Chamber and committees

Written submission from Billy Melo Araujo

Written submission from Billy Melo Araujo, Senior Lecturer, School of Law, Queen’s University Belfast, for the UK Internal Market Inquiry, 24 November 2021

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General Overview

Market Access Principles under the Internal Market Act 

1 The Internal Market Act establishes two market access principles that govern intra-UK trade in goods. 

2 First, the mutual recognition principle (MRP) according to which any good that can lawfully be marketed in one part of the UK can automatically be sold in any other part of the UK. This principle applies to relevant requirements, which are defined as statutory requirements that prohibit the sale of goods or impose an obligation or condition which, unless complied with, will lead to a prohibition of sale. Relevant requirements encompass ‘product rules’ - that is, rules regulating the physical characteristics of goods such as composition, labelling and packaging. 

3 Secondly, the non-discrimination principle (NDP) applies to rules regulating the circumstances or manner in which goods are marketed (where, when and how goods are sold). Two forms of discrimination are prohibited: (i) direct discrimination where a good imported another part of the UK is disadvantaged compared to locally produced goods; and (ii) indirect discrimination where there is no direct discrimination but the application of a local regulation places the imported good at a competitive disadvantage and produces an adverse market effect. 

4 There are a certain exceptions to these rules. Indirect discrimination can be justified by reference that are expressly and exhaustively listed legitimate aims in the IMA: protection of the life or health of humans, animals or plants or the protection of public safety or security. Moreover, there are regulatory areas that are carved out from the scope of the MAPs. These include, for example, measures intended to prevent the spread of pests and disease, rules relating to the authorisation of certain chemicals and taxation.

5 One of the main criticisms levelled at the IMA is that, by severely limiting the grounds for the invocation of exceptions to the MAPs, it generates a trend towards deregulation(1). Where a constituent part of the UK adopts high regulatory standards to achieve a public interest goal that is not recognised in the IMA, such regulatory standards will only apply to locally produced/manufactured goods. This places a higher regulatory burden on locally produced/manufactured goods and, therefore, places such goods at a competitive disadvantage. 

Ireland-Northern Ireland Protocol

6 The Ireland-Northern Ireland Protocol (Protocol) is a legal instrument annexed to the Withdrawal Agreement concluded by the European Union (EU) and the UK. It governs Northern Ireland’s (NI) trading relationship with the European Union. One of the central aims of the Protocol is to avoid a return to “hard border” in the island of Ireland. A hard border can be understood as any physical infrastructure marking the border between two jurisdictions. 

7 To avoid a hard border, the EU and UK negotiated the Protocol, which requires Northern Ireland to comply with EU customs, internal market and value added tax laws. By keeping NI subject to the EU’s customs and regulatory regime, the Protocol ensures that goods are traded between NI and the EU as if NI was still part of the EU. The upshot is that by placing NI in a separate by customs and regulatory regime to that of the rest of the UK, the Protocol has created certain barriers to trade in goods between Great Britain (GB) and Northern Ireland. Barriers faced by GB goods being moved on to NI include (i) customs procedures and declaration requirements; (ii) the application of EU tariffs where GB or third-country imports goods are deemed at risk of being moved on to the EU; and (iii) regulatory compliance checks.

 

How do the Protocol obligations impact on the operation of the UK internal market and in particular the market access principles?

8 In relation to NI, the market access principles established under the IMA apply in an asymmetric manner. GB goods moving to NI and NI goods moving to GB are subject to separate regimes. 

9 GB goods moving to NI face barriers to trade that result from the application of the Protocol. This includes the application of EU customs legislation and EU regulatory compliance checks. By contrast, Section 11 of the IMA provides for unrestricted access for ‘qualifying goods’ moving from NI to GB. 

10 The concept of qualifying NI goods is defined under Article 3 of the Northern Ireland Goods (EU Exit) Regulations 2020. Qualifying NI goods concern:

• Goods that are in free circulation in NI –that is,  not subject to any customs supervision, restriction or control which does not arise from the goods being taken out of the territory of the Northern Ireland or the European Union; or
• Goods that have undergone processing operations carried out in Northern Ireland only.

11 The “qualifying goods” criteria are phrased in purposefully vague and broad language in order to avoid trade disruptions in the immediate aftermath of the UK’s withdrawal from the EU. The UK government has, however, signalled that these rules are to be refined to ensure that only genuine NI businesses (businesses established in NI) benefit from unfettered access. This is to ensure that that EU imports destined for the GB market are not deliberately routed via NI in order to avoid UK customs checks. 

12 The UK government had planned to publish the new rules on NI qualifying goods in October 2021 to coincide with the introduction of full border controls on EU imports.  However, the full implementation of UK customs controls on goods moving from the EU to GB was postponed to January 2022 due to ongoing discussions with the EU regarding the potential renegotiation of the Protocol(2). 

What are the risks arising from the Protocol for Scottish businesses and the Scottish economy?

13 The application of the Protocol means that goods being moved from Scotland to NI face increased barriers to trade in the shape of customs checks, regulatory checks and, in some cases, tariffs. As a result, it seems likely that Scotland will lose some market share in NI.

14 The UK’s decision to apply a light-touch approach to checks between NI and GB may also lead to the diversion of RoI-NI trade to GB-NI. This is because the minimal checks applied at the Irish Sea border may create an incentive for RoI exporters of goods destined to Scotland to route those goods to Scotland via NI.

15 The Protocol may also lead to a reduction of the flow of goods in Scottish ports. Third-country goods that would have previously transited through Scotland on their way to NI may opt to enter NI directly to avoid being subject to dual customs and regulatory checks.

16 It should be noted that analysis conducted by the Northern Ireland Department for the Economy on the potential long-term impact of the Protocol (in combination with a zero-tariff EU-UK trade agreement) anticipates a 5.6% reduction in imports from GB and a 5.3% reduction in exports to the rest of the world(3).

What impact might the Protocol have on future trade agreements and how might this impact on Scottish economic interests in negotiating those deals?

17 The fact that NI is subject to a separate customs and regulatory regime to the rest of the UK may reduce the UK’s leverage in trade negotiations and, in turn, impact Scottish economic interests. This is because when negotiating trade agreements, the UK cannot guarantee its trading partners access to the NI market.  Goods imported into NI from the UK’s trading partners may be subject to EU tariffs where they are deemed at risk of being moved on to the EU. Further, any mutual recognition arrangement agreed to in the context of a trade agreement will likely not apply in relation to NI. This means that, when negotiating trade agreements, the UK can only guarantee preferential access to the GB market rather than the entire UK. However, the practical impact of this may be limited to the extent NI represents a small fraction of the UK market.

18 Some current UK trade agreements reflect this special legal status of NI. For example, Article 2.4(a) of the UK Singapore Free Trade agreement provides that in the event of an inconsistency between the Protocol and the trade agreements, parties may adopt measures that are inconsistent with the trade agreement. 

19 The Protocol may undermine the ability of NI to fully benefit from UK trade agreements. It will reduce the imports that can access NI on preferential terms agreement in such agreements and will likely exclude NI goods from any mutual recognition arrangement.  NI goods exported to countries with whom the UK FTAs may, as a result, face higher tariffs and regulatory barriers than GB exports.

 

Does the Protocol make regulatory divergence across the UK more or less likely?

20 The Protocol means that further regulatory divergence between, on the one hand, Northern Ireland and, on the other hand, Great Britain is more likely. This is because, unlike NI, GB is not subject to EU internal market rules. Therefore, any future deviation in one of the constituent parts of the UK from EU rules will inevitably cause regulatory divergence with NI. Similarly, because the Protocol requires dynamic alignment, NI has to comply with any new EU internal market legislation falling within the scope of the Protocol. Any new EU legislation may exacerbate regulatory divergence between NI and the rest of the UK.

What impact might the Protocol have on agreeing UK-wide common frameworks and UK-wide minimum standards? 

21 There is a considerable overlap between the scope of the Protocol and the regulatory areas covered by the Protocol(4). 

22 The Protocol may undermine the development of UK-wide minimum standards to the extent that it ties NI to the EU regulatory framework in relation to trade in goods. In NI, under the Protocol, EU law will prevail over domestic UK law meaning that common frameworks will only apply in NI to the extent that they do not conflict with applicable EU law. Any change in EU law or in any of the three administrations has the potential to lead to regulatory divergence.  

23 It is worth noting that identifying and avoiding regulatory divergence with NI will be no easy task because of the sheer complexity of NI’s post-Brexit regulatory regime. This regime is shaped by the interaction of EU law falling under the scope of the Protocol, the UK common frameworks, UK law, changes to retained EU law and NI law and policy. 

What are the implications for the Scottish Government’s commitment to align with EU law arising from the Ireland/Northern Ireland Protocol?

24 The commitment to align with EU law will minimise regulatory divergence between Scotland and NI. A clear benefit of regulatory alignment is that it will reduce regulatory burden for businesses involved in NI-Scotland trade. Scottish producers or manufacturers wishing to export goods to NI may not have to adapt the product to comply with regulatory standards applicable in NI and vice versa. 

25 Regulatory alignment will not, however, remove regulatory barriers faced by Scottish business exporting to NI. In the absence of an agreement on the mutual recognition of rules between the EU and the UK, goods originating from GB will remain subject to checks when accessing NI. 

26 Finally, it is worth noting that any decision by Scotland to align with EU law and, in doing so, diverge from the rest of GB may prompt the application the Common Frameworks processes and the application IMA.
 

Does dynamic alignment arising from the protocol make keeping pace in Scotland more or less likely, for example as a consequence of shared information between the Northern Ireland Executive and Scottish Government?

27 The dynamic alignment arising from the Protocol could be used to strengthen the argument for Scotland to “keep pace” with EU rules. The common frameworks should be used as a platform to facilitate dialogue on areas where regulatory divergence between NI and GB emerge and assess what steps can be taken to minimise such divergence.  
 

What are the challenges in relation to the transparency and accountability of the operation of the protocol and implementation of dynamic alignment given the UK is no longer directly involved in the EU legislative and policy-making process?

28 Article 13(3) of the Protocol on Ireland/Northern Ireland provides the legal basis for dynamic alignment to identified areas of EU law. The EU has an obligation to inform the UK about planned EU legislation falling within the scope of the Protocol, including any legislation amending or replacing acts listed in the Annexes of the Protocol. This occurs through the Protocol’s Joint Consultative Working Group (JCWG) – a body constituted of representatives of both the EU and the UK.

29 Where the EU is merely amending or replacing legislation listed in the Protocol, the act will apply automatically in NI. In other words, the UK cannot object to the application of such legislation. Where the EU is planning to adopt a new legislative act that falls within the scope of the Protocol, the EU must notify the UK before these acts are adopted.  Upon the request of either the EU or the UK, the Protocol’s Joint Committee (which oversees the implementation of the Protocol and makes decisions by mutual consent) will hold an exchange of views on the implications of the newly adopted for the proper functioning of the Protocol. The Joint Committee then has the option to either: (i) adopt the relevant act; or (ii) where no agreement can be found ‘examine all further possibilities to maintain the good functioning of this Protocol and take any decision necessary to this effect’.

30 A recent study focusing on the first six months of dynamic regulatory alignment with EU law under the Protocol identified three types of changes: (i) additions to and deletions from the Annexes of the Protocol, (ii) the repeal, replacement and expiry of EU law; and (iii) amendments to EU law implementing applicable EU law(5). The study found that since the end of the transition there were no additions or deletions made to the Annexes of the Protocol and that number of EU acts applicable in NI post-Brexit had, in fact, reduced in numbers. In the short-term, at least, there have not been significant substantive amendments to the EU law applicable under the Protocol. However, once new EU legislation is added to the Protocol, the questions on the lack of democratic accountability and scrutiny around the implementation of the Protocol will likely come to the fore.

31 While the JCWG offers a venue where the UK could potentially influence the EU, its role remains consultative and the content of the meetings are confidential. The UK government called for the development of “more robust arrangements to ensure that, as rules [EU law] are developed, they take account of their implications for Northern Ireland – and provide a stronger role for those in Northern Ireland to whom they apply (including the Northern Ireland Assembly and Executive, and wider Northern Ireland civic society and business). More recently, the EU has also recognised the need for transparency and proposed the establishment, within the framework of the JCWG, of structured groups with NI stakeholders (including NI authorities, civic society and business). 

32 The current system, as well as proposed reforms, falls short of the level of involvement granted to other third countries that are subject to EU dynamic regulatory alignment in the EU decision-making process(6). For example, under the European Economic Agreement (EEA), the EU has an obligation consult with EEA states when preparing EU legislation that may fall under scope of the agreement. The obligation also includes a requirement to seek the advice of experts of the EEA states in the same way as it seeks advice of EU Member States.  While EEA states are required to apply EU law, they have multiple formal and informal structures through they can influence the outcome of the decision making process.

Footnotes

1. S Weatherill, ‘Will the UK survive the United Kingdom Internal Market Act?’ UKICE Working Paper 03/2011, 12
2. J Campbell, Brexit: Rules for moving goods from NI to GB delayed 1 September 2021. Available at: https://www.bbc.co.uk/news/uk-northern-ireland-58411406
3. NI Departmentfor the Economy, Direct Economic Impact of the Northern Ireland Protocol on the NI Economy, December 2020. Available at: https://www.economy-ni.gov.uk/sites/default/files/publications/economy/direct-economic-impact-ni-protocol-on-ni-economy.pdf
4. J Sargeant and M Thimont Jack, ‘The UK Internal Market’, June 2021. Available at: https://www.instituteforgovernment.org.uk/publications/uk-internal-market
5. L Claire Whitten, ‘The Protocol: ‘dynamic alignment’ in post-Brexit Northern Ireland, UK in a Changing Europe’, September 2021. Available at: https://ukandeu.ac.uk/long-read/the-protocol-post-brexit-northern-ireland/
6. K Hayward, ‘‘Flexible and Imaginative’: The EU’s Accommodation of Northern Ireland in the UK–EU Withdrawal Agreement’ (2021) 58(2) International Studies 209-210