Despite being trapped in a deep political quagmire, we believe an eleventh-hour creative solution to the Irish backstop is available to embattled Boris Johnson.
Our proposal is for the UK to grant Northern Ireland (NI) SEZ (special economic zone) status. SEZs have been in operation in China since 1980. They do not compromise China's sovereignty, while offering economic agents within SEZs preferential economic and legal terms to those in the rest of China.
As an SEZ, NI could remain part of the UK while enjoying the EU's economic terms. The basic idea of an SEZ is to carve out a small part of the country that, like petri dishes, allow the government to experiment with reform measures involving investment and trade. We believe NI could be made an SEZ for the UK to access the EU, if trade between the two economies cannot be aligned.
Removing the backstop in the draft Withdrawal Agreement would not solve the underlying issue that a no-deal scenario would lead to some form of a customs border between NI and the Republic of Ireland, since a future EU-UK trade arrangement would face this same obstacle.
Making NI an SEZ would have several advantages, from the perspectives of different parties involved. From NI's perspective, operating as a SEZ would avoid a physical border with the Republic and a border with the rest of the UK, though there would need to be some customs checks in the Irish Sea. The structure of the SEZ could also be designed to provide economic incentives minimising NI's exposure to the initial dip in the expected ‘J-curve' the UK economy may experience.
From the perspective of the Republic, making NI an SEZ ought to be seen as superior to either a hard Brexit and/or a physical border with NI. Moreover, with NI as an SEZ possessing the same terms of trade as Ireland, and with a customs border in the Irish Sea, there should be no objections from EU chief negotiator Michel Barnier.
Proposing to turn NI into an SEZ could help Boris Johnson persuade the EU, as well as pacify the MPs opposed to a hard Brexit. Second, a SEZ would provide the UK with flexibility to work out the best trade arrangements with the EU and the rest of the world over time. A solution to the Irish border issue that is malleable ought to be advantageous for the UK because it would best preserve the option value of future changes.
Turning NI into an SEZ would simultaneously satisfy two seemingly inconsistent objectives: the EU extending the same terms of trade to both Ireland and NI and observing the sovereign integrity of the UK.
Crucially, the Good Friday Agreement would be honoured through a SEZ: NI would no longer be a ‘zero-sum game' whereby either the EU or the UK wins and the other party loses. And finally, since a SEZ is not permanent, this structure would offer built-in flexibility over the long run, allowing for advancing border technology and changing political opinions in NI and Ireland to determine whether NI should continue to operate as a SEZ within the UK.
Stephen Jen, CEO and co-CIO of Eurizon SLJ Capital