EU threatens UK with tariffs as Northern Ireland spat escalates

[BRUSSELS] The European Union warned it could impose tariffs and quotas on the UK as a bitter Brexit dispute over trade with Northern Ireland escalates.

"We are at a crossroads in our relationship," European Commission Vice President Maros Sefcovic told reporters on Wednesday after talks with UK Brexit Minister David Frost ended without a breakthrough.

"Patience is wearing very, very thin."

At issue is Prime Minster Boris Johnson's effort to backtrack from a legally binding agreement the UK spent years negotiating to secure its orderly withdrawal from the bloc.

In a bid to avoid customs checks on the island of Ireland, he agreed to put a trade border in the Irish Sea.

The UK has since said it underestimated the disruption the move would wreak on businesses in Northern Ireland, and has sought to delay implementing parts of the accord - something the EU has strongly resisted.

If the UK makes more unilateral changes to the accord, Mr Sefcovic said the bloc could retaliate by suspending cooperation in certain sectors and that quotas and tariffs "could come into play." "We hope to avoid it," he said. "It's not too late. Let's correct the path, let's focus on what unites us."

While Brussels officials have previously warned in private that the bloc could take retaliatory measures under the terms of Britain's Brexit deal, Mr Sefcovic is the first to make the threat in public and detail the potential reprisals. His comments signal how far relations between the EU and UK have deteriorated six months after the two sides struck a zero-tariff, zero-quota trade accord.

"For now, the short-term trajectory is an escalatory one," Mujtaba Rahman, Eurasia's managing director for Europe, said in a research note on Wednesday, rating the chances of a trade war as early as July at 30 per cent.

Mr Johnson will see "standing up to Brussels" as a popular move among voters, making it unlikely he will back down, he wrote.

A senior UK official close to the negotiations said Britain doesn't want a trade war, and that the EU should "think hard" before retaliating. The bloc's "excessively purist" approach is "risky" given Northern Ireland's history of violence, the official added.

The pound gave up its earlier gains and fell 0.2 per cent to US$1.4120.

"Sterling is under pressure as the tensions between the EU and the UK were put on a full display," said Valentin Marinov, head of G-10 currency research at Credit Agricole. "The post-Brexit uncertainty is still very much there and could continue to cloud the outlook for the U.K. services sector."

Tensions are set to grow in coming days. A grace period allowing traders in the rest of the UK to continue selling sausages and chilled meat in Northern Ireland is set to expire on June 30. After that, some products will be banned because the EU rules have no provision for certifying that they are safe to eat.

The senior British official stated that a unilateral extension is one option being considered by the UK - a step Mr Sefcovic warned could provoke the EU to respond "swiftly, firmly and resolutely." Asked if the EU was prepared to be flexible on the grace period, Mr Sefcovic said it would be "very difficult" because the UK hasn't set up the border controls it promised to.

BLOOMBERG