U.K. Plans a Brexit Compromise on Irish Border Rules

(Bloomberg) -- U.K. Prime Minister Theresa May is preparing to make a significant new Brexit offer to the European Union in an attempt to open the door to a deal, according to a senior British government official.

Divorce talks are stuck on the question of how to avoid the need for police and customs checks on the border between the U.K. and Ireland, but the British side now sees a path to reaching an agreement, the official said.

The pound surged as much as 0.7 percent against the dollar, before paring gains in later trading. Brexit Secretary Dominic Raab said the official’s comments were speculation.

The U.K.’s offer applies to the so-called Irish backstop, a legal guarantee to ensure that the border between Northern Ireland and the Irish Republic remains open and free for travel and trade after Brexit. It would only apply as a last resort in case an overarching trade deal doesn’t address the issue.

Under the plan, which May is likely to put forward later this month, the U.K. would back down on its opposition to new checks on goods moving between the British mainland and Northern Ireland. In exchange, May’s team would need the EU to compromise and allow the whole of the U.K. including Northern Ireland to stay in the bloc’s customs regime as part of the temporary backstop.

Although the picture is detailed and complex, the outline of a deal -- as the British see it -- would potentially unlock negotiations which have been in virtual stalemate since March.

The EU says without agreement on the backstop, there can’t be an exit deal. That would mean Britain crashing out of the bloc in March, and no transition period before future trading arrangements take effect.

Both sides want to avoid imposing security and customs checks at the frontier between Ireland and the British province -- which would revive memories of the sectarian conflict that gripped the region for decades until a peace deal was reached 20 years ago.

The problem arises because after Brexit, the U.K. will no longer be part of the EU’s customs union and single market. The EU says this will mean goods moving into Ireland will need to be checked to ensure they comply with safety and quality standards rules and that the correct tariffs are paid.

In order to avoid these checks taking place at the Irish border with Northern Ireland, the EU has proposed keeping the region inside its customs territory.

Finding a Compromise

That would require checks to take place instead at a notional border down the Irish Sea -- between Northern Ireland and the British mainland. May has flatly rejected this option -- warning it would divide the U.K. constitutionally into two separate customs territories, something she said no prime minister could ever contemplate.

The proposed compromise revolves around the distinction between customs checks and regulatory checks. May wants to keep the whole U.K. -- including Northern Ireland -- inside the EU tariff regime as part of the backstop plan.

The EU is currently opposed to allowing this, and wants only Northern Ireland to remain inside its customs territory after Brexit. That will need to change if there is to be a deal, the official said.

Some Checks

Under the British plan -- which has not yet been announced and could change -- the U.K. would keep goods regulations in Northern Ireland closely aligned with the EU rules applying in the Irish Republic.

But there would be new regulatory checks on goods passing between Northern Ireland and the British mainland, where different rules could apply once the country is outside the EU.

The U.K. would seek to minimize these extra checks -- taking up the offer of EU chief Brexit negotiator Michel Barnier to use technology and other means to limit the intrusiveness of the goods inspections.

One complicating factor for May’s team is that she has no majority in Parliament and must rely on the votes of Northern Ireland’s Democratic Unionist Party to stay in power. The DUP is implacably opposed to anything that looks like a new border separating mainland Britain from Northern Ireland.

The new plan will need to be accompanied by wording in both the exit agreement and the political declaration on the future trade deal that makes clear the backstop almost certainly won’t be needed, the official said. But if May’s proposals for the future trade agreement are rejected by the EU, the government may have to consider staying in a partial customs union forever, the person said.

Some in Cabinet already think keeping the EU’s common tariff could be the only way to get a future trade deal, but others who are lifelong euroskeptics will find that impossible to accept, according to the official.

©2018 Bloomberg L.P.