meet the EU's requirements. If it doesn't want to conform to EU regulations in some areas, it will need to ensure that goods moving across the Irish border do. There can only be compromise or serious damage.

Let's hope that the usual Brexit script of heat followed by light prevails here, too. Trade wars may not be hot wars, but they do real damage — and it mostly falls not on the armchair generals prosecuting them but on the foot soldiers who, in this case, will live on to vote another day. (Bloomberg)