Britain and the EU stand on the brink of a trade war

As the UK and EU stare down the barrel of what seems to be an impending trade war, both sides are praying they come out on top.

It is now considered almost certain on both sides of the Channel that the UK will put the cat among the pigeons at the end of this month by invoking Article 16 of the Northern Ireland Protocol (NIP).

On Wednesday, Brexit minister Lord Frost said doing so may be the “only option”, with the UK having claimed for months that conditions required for triggering it have been met. The Irish government has said such a move would be “reckless and irresponsible”.

Using the instrument, introduced in the NIP at the start of this year alongside Britain’s Trade and Cooperation Agreement (TCA) with the bloc, could mark the beginning of the end for a fledgling free-trade relationship.

“The relationship is totally broken, and it’s not going to move into a better equilibrium until this question of the Protocol is fixed,” says Mujtaba Rahman, a former EU official now at consultancy Eurasia Group.

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It threatens to plunge Westminster and Brussels into a fresh crisis, reliving the uncertainty of Brexit negotiations in 2019 and 2020 which revealed little common ground.

A form of “no deal” may just happen after all. A conflict of commerce would once again cast the spotlight on issues over fishing, energy and the border with Northern Ireland, while a failure to reach a deal on financial services could mean workers will be on the frontline.

Invoking Article 16 means that both the UK and EU have a window of opportunity to unilaterally take action and change the NIP, if they believe it is causing serious problems including “economic, societal or environmental difficulties” – though there is no clarity on what constitutes as serious.

But before that stage is reached, UK and EU negotiators would once again be thrown together for talks to iron out difficulties. These are thought to be highly unlikely to be successful given what is at stake for both sides: for the UK, integrity of the union; for the EU, the risk of blowing a hole in the border of its Single Market.

If they fail, the UK will likely go about making changes to the NIP – expected to be in line with UK Brexit Minister David Frost’s “command paper” published in July, which notably proposed removing the role of EU bodies in how the protocol is enforced.

Johnson could get a re-written NIP through Parliament, on the justification it is sovereign, but Brussels is likely to reject the UK’s changes while possibly making its own.

“This is where you’re into really difficult territory that the UK essentially would be breaching international law,” says Catherine Barnard, a professor of EU law at the University of Cambridge.

At that point, the two sides’ positions may be irreconcilable – for the EU, it is anathema that goods from the UK be allowed to freely enter the Republic of Ireland.

The bloc will look to strike another blow in an effort to drag the UK back to the negotiating table and when it does, Barnard says, it will have a “smörgåsbord” of options available.

The big one is Article 779, which allows either side to terminate – not suspend – the TCA with 12 months’ notice.

“Politically the lowest hanging fruit will be termination,” says Eurasia Group’s Rahman, because it would involve building support for disruption a year later, rather than immediate.

“That sounds odd because it’s the nuclear option, but the nuclear option is actually the easiest thing for the EU to do.”

If invoked, Article 779 would set a familiar clock ticking. Twelve months, perhaps to the end of 2022 if events move rapidly in the coming weeks, for the sides to reach a new agreement – a situation which trade expert Dmitry Grozoubinski calls “2020 redux”.

“There [would be a] negotiation to maintain the status quo, and the biggest issues on the table are going to be fish and Northern Ireland,” he says.

While the EU was patient as Brexit consumed and divided British politics between 2016 and 2019, now – encouraged by combative members including France – it may decide that it is the time for proactivity.

Rahman says this could result in tariffs imposed in the first half of 2022. Anton Spisak, a former civil servant working on Brexit, thinks the EU would be more cautious, moving instead to freeze Britain out of Horizon, the research funding programme, and suspending data-sharing rules.

The bloc could also try to leverage red tape against the UK. British exporters appear to have got past the worst of new checks at the French border, but an instruction from Paris to ramp up scrutiny could cause severe disruptions.

“None of this is necessarily hugely logical,” says Grozoubinski. “But these are all unilateral things that the EU giveth and the EU can taketh away irrespective of the status of the TCA.”

France has repeatedly threatened to cut off UK power supplies as part of the dispute over fishing rights in the channel, but James Webber, a partner at law firm Shearman & Sterling, says that approach is unlikely to gain momentum.

“In theory the EU could use trade sanctions to stop energy firms selling power and gas through the interconnectors,” said Webber. “But that is very extreme and it would be difficult to build EU unity behind such a step.”

Whatever happens, the UK will want to respond in kind. The country stands in a weaker position given its trade deficit with Europe, but still has options, most notably locking Europe out of access to the City of London’s clearing houses. Symmetric tariffs could also prove effective because they will hit EU members unevenly, potentially stoking divisions within the bloc.

If no new agreement is reached, however, both sides will revert to trading on World Trade Organization rules. Fearing that, officials in the UK and EU may find themselves tempted into the same imperfect compromise reached last year of re-hashing the existing TCA.

Meanwhile, the EU has other tools at its disposal such as Article 506.2, which terminates certain fishing rights in waters near France at just a week’s notice. It may use these to pursue a softer approach – or to augment a hardline stance. 

There is nothing stopping Brussels from mixing and matching articles: setting the clock ticking on full-blown termination of the TCA while also taking swift action on fisheries.

If things reach that stage, it will once again be a case of who blinks first. The UK and its bloc neighbours are likely to aim for each other’s pressure points – fishing communities on both sides are in the firing line, as are the City and its continental rivals.

In the end, the process revolves around politics not commerce. Experts say the EU could buckle if its members become sufficiently disunited, while the UK will succumb if the pressures of a trade war – to both the economy and Britain’s international standing – prove too politically unpalatable.

“When this becomes toxic for the Government, when they are seen by other international partners to be losing credibility, that’s the point at which they would want to find a negotiated compromise,” says Spisak.

Ultimately, the decision may come down to Johnson. But he will need to act fast, says Jill Rutter from the think tank UK in a Changing Europe, there is a danger that fresh Brexit uncertainty will dry up business enthusiasm and political goodwill for the UK.