Trade disruptions and new border checks lead to a notable slowdown in trade activity since their implementation at the start of 2022
The government’s announcement that it will seek to unilaterally change the Northern Ireland (NI) protocol reflects domestic political sentiment and an attempt to rile up its base, but the business implications of the move and potential risks remain severe. MNCs should monitor upcoming amendments to the bill and the EU’s response, which will be indicative of the latter’s response if the bill is adopted as a law at the end of 2023. In the meantime, executives should revisit their medium- to long-term strategic plans for the market and ensure they account for a downside scenario in which the adoption of the bill triggers a punitive trade response by the EU.
The Northern Ireland Protocol Bill passed a second reading in the House of Commons, triggering concerns about a potential punitive response by the EU if the bill becomes a law. The UK government has rejected EU proposals for technical solutions and instead plans to increase the power of ministers to unilaterally suspend parts of the NI Protocol and create two “lanes” for goods—one for those meant for Northern Ireland and the UK, and one for those that are to cross the border with the Republic of Ireland (RI). The EU’s response has remained relatively measured, with the bloc threatening legal action over the bill, but recent toughening of rhetoric suggests that support for more drastic measures is on the rise.
While the UK government claims that the Northern Ireland Protocol Bill is not in breach of international law, the introduction of the bill could severely damage its standing abroad, especially in light of the recent move to extend steel tariffs in breach of WTO rules. The bill is a long way off from becoming a law, however, and will need to go through a committee stage and a final reading in the House of Commons, before it goes to the House of Lords, where it will likely face significant scrutiny and a slew of amendments. In reality, the introduction of the bill may reflect the government’s attempt to force the EU to compromise during NI protocol negotiations, aiming to rile up its domestic support base, which has been eroded in the aftermath of a number of recent scandals that culminated with a failed no-confidence vote against Prime Minister Boris Johnson. As such, the bill likely represents an attempt to boost domestic political support, as much as it is a move to strong-arm the EU to back down during negotiations. A likely amendment to the 1922 Committee rule, which would allow a second vote of no-confidence against PM Johnson, and the possibility of an open rebellion against the bill from Tory MPs, who would be able to introduce a number of amendments to neuter the bill, significantly complicate the outlook and increase the risk of a political miscalculation. The problem is compounded by the increasing likelihood that the PM will lose his leadership under internal party pressures, as a significant number of ministers resigned in response to a recent controversial appointment and have called for him to quit. Should Johnson be removed, the likelihood that the bill will be defeated or amended will increase significantly. As such, while our base case continues to call for technical solution to the NI issue that involves a bespoke border check certification process and documentation on the NI-RI border, the recent toughening of the EU’s stance suggests that the probability for a trade standoff between the bloc and the UK is increasing. In this downside scenario, the EU could potentially impose tariffs on certain goods, including agricultural and raw commodities, which will serve to increase inflation dramatically and drive the UK economy into a contraction. The EU itself will not be unscathed in this scenario, with the aftermath of such a move leading to a much softer growth outlook going into 2023–2024.
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