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Post-Brexit Governance NI – Explainer 1

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Post-Brexit Governance NI – Explainer 1 Post-Brexit Governance NI – Explainer 1 Trade in Goods under the Protocol on Ireland/Northern Ireland: an explainer Billy Melo Araujo Introduction The Protocol on Ireland/Northern Ireland Protocol is a legal instrument annexed to the Withdrawal Agreement (WA) between the European Union (EU) and the United Kingdom (UK). It governs trade in goods between Northern Ireland (NI) and the EU. From a trade perspective, its primary objective is to avoid a hard border on the island of Ireland. To do so, the Protocol creates a complex and hybrid trading regime where Northern Ireland formally remains within the UK customs territory and internal market for goods but is also required to comply with EU customs, internal market and valued added tax rules. This explainer provides an overview of the main features of the Protocol in relation to trade in goods and highlights some of the current and future implementation challenges. This explainer is subdivided into six sections. Section 1 explains the purpose of the Protocol’s provisions in relation to trade in goods. Section 2 provides an overview of the Protocol rules relating to tariff barriers. Section 3 addresses the issue of non-tariff barriers with a particular focus on regulatory barriers to trade. Section 4 addresses the impact of the Protocol on Northern Ireland’s ability to benefit from EU and UK trade agreements. Sections 5 and 6 briefly discuss the value added tax and state aid regimes established by the Protocol. 1. Understanding the Protocol from a trade perspective There are, very broadly speaking, three things that happen at a border with respect to trade in goods: - First, customs authorities collect tariffs (customs duties) or apply tariff-rate quotas (TRQs) on imported goods. Tariffs are taxes imposed on imported goods. TRQs are mechanisms that allow countries to apply a low tariff on a specific import (typically agricultural goods) up to a predetermined quota and apply a higher tariff once the import quota is exceeded. - Second, checks are carried out on imported goods to ensure that they comply with regulatory standards of the country of destination. This is typically done to ensure that goods brought into one’s territory are safe, do not present a health This explainer is produced as part of the ESRC-funded project on Governance for 'a place between’: the Multilevel Dynamics of Implementing the Protocol on Ireland/Northern Ireland. For further details see: www.qub.ac.uk/sites/post-brexit-governance-ni. Follow the Project on Twitter: @PostBrexitGovNI risk, and are not illicit. Some goods may be subject to stringent regulatory requirements whilst others may be banned entirely. - Third, checks may be required to ensure compliance with taxation rules, notably checks on imported goods subject to value added tax (VAT). When the UK was an EU member state, it was part of the EU customs union which removes all tariffs on intra-EU trade and applies a common external tariff on third countries. Regulatory compliance checks are also not required within the EU because of EU law on free movement of goods which requires all EU member states to abide by the principle of the mutual recognition of rules. This principle means that if a good can be lawfully produced and marketed in one member state it can be lawfully marketed in any other member state without being subject to restrictions. For this system to work, EU member states must comply with EU law (including minimum regulatory standards) which are enforced by both national and EU courts. The UK’s decision to leave the EU customs union, internal market (and VAT regime) meant that checks on goods traded with the EU became inevitable and physical infrastructure would be needed to carry out such checks. Indeed, to date, the UK government has invested more than £750m on the development of border infrastructure, expertise and technology to handle checks resulting from the decision to leave the EU. The return of border checks on traded goods between the EU and UK was problematic for Northern Ireland because of the view that the imposition of a ‘hard border’ would undermine the peace process established by the 1998 Belfast (Good Friday) Agreement. A hard border was understood to mean any physical infrastructure and installations that would mark the land border. To avoid such a hard border, the EU and UK negotiated the Protocol which requires Northern Ireland to comply with EU customs, internal market and VAT laws. By keeping Northern Ireland subject to the EU’s customs and regulatory regime, the Protocol ensures that goods are traded between Northern Ireland and the EU as if Northern Ireland were still part of the EU. The upshot is that by placing Northern Ireland in a separate customs and regulatory regime to that of the rest of the UK, the Protocol has introduced certain barriers to trade in goods between Great Britain (GB) and Northern Ireland. Further, by creating a hybrid regime, where Northern Ireland is situated within the spheres of both the EU and the UK customs and internal market regimes, the Protocol raises questions concerning Northern Ireland’s place within the UK’s external trade policy. 2. The Protocol and tariffs 2.1 Import tariffs and the “goods at risk” regime Northern Ireland is part of the UK customs territory. This much is expressly recognised in the Article 4 of the Protocol. Normally, this would mean that Northern Ireland should 2 apply UK tariffs on third country imports and that no tariffs would be applied to goods traded between GB and Northern Ireland. In practice, however, this is not necessarily the case. Goods imported into Northern Ireland may be subject to EU tariffs. First, with respect to third country imports into Northern Ireland (i.e., goods from outside the UK), checks are still required to ensure that such goods are not moved on to the EU without having paid the applicable EU tariff. Secondly, with respect to imports from GB, although the UK-EU Trade and Cooperation Agreement (TCA) provides for zero-tariff access for goods traded between the two parties, not all goods from GB qualify for tariff-free access into Northern Ireland. This is because of so-called rules of origin (RoO). RoO are included in trade agreements to ensure that only goods originating from the parties involved can benefit from preferential tariff access. This is a straightforward determination to make with regard to ‘wholly obtained goods’ (e.g., unprocessed agriculture goods and raw materials), but the determination is far more difficult for processed and industrial goods which are the result of complex production/ manufacturing processes and often rely on inputs from different parts of the world. A good made in GB but which is composed of inputs sourced from both inside and outside the UK may not qualify as a ‘UK-originating’ product for the purposes of the TCA. For example, in order to qualify for tariff-free access under the TCA, UK produced flour must not include more than 15% wheat originating from outside the UK. Flour produced in GB that falls foul of this criterion would not benefit from tariff-free access into Northern Ireland (and the EU). Similarly, EU goods exported to GB that then move on into Northern Ireland may be subject to EU tariffs unless they have undergone substantial processing in the UK. In this way, EU goods that are merely stored in GB and then moved on into Northern Ireland would also fail to qualify for tariff-free access. For GB goods destined for the EU that do not comply with the TCA’s RoO, EU tariffs remain applicable. And checks are required to avoid goods entering Northern Ireland moving on to the EU without having paid the applicable EU tariff. Without the Protocol, those tariffs would be collected at the land border between Northern Ireland and Ireland. However, to avoid this, the Protocol creates a regime where goods imported into Northern Ireland are subject to EU tariffs if they are deemed to be “at risk” of subsequently being moved on into the EU. In fact, the Protocol sets the payment of EU tariffs as the default option. EU tariffs are applied on third country goods (including goods from GB) entering Northern Ireland unless it is shown that the goods are not at risk of being moved on to the EU. The Decision of 17 December 2021 of the UK-EU Joint Committee on the determination of goods “not at risk” regulates the circumstances where goods will not be considered to be at risk depending on whether imports originate from Great Britain or the rest of the world. 3 Where goods are being imported from GB into Northern Ireland they will not be considered at risk if they are not considered to be subject to further commercial processing and where: • the applicable EU tariff is zero; or • the goods are brought into Northern Ireland by a business registered with a UK Trader Scheme for sale to or final use by end consumers in Northern Ireland or for internal UK trade elsewhere in the UK. However, goods subject to further commercial processing will not be considered at risk if the annual turnover of the importer is less than £500,000, or the goods relate to food sales to UK consumers or certain activities in construction, health or care services or not-for-profit activities. Where goods are being imported from the rest of the world into Northern Ireland, they will not be considered at risk if: • the applicable EU tariff is lower than or equal to the UK tariff; or • the importer has been authorised, under the UK Trader Scheme, to bring goods into Northern Ireland for sale to or final use by end consumers in Northern Ireland, and the difference between EU and UK tariffs is lower than 3% of the value of the good.
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