The Protocol and Strand 2 of the Belfast Agreement

Although it has received next to no analysis, the impact of the Protocol alongside the wider UK withdrawal process will not be limited to Northern Ireland’s trade regime with the rest of the UK. It is also likely to have implications for the functioning of Strand 2 of the Belfast Agreement. Whatever the final political and economic shape of the agreed (or not) long term future relationship between the EU and the UK, the Protocol is likely to impinge strongly on the nature of north-south cooperation, Strand 2 of the Belfast Agreement. By conferring special status on Northern Ireland, the Protocol allows the region to be part of two separate customs territories - the EU and the UK - at the same time, which has no precedent in international trade law. Governing this special status arrangement is very likely to have implications - both negative and positive - for how the north and south of Ireland interact with each other.

If the UK government is successful in its demand for minimal customs checks on the Irish Sea then one unintended consequence may to make the customs processes associated with shipping goods from Great Britain to Ireland more burdensome. As a result, shipping goods to Ireland would become quicker and cheaper via ports in the north rather than the south. The greater the border frictions between Great Britain and Ireland, the greater the incentive for firms in Northern Ireland that currently use the Dublin-Holyhead route to export and import to and from Great Britain to switch to a Northern Ireland port. Even producers located in Great Britain may be encouraged to use Northern Ireland ports to export goods destined for the market in Ireland. Thus, the Protocol could increase the competitive rivalry between ports in different parts of Ireland. Another example of the Protocol inducing greater north-south competition than cooperation relates to the agri-food industry.

If the EU and UK fail to reach agreement on their long-term future relationship or if a deal is reached that permits regulatory divergence, then inexorably agri-food producers in Ireland will face a battery of tariff and non-tariff barriers when seeking to export to the UK. But the same barriers are unlikely to be faced by Northern Ireland agri-food producers due to the region being part of the UK’s customs territory. As a result, Northern Ireland agri-food industry would be placed at a competitive advantage relative to its counterpart in Ireland. The advantage might even be so significant as to lead to a reconfiguring of the vertically integrated cross border supply chains that exist in many parts of the industry. A feature of these supply chains is that the downstream processing of products occurs in factories located in Ireland. Faced with the prospect of either losing UK market share or paying high tariffs to enter the UK market, it might make sound commercial sense to set up processing factories in Northern Ireland: producers would be able to maintain their home base in Ireland and continue to export to the UK market tariff-free. Once again, the two parts of the island would be pitted against one another.

But this is not in the end of the story as other pressures are likely to encourage greater regulatory cooperation between the north and south. If the EU and UK reach a deal that permits regulatory divergence or if no deal is concluded, then it will become more difficult to manage Northern Ireland’s dual membership of the EU and UK customs territories. Regulatory divergence will require Northern Ireland to stay with EU rules. As regulatory rules rarely stay the same and can evolve fairly quickly, Northern Ireland sooner rather than later is likely to face the challenge of developing new legislation to comply with new EU Directives. If the Northern Ireland government sought to do this by itself then almost certainly it will have to build up considerably its technical and legal administrative capabilities. One way of circumventing this administrative challenge would be to piggyback on the legal expertise that already exists in Dublin and copy how the Irish Government introduces a new piece of EU legislation. The added advantage is that creating regulations that are more or less the same north and south would give a boost to moves towards an all-Ireland economy.

Other opportunities for closer north-south cooperation could be exploited if the UK diverged too much from EU rules. Consider once again the agri-food sector. Regulatory divergence is likely to put at risk the €26bn worth of goods that UK agri-food producers export each year to the EU. By any standards, this is a large, lucrative market. Frank Barry (2019) perceptively observes that unlike UK financial services firms, UK-based agri-food producers have not really engaged in precautionary foreign investment strategies to protect their EU market share. In the financial sector, of course, this has involved shifting hundreds of billions out of the UK (mostly London) to various European locations. The lack of action on the part of agri-food companies could change very quickly if the prospect of expensive tariff (and non-tariff) barriers became imminent. These companies may seek to establish export platform operations inside the European internal market to ensure continued unfettered access. Barry suggests that Ireland would be an attractive location for such operations given the abundance of raw agricultural inputs that would be ready to hand. He urges the IDA to replicate the strategy it has pursued in the financial sector and aggressively market Ireland as the ideal site for precautionary export platform investments in the agri-food industry. A variant of this strategy would be for this strategy to be pursued jointly north and south of the border.

Thus, the nature of the future relationship between the EU and the UK alongside the manner in which the Protocol is implemented could trigger either some form of regulatory competition or create opportunities for greater regulatory and policy cooperation between the two parts of the Ireland - or perhaps even both. If the minimalist approach to cross border cooperation currently promoted by Strand 2 of the Agreement is maintained, then regulatory competition is more likely than regulatory cooperation: the mechanisms used to advance north-south cooperation at the moment are simply not sophisticated enough to exploit any of the two potential opportunities set out above for policy cooperation. If regulatory competition were to take hold. Northern Ireland is likely to gain in some areas, but by no means in all. Overall, it is uncertain which part of the island would be the net beneficiary. But one casualty for sure would be progress towards a meaningful all-Ireland economy.

Developing regulatory and policy interventions to avoid the north and south being pitted against one another would require a decisive move away from light touch north-south cooperation. If the Irish and Northern Ireland governments choose to pursue a policy of strong regulatory and policy cooperation in the wake of Northern Ireland securing a special status inside the EU, then it is inevitable that a more institutionally-driven form of north-south cooperation is likely to emerge. The result will be greater alignment between business rules and regulation in both parts of the island as well as deeper policy synchronization between Dublin and Belfast. Levels of interactions would become hugely more intensive between core parts of the public administrations in Dublin and Belfast. Advances towards an all-Ireland economy would be significant and on-going. The message could not be starker: to exploit the opportunities for mutual gains and manage the destructive properties of regulatory competition that are likely to be released by the introduction of the Protocol, then Strand 2 of the Belfast Agreement needs to be recast. A more robust and sophisticated institutional regime is required to govern cross border economic activity. Of course, the implications for the strategic direction of the Northern Ireland economy will be far reaching.

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