Is the ‘Backstop’ a Trampoline to the Future UK-EU Trade Relationship

Following the publication of the text of the Withdrawal Agreement on 14 November, the full text of the Political Declaration on the future UK-EU relationship is now keenly awaited (the outline was published on the same day as the text of the Withdrawal Agreement). It will set out the aspirations for an ambitious economic relationship between the UK and the EU to be negotiated once the UK has left the EU on 29 March 2019. EU leaders will consider these documents at a special summit to be held on 25 November.

The Withdrawal Agreement itself is not just the ‘divorce’ agreement but also sets out two routes to a new UK-EU relationship.

The apparently obvious route is to be found in the part of the Agreement establishing a ‘transition period’. In essence, the transition period is a legal ‘stand-still’ during which time the UK will remain bound by EU law obligations but without being a Member State and without any of the representation in the EU’s institutions that flows from EU membership. The transition period is intended to give the UK and EU time to negotiate agreements governing their future relationship. The transition period lasts until 31 December 2020 unless – before the end of July 2020 – the UK and EU agree to exercise an option to extend the transition period. Although the Withdrawal Agreement does not determine how long this extension might last, the use of the formulation ‘up to [31 December 21XX]’ suggests at least a year up until the end of 2021, although Michel Barnier has indicateda willingness to accept a transition period up until the end of 2022. Extending transition will entail making future budget contributions for the additional years that the UK remains in the transition period.

The longer that the UK remains in transition, the longer the UK and the EU have to negotiate a future relationship without the need for the provisions of the Protocol on Ireland and Northern Ireland – the ‘backstop’ – to be triggered. Until the transition period ends, frontier controls on the island of Ireland will continue to be eliminated because the UK will remain in the Customs Union and the Single Market. While offering a relatively smooth transition from EU membership – things would remain more or less as they are until the new agreement became applicable – an extended transition period has certain drawbacks.

A longer transition opens the UK Government to the accusation of delivering a ‘zombie’ Brexit that transgresses its own red lines. In transition the UK will have formally left the EU but will remain within the Customs Union, the Single Market – including free movement of people – and remain subject to the jurisdiction of the Court of Justice. Extending transition also entails additional budgetary contributions. The other less obvious but potentially significant problem with parking the UK in transition is that it doesn’t help identify what the UK would be transitioning towards and so might make it less easy for businesses to anticipate the adjustments they may need to make. That said, the political declaration ought to go some way towards illuminating the path towards the future relationship even if it stops short of building a direct legal bridge towards the ultimate destination.

The less obvious route to a future relationship with the EU is through the ‘backstop’. There are two reasons why we have perhaps not given sufficient thought to the backstop as an additional bridging device. The first is that we have tended to treat the ‘Irish problem’ as somehow distinct from the wider discussion about the UK-EU future relationship. This was odd given that it should have been clear that any solution to the border issues on the island of Ireland was always going to be a strong signifier of how the UK and the EU might structure their economic relationship to reduce any friction on trade. It would be a tall order to devise one solution to manage the border issues in Ireland as a ‘backstop’ and at the same time devise a different but equivalent solution for the future relationship. Nonetheless, with some factions pushing the Government towards a more minimalist free trade agreement – which would leave unresolved the Irish border issues – treating the backstop as an exceptional device became part and parcel of how we thought about it. Secondly, the language of ‘backstop’, or ‘insurance policy’ or ‘safety net’ has underscored the idea that this is a device which is not intended to be used.  Instead the focus has been on agreeing the future relationship to avoid ever having to invoke the backstop’s provisions.

However, when we consider what the UK and the EU have agreed as a backstop it becomes much clearer that this may be less a residual fall-back and more of a policy choice as a way of bridging the gap between EU membership and a future relationship. The backstop may turn out not to be a safety net, but a trampoline.

At the core of the backstop is the ‘single customs territory’ encompassing the customs territory of the EU and the customs territory of the whole of the UK including Northern Ireland. Good produced in either territory move without payment of any customs duties, as do goods from third countries that have paid the relevant tariffs applied by the EU and the UK to goods from outside the single customs territory (the UK will align its tariffs and its trade policy with that of the EU).

During the operation of the backstop, the UK has committed to certain ‘level playing field’ obligations in respect of taxation including compliance with EU and international standards as well as certain EU directives. In the spheres of environmental, social and employment regulation, there are  ‘non-regression’ clauses. These commit the UK to not reduce its level of protection in things like air quality targets and waste management. The UK has also agreed to implement a system of carbon pricing in line with the EU’s carbon trading system. In the area of employment protection, the Protocol requires the UK not to reduce standards in areas such as health and safety at work, working conditions and employment standards (but without application of the dispute resolution mechanism laid down in the Agreement).

In addition to all of this, the Protocol requires the UK to comply with EU state aid rules (with certain exemptions for agricultural production) albeit enforced not by the European Commission but the UK Competition and Markets Authority (the UK’s competition regulator). That said, the European Commission is to be allowed to bring cases in UK courts for alleged breaches of state aid rules. The EU’s competition rules on cartels and abusive market behaviour is also applicable.

In short, while the backstop means that the UK is out of the EU Customs Union and its Single Market, the coordination of the UK and EU customs territories and the maintenance of certain obligations aimed at ensuring that competition is not distorted ensure that the whole of the UK will enter into an economic relationship with the EU that may anticipate the type of future relationship that the UK and EU might seek to build. To be sure, an agreement on a future relationship will seek to go beyond this not least in terms of trade in services and other non-economic spheres of cooperation like foreign and security policies. But at least as regards trade in goods, entering into a backstop arrangement pending the finalisation of a complete package of agreements on a future relationship might seem preferable to an extension of the transition period.

What then becomes interesting is that the other provisions of the backstop that are specific to North-South relations on the island of Ireland and which would keep Northern Ireland more closely aligned with the EU Single Market than the rest of the UK – in order to avoid non-tariff barriers to trade on the island of Ireland – becomes the exceptional part rather than the dominant part of the agreement.

That the backstop may perform a more active role in defining what happens after 29 March 2019 can be easily evidenced. The Preamble to the Protocol itself makes clear that:

‘HAVING REGARD to the Union and to the United Kingdom’s common objective of a close future relationship, which will establish ambitious customs arrangements that build on the single customs territory provided for in this Protocol, in full respect of their respective legal orders.’

The UK Government’s own explanation of what the Withdrawal Agreement entails – while describing the backstop as an ‘uncomfortable arrangement’ – nonetheless states that:

‘If the future relationship is not going to be ready by 1 January 2021, the UK has two choices: request an extension of the [transition period] or activate the backstop.’

This presents the backstop as a distinctive policy choice. It would move the UK out of a stand-still transition in which the UK would have the obligations and not the benefits of EU membership into what would in effect constitute an ‘interim agreement leading to the formation of a free trade area/customs union’ within the meaning of Article XXIV of the General Agreement on Tariffs and Trade 1994. The enforcement mechanisms contained in the Withdrawal Agreement would apply in place of the normal enforcement mechanisms that apply to EU Member States and which will apply to the UK during transition. The free movement of people would come to an end.

Legally, using the backstop as an interim trade deal is not without its difficulties and may even be incompatible with the use of Article 50 TEU as a legal basis particularly if the backstop dragged on. Indeed, while there has been much discussion about the inability of the UK to unilaterally exit the backstop, were the backstop to become an enduring basis of UK-EU relations the legality of the arrangement would likely be challenged.

If the Withdrawal Agreement ever enters into force – and currently it looks unlikely to obtain approval in the House of Commons – we may yet look back and realise that turning the backstop into an interim trade arrangement was the key to making Brexit happen.