PROVIDING Magalluf is allowed to reopen next year, business owners, especially those in the hostelry sector, could be faced with a complicated problem, where will they get their seasonal workers from?

Seasonal Business in Travel (SBiT) has launched a petition calling for the UK and Europe to allow young people to work for short periods of time without visas.

The organisation, which had campaigned for a second referendum on Brexit and to keep free movement in any deal with the EU, says the jobs of 25,000 UK citizens working abroad in Europe are at risk without a visa exemption scheme in place.

It said 87% of those 25,000 seasonal working are aged between 18 and 34-years-old, and jobs include reps, hotel staff, nannies, drivers and logistics experts.

The first concern is what is going to happen to those Britons heading off to work the winter ski season, providing there is one.

The second one is going to be what will the rules and regulations be for the tens of thousands of young people who normally, or are planning, to spend the summer working in an overseas resort in bars, shops, hotels etc.

If visas and the like become a requirement, it may deter many from bothering and in resorts like Magalluf, where are the seasonal staff, which are mostly British, going to come from?

The EU and UK have grappled with the Irish border for three years.

How could Britain leave the single market and customs union without that necessitating customs and regulatory controls at the land border between north and south, with its 200 crossing points?

The solution is the Northern Ireland Protocol. It is by no means pretty, and it essentially displaces the pain from the land border to the Irish Sea.

Still, it facilitates the free circulation of Northern Irish goods across the border and into the 26 other EU countries, so the invisible land border remains exactly that. 

But a new complexity has arisen. Once again, key sectors of the all-island economy are under threat. This time potential solutions are being cold-shouldered because of sensitivities at the heart of the current free trade negotiations between London and Brussels.

So what is the problem?

There is no provision in the Protocol to continue the practice of northern components being added to goods produced in the south, and then exported around the globe under EU free trade agreements (FTAs).

It’s not that this was unforeseen. Northern Ireland business organisations, and Stormont officials, raised the issue with both the European Commission and the British government even as the ink on the Protocol was drying last October. 

Under Theresa May’s deal there was no issue, because the UK as a whole was staying in a customs union with the EU.

Under Boris Johnson’s deal, however, Northern Ireland would be out of the customs union, but simultaneously operating EU customs union rules and producing goods to EU single market standards. 

Did that mean Northern exporters could still benefit from existing and future EU trade deals around the world?

Business groups say London and Brussels said yes. One Stormont official present is more circumspect.

“It was never absolutely ruled out, but the door was never wide open either,” says the official. It’s understood the promise – if that is what it was – went cold in the early part of this year.

“There was a diminishing level of trust [in Brussels] that the UK was serious about its obligations under the Protocol,” says one business representative who attended numerous meetings on the issue. “The EU was then rowing back from its creative interpretation. Lines were laid down by the Commission.”

Those lines were hardening when the European Commission met Irish business organisations in the spring. According to one industry source present, the Commission said continued access for Northern Irish exporters to EU trade deals was “not up for discussion”.

In June, the Commission wrote to one Irish export sector: “For the purpose of EU FTAs, goods produced in the UK, including Northern Ireland, will not be considered as being of EU-27 origin as from the end of the transition period.”

According to that declaration, Northern Ireland will fall out of some 60 free trade agreements between the EU and trading blocs around the world on January 1. 

Northern goods will be considered as British, and not European, even though they will have been produced to EU standards. This is because Northern Ireland will remain part of the UK’s customs territory.

If Northern Ireland can’t continue to avail of EU FTAs, how big a problem might it be?It is a mixed picture. Some sectors will be very exposed, others less. It certainly has the potential to significantly disrupt all-island value chains.

With the deadline approaching, Dublin has been discreetly pushing the issue at the behest of Northern businesses. Senior figures have been “echoing” their concerns to both the European Commission and the British government.

“We have informally signalled it to the Commission and there have been some discussions,” says one senior source. 

In fact, it has crept onto the agenda of the EU-UK Joint Committee, the body tasked with implementing the Brexit Withdrawal Agreement, including the Protocol. Both the EU’s representative on the Committee, Maroš Šefčovič, and Michel Barnier, the EU’s chief negotiator, are said to be sympathetic.

Dublin is pushing this for a number of reasons. Northern traders are having to comply with EU standards, and there will be onerous checks and controls on goods coming in from Great Britain.

“It would show the North some of the benefits of the new status,” says the source. “Traders could get access to quotas in third country agreements that the rest of the UK wouldn’t.”

The Irish government is also keenly aware that the Northern Ireland Assembly will be voting on whether or not to continue the trade provisions of the Protocol in four years’ time.

However, if Northern Ireland can’t continue to avail of EU FTAs, how big a problem might it be?

It is a mixed picture. Some sectors will be very exposed, others less. It certainly has the potential to significantly disrupt all-island value chains.

The key determinant of how big a problem it will be is the “country of origin” principle. Under trade rules, a product can qualify for preferential access even if part of that product comes from somewhere else, ie; not the country that is negotiating to get tariff-free access to another market.

A majority of north-south cross-border trade is in intermediate inputs, ie; component parts or ingredients that are added to goods which are processed and sold on. Inputs account for over 60% of southern exports going north, and 70% of northern exports coming south. 

In 2017, 1,402 southern companies imported components or inputs from the North. Some of the components will end up in goods which stay on the island, some will end up in goods going back to the North, to Great Britain, or to the rest of the EU.

None of that will change.

Martina Lawless, a research professor with the Economic and Social Research Institute (ESRI), was commissioned by the Northern Ireland Department for the Economy to explore the problem faced by those Northern inputs currently exported overseas from the south under EU trade deals.

One quarter of those north-south inputs go to Irish companies which typically avail of EU free trade agreements, mostly in the pharmaceuticals and chemicals sectors. 

By far the most exposed sector will be dairy, which accounts for 45% of those goods which cross the border to be added to products going overseas. 

“Any dairy product manufactured in NI can be exported under EU free trade agreements,” says Mike Johnstone, chairman of the Dairy Council of Northern Ireland.

“We have a third of our raw milk moved from the North to the Republic for further processing. A significant proportion goes on to third countries and is exported under EU FTAs.”

During the Brexit Withdrawal Agreements, dairy was highlighted as the exemplary all-island product for which Brexit meant disaster.

EU civil servants were schooled in the fabled activity of thousands of tankers bringing millions of litres of milk along narrow roads, collected on one side of the border, processed in another, turned into cheese, powdered milk or infant formula somewhere else on the island and then exported to the EU or around the globe.

This all-island model was forged over time. The North doesn’t have enough capacity to process all the milk it produces; large sophisticated co-ops in the south need Northern milk to both meet export demand and keep running efficiently.

In all, up to 20% of the milk pool in the Republic comes from Northern Ireland. It gets fragmented into regular milk, butter, cheese, powdered milk, sports drinks, all processed along the border and further afield in Ireland.  Northern milk’s overall footprint is bigger than it appears.

But if Northern Ireland is out of EU free trade deals, what happens to that model? It is worth looking at global trade rules in detail to explain the issue further.

Free trade agreements mean goods from one country get preferential access to another. They attract a smaller (or zero) tariff and there are agreed quotas on how much can be shipped before a higher tariff kicks in.

Global trade rules are devilishly complex. Rules differ from product to product, and FTAs run to thousands of pages because individual goods are categorised differently, depending on what they are, and how much of the good originates in the partner country.

“These criteria can be quite complex,” Martina Lawless wrote in her paper ‘Northern Ireland inputs to Republic of Ireland EU FTA exports’, which was published in September. 

“In the event of uncertainty as to whether Northern Ireland inputs are considered as equivalent in origin to those sourced within the EU, this could lead to EU purchasers that trade via EU FTAs reorienting their supply chains away from Northern Ireland producers.”

Some of the older EU FTAs, such as those with the Middle East, sub-Saharan Africa and Nigeria, do not have rules of origin strictures, so it doesn’t matter if some of the milk originates in Northern Ireland, according to an industry source.

In other words, a disruption to all-island supply chains. A southern company could simply look for a supplier elsewhere in the EU if there are sudden complications with a Northern component.

Under the rubric of “rules of origin”, trade partners can accept each other’s goods even if a significant part of those goods originates in another part of the world, or a country with which one partner does not have a free trade agreement.

The more that the extra component is transformed into, say, a more “Irish” product the more that component is tolerated, and the lower the tariff which applies.

Some of the older EU FTAs, such as those with the Middle East, sub-Saharan Africa and Nigeria, do not have rules of origin strictures, so it doesn’t matter if some of the milk originates in Northern Ireland, according to an industry source.

Under trading arrangements with the United States and China, Northern milk will still be accepted.

However, the big concern is the more “modern” FTAs the EU has negotiated with Canada, Japan, South Korea, Vietnam, Singapore and Mercosur, and future “modern” FTAs. They will require all milk to be designated EU milk in order to benefit from preferential market access.

“The issue is to take advantage of these new FTAs,” says the industry source, “Canada, Japan, South Korea, where there is a rules of origin stipulation. This is where we’re supposed to be growing our market diversification. This is going to be problematic.”

The most exposed areas will be along the border, where co-ops have a heavier reliance on Northern milk.  Glanbia, Lakeland Dairies and Aurivo Dairy Products are said by those familiar with the situation to be among the more affected companies.

Another sector with real concerns is Irish whiskey. The iconic brand is classically all-island, and is protected by the EU under what is known as a Geographical Indication (GI). 

“The Irish whiskey industry is the oldest in the world,” says William Lavelle, head of the Irish Whiskey Association (IWA).  “Some of our all-island supply chains go back to the 1900s.”

Some 95% of Irish whiskey is blended, and last year 26% of all whiskeys sold relied on ingredients from both sides of the border.

Once the European Commission made it clear that Northern Ireland goods could not benefit from existing free trade agreements, the IWA sought assurances that they could still benefit from those future agreements deemed so important to the dairy sector. 

The Australian market is a particular concern. It is the 10th largest market for Irish whiskey, and absent an EU-Australia free trade agreement the tariff on whiskey would be 5%.

However, in June the Commission made it clear that, aside from a small marginal percentage, if there were any significant Northern ingredients added to Irish whiskey then the entire bottle would face the 5% tariff.

Even if all the whiskey was blended in the south, if it was bottled in the North then that would disqualify it from tariff-free access.

Why has the EU taken such a hard line on “rules of origin”, to the detriment of Northern Ireland producers?

Multiple sources believe it relates to the tensions which go to the heart of the current EU-UK free trade negotiations.

Barnier’s position on rules of origin reflects the EU’s gravest concern: that having left the EU, the UK will now disproportionately profit from access to the single market if there is a too permissive attitude to where it sources its manufacturing parts.

When the negotiations began, the UK sought a broad agreement whereby both sides would recognise each other’s inputs as qualifying for zero tariffs. In other words, the UK could use EU components and ingredients when manufacturing a product that could then be sold on, tariff free, to the EU, and vice versa.

The EU adopted a similar approach, as it is a standard way of handling “rules of origin”.  It would mean that bilateral supply chains can continue.

However, the UK wanted a wider agreement whereby both sides would accept products where components have come, not from each other, but from trade partners around the world with which both the EU and UK have a free trade agreement.

This interchangeable approach is known in the jargon as “diagonal cumulation” (we’ll call it cumulation for simplicity’s sake).

However, the EU has resisted automatic cumulation.

Under current trading arrangements, the EU expects that at least 55% of the value of a car is created in a partner country for that car to qualify for preferential access. 

The average car assembled in the UK relies on 44% of its components coming from outside, meaning that the proportion of the car having its value added in the UK is only between 20% and 25%.

In the negotiations, London demanded that “cumulation” be applied so that the EU would accept component parts from Japan and Turkey as “British”, since the EU itself had free trade deals with both countries.

In September, the UK’s chief negotiator David Frost wrote to the car industry to say the EU had declined this.

“[The EU chief negotiator Michel] Barnier said no because the EU thinks the UK is just trying to remain part of supply chains, trying to get [EU] customs union benefits without being in the customs union and it will lead to a UK offshore manufacturing hub,” says Sam Lowe, a trade expert with the Centre for European Reform (CER).  “The EU has been quite firm on this.”

After one fractious negotiating round in June, Mr Barnier said: “Do we really want to take a risk with rules of origin that would allow the UK to become a manufacturing hub for the EU, by allowing it to assemble materials and goods sourced all over the world, and export them to the single market as British goods, tariff-and-quota-free?”

In other words, Barnier’s position on rules of origin reflects the EU’s gravest concern: that having left the EU, the UK will now disproportionately profit from access to the single market if there is a too permissive attitude to where it sources its manufacturing parts.

Irish industry insiders, closely involved in the issue, fully believe that this is exactly what is driving the EU’s reluctance to grant Northern Ireland access to EU FTAs.

If flexibility was shown to Northern components in forming part of EU trade deals, is the argument, why could the EU not extend that flexibility to components made in the rest of the UK?

“They’re afraid that by having a discussion on protecting inputs from NI it is giving the UK a talking point,” says one source. “They’re giving a chink of light to UK negotiators and they would drive straight through that chink of light. It would get cumulation back on the agenda.” 

Privately, the European Commission has told the Irish government that it is sympathetic to the idea. Senior figures agree with industry sources that the broader issue of rules of origin is simply too sensitive for either side to start burning negotiating currency on how rules of origin might affect Northern Ireland, which in global terms is a tiny market.

There is also the practical issue of how it would be done. 

The status quo on the all-island economy is unlikely to be maintained unless both the EU and UK formally agree that Northern Ireland inputs can continue to be part of existing and future EU trade deals.

“It’s possible the EU could just write to all its trade agreement partners and ask, will you continue to accept Northern Ireland inputs as EU inputs for the foreseeable future,” says Sam Lowe of the CER.

Indeed, when the UK entered the Brexit transition period running from the end of January until December 31, it continued to be regarded as participating in all EU free trade agreements because the European Commission wrote to its trade partners specifically asking if they would accept that.

If the Commission starts writing to its trade partners again, the risk is that those partners could start to look for something in return.

“The idea of going to every third country partner and asking them to reopen the agreement to insert Northern Ireland in is quite a challenge,” says one senior source. “In certain cases, if you asked them to reopen the agreement they might ask for other stuff.”

Would it make any difference when the UK negotiates its own FTAs?

So far the UK has signed one major free trade deal - with Japan - but it has rolled over 47 of the 77 trade agreements that the EU has in place and is expected to roll over more (although not all) by the end of the year.

As part of that process, the UK is saying it will allow EU inputs to be added to British products, and that has largely been accepted by those trade partners with whom the roll-overs have been agreed.

However, the status quo on the all-island economy is unlikely to be maintained unless both the EU and UK formally agree that Northern Ireland inputs can continue to be part of existing and future EU trade deals.

Again, if the EU resists wholesale acceptance of cumulation for UK imports into the single market, that would mean that if the UK were to agree to a joint approach to the island of Ireland issue, then London would be accepting something for Northern Ireland that other parts of the UK won’t benefit from.

It should not be forgotten that Boris Johnson sold the revised Protocol on the basis that Northern Ireland would be able to participate in the UK’s new trade deals with third countries.

“We’re banging the drum about how the UK can benefit from these fantastic new free trade agreements like Japan,” says a senior UK source.

“I’m sure NI business would love to get the best of both worlds, but if the [European] Commission says you can’t have your foot in both camps, the British view would be that Northern Ireland comes with us on our buccaneering ride through free trade agreements rather than being left in the EU orbit.”

On 5 October, the deputy leader of the Alliance Party Stephen Parry MP asked in the House of Commons if Northern Ireland could continue to benefit from EU trade agreements.

The Minister for International Trade Ranil Jayawardena replied: “Northern Ireland is and remains British, so will be part of the United Kingdom’s customs territory… It will be HM Government – not the EU – that will negotiate and deliver trade deals on behalf of the United Kingdom as a whole.”

It is politically extremely delicate. The Irish government believes the UK itself is sympathetic but in the current climate it is not an issue which can be shouted from the rooftops.

Dublin believes that if there is a successful FTA, then once the Protocol beds down and the heat is taken out of the issue, a joint EU-UK agreement that can protect those all-island supply chains might be possible.

It’s a reflection of how Brexit continues to pull at the all-island economy, and how the diverging global instincts of the EU and UK can polarise opinion over something as abstract as trade deals and rules of origin.

The Irish whiskey industry says some distillers are already reconsidering their all-island approach to sourcing ingredients. 

“Time is running out for us,” says William Lavelle, of the Irish Whiskey Association.

“Unless things change, there will be Irish whiskeys that are predominantly produced in the Republic, blended in the Republic, exported by Republic-based companies, but they may contain one component from the North. So that could mean a tariff.”

He adds: “We survived partition, we survived going into the EU, now Brexit is going to mean us severing the industry in two, and having a two tier system of exports.”