Brexit explainer: why all options are back on the table

Why the Irish backstop is the main sticking point to a Brexit deal; why it matters and what the alternatives are.

Theresa May has delayed the vote on her Brexit deal to an unspecified date as she acknowledged that it would be defeated in Parliament. But there is little time to negotiate an alternative. This bespoke 585-page Withdrawal Agreement has taken the best part of two years to negotiate.

The sticking point seems to be the Irish border: Northern Ireland is part of the United Kingdom, while the Republic of Ireland is in the EU. Any deal would have to avoid a “hard” border and preserve the open border that’s been in place since the Good Friday Agreement. So, Mrs May’s deal kept the UK tied to the EU in a customs union until a trade deal is agreed. But enough parliamentarians don’t want to see an “indefinite” Irish backstop.

In an attempt to salvage her deal, Mrs May is going to seek assurances from the EU that the UK’s participation in customs union will not be indefinite without re-opening the negotiations on the legal text. Essentially, she’s trying to take the toughest can and kick it down the road.

Why all the fuss?

Although the Brexit Withdrawal Agreement is not a trade agreement, the backstop could be in place for a long time until one is agreed. Its provisions only govern the transition or implementation period that will last until December 2020 and can be extended if the UK and EU need more time to negotiate a trade deal. But, without it, there is no transition period and the UK will depart with no deal on March 29, 2019, which Parliament has said it won’t allow.

If Mrs May can’t find a solution to get the votes she needs, it’s very unlikely that there will be enough time to negotiate a new bespoke withdrawal deal in the coming weeks since any deal not only has to be agreed by the British parliament, but also the parliaments of the EU-27 countries.

So, today’s postponement of the vote means that it looks more likely that an existing EU trade arrangement will be considered: a deal that can be plucked off the shelf and perhaps tailored around the edges.

Is there an alternative?

Norway model: The alternative that has been most discussed is the Norway model, but this may not be the best solution. The Norway trade model accepts free movement of people; Norway also has to follow EU rules since it is essentially within the Single Market. That also somewhat affects the ability of Norway to do trade deals since it must abide by EU rules (over which it has no say) in goods and services, although not agriculture. This has implications, as the governor of the Bank of England has pointed out. Mark Carney highlighted the downsides for the UK’s financial sector if it is governed by rules over which it has no say. Moreover, the other countries in the European Economic Association (EEA), which includes Norway, Lichenstein and Iceland, would have to agree to include the UK. And it’s worth bearing in mind that all of these countries will need to agree about the adoption of EU rules, so it’s not just up the UK to decide.

Swiss model: Thisoffers perhaps a better option. Switzerland is not in the EEA but is in EFTA, which is the European Free Trade Association via a series of bilateral treaties agreed with the EU. This would offer the UK many of the benefits of the Norway model but more autonomy. So what’s the problem? The short version is that this is not a model that the EU wishes to replicate. Brussels is increasing pressure on Switzerland to adopt EU rules more automatically. But the Swiss model could be proposed as a temporary, transitional arrangement for the UK. Giving the UK more autonomy in deciding which EU rules to adopt could be preferable for the financial sector. After all, Geneva and Zurich are both prominent international financial centres.

The sticking point

Neither of these models includes a customs arrangement, which is the sticking point over avoiding a hard Irish border in the Brexit Withdrawal Agreement. Would the border as it stands between Switzerland and the EU or Norway and the EU be acceptable for the transition period? These are still borders with checks, which means that they may not be agreeable. Even if so, is it likely that the UK and EU can agree a trade agreement, that is not a customs union, that avoids the hard border, so it would only be for a temporary period of time? It’s also worth considering whether technology can reduce the border frictions sufficiently in the coming years. If so, would that be enough?

Undoubtedly, the Irish border will continue to be the sticking point beyond the transition period and form the centrepiece of any new UK-EU trade agreement regardless of the transition model. But, if the PM’s revised withdrawal agreement is rejected by Parliament and the UK can’t leave with no deal, then instead of the Norway model, perhaps the Swiss model should be explored.

And if none of the above work?

If PM May is unable to salvage her bespoke deal, or suitably adapt an off-the-shelf solution, remaining in the EU is also on the table. Yesterday’s ruling from the European Court of Justice opens the door to the UK unilaterally revoking Article 50 before March 29 which wouldn’t require the agreement of the EU.

It seems that after today, all options are back on the table.

Dow Jones