Monday 25 May 2020 10:00 pm

Closing the backdoor to EU dumping

Barnabas Reynolds is a partner at the global law firm Shearman & Sterling

Full sovereignty is fundamental to the UK’s success in the post-Brexit future. For it to be achieved a number of loose ends left by the Brexit withdrawal process must be tied up. 

This should now be a priority for the future trade deal, so the UK can ensure UK citizens and businesses can compete fairly in the global markets. In particular, the world’s trade law regime recognises that independent states are free to protect their domestic industries from unfair trade dumping and subsidisation from abroad, by levying tariffs to maintain fair competition. 

These protections are fundamental attributes of statehood and the intended result of Brexit. As such, they should be reflected in post-Brexit UK-EU arrangements with little difficulty. 

Read more: Progress lacking in Brexit negotiations

The Withdrawal Agreement commits both parties to using ‘good faith’ and ‘best endeavours’ to achieve a new, sovereign-to-sovereign relationship by the end of this year. Yet loose ends arise because there are many aspects of the Withdrawal Agreement that are at odds with a sovereign outcome and need to be appropriately replaced as part of the new relationship.

The most notable issue relates to Northern Ireland, through an apparently obscure, but dangerous, section which puts Northern Ireland under EU sovereignty for goods and agrigoods. This was inherited from the previous administration and, although its significance was apparent, it was allowed to survive as a stepping stone, meeting EU legalism in the only way the EU would accept, by providing for an invisible, north-south Irish border if no trade deal were reached by the year end. 

Crucially, the EU committed to avoid such an outcome and to use every effort to reach a sovereignty-compliant deal on the agreed terms. 

So today we are left with a Protocol that provides for a theoretically inconceivable failure to reach a free trade agreement. 

Riddled with EU law it would enable the EU to restrict the UK’s competitiveness and encroach on the status of Northern Ireland itself in terms of sovereignty. It applies the politically charged EU State aid rules to the whole of the UK, giving the European Commission executive authority over important matters of UK economic policy such as tax relief or other incentivisations for UK businesses where these could in theory (in the judgement of the ECJ) distort trade across the Irish border. It also creates a border across the Irish Sea. As such, the end result is unworkable and is not the result the parties committed to achieve.

Importantly, the EU has committed to recognise the UK’s ability to protect its single market. The Protocol would defeat this because it would restrict the UK from charging tariffs, as it entitled to do (under WTO law), to protect its businesses’ Northern Ireland operations from trade dumping and unfair subsidisations from EU producers – which already occur and are getting worse because of the economic effects of Covid19.

First, northern Eurozone exporters are accumulating unparalleled trade surpluses due to the structurally low currency value, caused by the lack of a single Eurozone sovereign backer for the zone and by the indebtedness of the southern states (for which the north avoids joint fiscal responsibility). 

Secondly, the Eurozone’s TARGET2 arrangements provide unlimited financing to Eurozone buyers from (predominantly) northern Eurozone producers, unfairly subsidising those producers.

Thirdly, EU exports into Northern Ireland are subsidised by artificially cheap financing from Eurozone – including Irish – banks since they do not carry the cost of the financial risk inherent in the Eurozone’s legal structure, which operates on the false assumption that Eurozone member state debt is riskless, allowing lower bank overheads than would arise were international standards properly applied. 

This assumption is false because Eurozone states each borrow in what is essentially a foreign currency they cannot control individually and so are constantly at risk of defaulting on their debts.

The task for the UK is to ensure these Withdrawal Agreement provisions are replaced under the future UK-EU arrangement. 

The nonsense of the EU’s insistence on splitting the Withdrawal Agreement discussions from future trade is now all too clear. We must put in place an invisible North-South (not East-West) border, but in a manner that ensures both parties can operate their own single market and fulfil their commitments to a free trade agreement that respects this. 

Any tariffs and verifications that are still needed can be kept to a minimum and be subject to mutual enforcement, under which each side would collect each other’s residual tariffs and enforce (in whatever way it sees fit) the remaining checks of the other party against its own exporters across the border. If either party finds evidence of consistent, material breach, it can claim damages through an independent tribunal system. Both sides can then do what they want in their legal systems, and apply whatever protective tariffs they are entitled to apply, in the UK’s case defending itself from the unfair trading practices of the Eurozone. 

Now is the time for the UK to use its sovereign power to champion solutions to which the EU too can agree, consistent with its goals and as a matter of good faith. It is only then that a sovereign-to-sovereign trading relationship can be achieved.

Barnabas Reynolds is at Shearman & Sterling LLP, author of A Template for Enhanced Equivalence and co-author of Managing Euro Risk, published by Politeia.

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