The government has agreed to drop controversial legislation on Brexit that would have broken international law.

It would have allowed ministers to renege on Boris Johnson’s withdrawal agreement (WA), which took the UK out of the EU this year, in order to protect Northern Ireland’s status within the UK.

But Michael Gove agreed to drop the law-breaking clauses from the Internal Market Bill and the Taxation Bill following talks with his EU counterpart on the joint committee for implementing the WA.

The decision to drop the law-breaking clauses ends an explosive row with the EU which threatened to torpedo Brexit negotiations on a wider trade deal, which are on a knife edge as the end of the transition approaches on December 31.

The prime minister is set to travel to Brussels this week for talks with European Commision president Ursula von der Leyen in a make-or-break attempt to thrash out the deal to stop the UK crashing out of the EU without a trade deal on January 1, predicted as the most economically damaging outcome.

Gove’s agreement with his opposite number on the joint committee on implementing the WA, Maros Sefcovic, may raise expectations that both sides are clearing the path for Johnson and Von der Leyen to strike a wider deal on the future UK/EU relationship.

At a Brussels press conference, Sefcovic said the deal on Northern Ireland removed “one big obstacle” to a wider agreement.

“I hope that this would create positive momentum for the discussions on the free trade agreement,” he said.

“As you know we are still very far apart.”

He added: “We removed, I would say, one big obstacle from the way.”

The row over the law-breaking clauses centred on the special status created in the WA for Northern Ireland, which will follow EU rules in some areas while the rest of the UK will not, in order to maintain an invisible border with the Republic of Ireland.

This arrangement created a need for exit declarations on goods travelling between Northern Ireland and the UK mainland, checks on goods flowing the other way if they were deemed “at risk” of entering the EU, and would mean Brussels state aid laws could apply to any British business if government subsidies was deemed to distort trade in Northern Ireland.

The prime minister had attempted to use the law-breaking clauses to give ministers the powers to override the WA in all these areas.

But Gove and Sefcovic announced in a joint statement that agreement had now been reached on key sticking points and that the law-breaking clauses would be dropped.

They said “agreement in principle” had been reached in areas including export declarations for Northern Ireland, checks on animal and plant products, the supply of chilled meats to the province and on the application of state aid.

They also reached an agreement in principle on “practical arrangements” for the EU’s presence in Northern Ireland when the UK authorities implement checks and controls and determine criteria for goods to be considered “not at risk” of entering the European single market when moving from the UK mainland to the province.

There was also an agreement to exempt agricultural and fish subsidies from state aid rules and finalised the list of chairs for the arbitration panel that will resolve disputes over how the WA is implemented after January 1.

“In view of these mutually agreed solutions, the UK will withdraw clauses 44, 45 and 47 of the UK Internal Market Bill, and not introduce any similar provisions in the Taxation Bill,” the statement said.

Draft texts will now be analysed in the UK and EU and the joint committee will meet to formally adopt the agreements.

Michel Barnier, the EU’s chief negotiator on a wider trade deal, thanked Gove and Sefcovic for reaching a deal.

It came as an industry chief warned that the failure to resolve Brexit with just weeks left until the end of the transition period is contributing to a “complete assault” on businesses’ headspace.

Food and Drink Federation (FDF) chief executive Ian Wright said the combination of the economic shock of coronavirus, the Christmas rush and the fact firms have “no clue” what their trading terms are from January 1 are taking an “enormous” financial and mental toll on firms.

It is causing a “complete assault on people’s headspace”, Wright added.

Wright told the Commons business committee: “With just 14 days to go, we have no clue what’s going to happen in terms of whether we do or don’t face tariffs and that isn’t just a big imposition, it’s a binary choice as to whether you do business in most cases.

“So my members will not know whether they are exporting their products after January 1 or whether they will be able to afford to import them and charge the price that the tariffs will dictate.

“And in Northern Ireland it’s even worse.

“I have to say, the Northern Ireland protocol is a complete shambles and the idea that you can prepare for something as big as the changes that’s going to happen – that is to say everybody doing business in Northern Ireland is in effect exporting to the EU, many of them for the first time – is ridiculous.

“So it’s a massive toll, financially it’s a big imposition but I think a bigger toll is the level of confusion and chaos that we potentially face.”