Red tape and customs checks relating to the NI protocol have been a key driver behind businesses’ reduction of goods to Northern Ireland
The new Northern Ireland (NI) protocol deal is in line with our expectations, but the fact that it was negotiated at a much quicker pace than we initially expected should provide needed policy and business predictability and will significantly reduce the risks of worsening trade tensions between the UK and the EU. Given that the deal introduces some changes to the flow of goods between NI and the rest of the UK, companies may need to revisit their supply chain operations, but this ultimately should reduce operational costs and speed up border checks.
Overview
- After months of renegotiations, the EU and the UK announced that they have reached a deal on the controversial NI Protocol, with additional details unveiled in a meeting on February 27 between PM Rishi Sunak and European Commission (EC) President Ursula von der Leyen.
- PM Sunak announced that the deal will need to go through parliament before the new arrangements enter into force; key Conservative Brexiteers are set to support the government’s bill, and a widespread party rebellion is unlikely.
- The deal will introduce a two-lane system, which will determine border checks upon the entry of goods through Northern Ireland’s ports and airports.
- The green lane covers goods destined for Northern Ireland, which will not be subjected to single-market rules that apply to imports from non-EU countries.
- Customs border checks will apply only for goods set to go across the border of the Republic of Ireland or be exported to the rest of Europe.
Our View
The renegotiation of the NI protocol has concluded at a much faster pace than we expected at the start of 2023, but the final agreement is in line with our base case for the UK market. As such, while effectively the customs border remains in the Irish sea, the provisions of the new protocol allow for frictionless trade between Northern Ireland and the UK, which should reassure unionists in NI and hardline Brexiteers, who have previously argued that the protocol carves out Northern Ireland from the rest of the UK. In a widely anticipated move, the UK will also ditch the controversial legislation introduced by Boris Johnson that threatened to unilaterally suspend the NI protocol, and in return the UK will be able to participate in the EU’s EUR 95.0 billion Horizon science project.
The new deal, however, maintains the primacy of European Courts when it comes to resolving trade disputes regarding NI, the suspension of which has been a key demand of both prominent Brexiteers and the Irish Democratic Unionists (DUP). Yet, the provisions stipulate that the devolved Irish parliament can veto new EU trade legislation that would apply to NI, as long as a total of 30 Irish MPs from at least two parties choose to activate the emergency brake—which is then subject to Westminster approval. The latter should put significant pressure on the DUP and other unionists to support the deal, especially in light of the fact that power-sharing in Stormont has been severely obstructed by the DUP’s refusal to reinstate the devolved power arrangements. In other words, for the emergency brake to be triggered, the DUP will not only have to re-enter Stormont and restore the devolved administration but will also need to collaborate with other major parties, including Sinn Fein. As it stands, it will be difficult for the DUP to attempt to disrupt the approval of the agreement, given that it may prompt Westminster to eventually step in, further dampening support for the party. The new arrangements will also likely address key Brexiteers’ demands, providing a mechanism through which the NI authorities can challenge the protocol (but also one that is unlikely to be ever used).
Given that PM Sunak has seemingly managed to secure support for the deal and put significant pressure on opponents of the renegotiated terms, the vote on the new protocol should be able to pass smoothly though Westminster despite an expected rebellion from Johnson supporters within the Conservatives’ ranks. Additionally, this will likely significantly improve Sunak’s authority within the party and may marginally strengthen the party’s otherwise poor performance in political opinion polls. Most importantly, however, the new deal will abate EU/UK trade risks and should provide substantially more predictability when it comes to the business environment going forward.
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