On 17 January 2017, the UK government finally announced its Brexit intentions. The government confirmed a so-called ‘hard Brexit’, making it clear that the UK will not remain a full member of the EU customs union and will instead seek a free trade agreement with the EU, enabling it to negotiate its own trade deals with the rest of the world. It is unlikely that the EU will agree to such a customs agreement. If a new customs deal is not reached, stiff World Trade Organization (WTO) tariffs will apply to trade with the EU. Uncertainty remains for many UK businesses and there can be little doubt that a hard Brexit will provide challenges to international trade. There will also be opportunities for businesses in the form of new markets to which to export their goods and services; and potential amendments to current customs legislation to remove unnecessary burdens.
Michelle Sloane (RPC) considers key questions on international trade, following the government’s announcement of a ‘hard Brexit’.
After many months of uncertainty, the government has finally announced its Brexit intentions and objectives. The UK Prime Minister Theresa May confirmed during a speech on 17 January 2017 that the UK will be heading for a so-called ‘hard Brexit’. The term ‘hard Brexit’ means that the UK will leave both the European Union (EU) and the European Economic Area (EAA), and as a result will then be outside the single market.
May confirmed that the UK will not remain a full member of the EU Customs Union after Brexit, preferring the UK to negotiate its own trade deals directly with the rest of the world. She advised that she will seek a ‘bold and ambitious free-trade agreement’ with the EU and wants the UK to retain a form of ‘associate membership’ of the Customs Union, limiting the increase in red tape for businesses which export to the EU. May would also like the UK to continue tariff-free trade with Europe and for cross border trade to be as frictionless as possible.
May warned that the UK could ‘change the basis of Britain’s economic model’, if denied access to the single market in a post-Brexit world. She warned too that, for the EU, this would mean new barriers to trade with one of the biggest economies in the world.
The EU Customs Union allows goods to circulate within the EU’s 28 member states without checks, duties and tariffs. For example, a car manufactured in England can be shipped directly to Italy as easily as it can be sent elsewhere in the UK. The EU member states also apply the same import duties on goods arriving from the rest of the world, pursuant to the Common Customs Tariff (CTT). Once any applicable import duty is paid on goods passing customs controls as they enter one member state, the goods can then move freely within the EU. One of the major advantages of the Customs Union is that it cuts the costs of doing business and speeds up trade, avoiding the bureaucracy of customs declarations and checks at the border of each country.
May does not want the post-Brexit UK to retain full membership of the Customs Union, as she considers this would prevent the UK from negotiating its own trade deals with the rest of the world, as it would have to apply the CTT.
May has suggested a customs arrangement with the EU involving reciprocal tariff-free trade with no customs duties flowing between the EU and UK, but without the CTT. This is a significant political ask and it is difficult to envisage the EU agreeing to what the UK is seeking, which would allow the UK to enter into agreements with countries outside the EU in relation to external tariffs and quotas, while at the same time retaining tariff free trade within the EU. The EU has already warned the UK against cherry picking, while the EU’s chief Brexit negotiator Michel Barnier has stuck to the EU’s negotiating line that the ‘single market and its four freedoms are indivisible’. This highlights the difficulty that the UK will encounter in seeking to secure tariff-free trade. However, a post-Brexit outcome which reduces trade and increases the cost of trade would be damaging for both the EU and the UK. In negotiations with the EU, the UK will have to demonstrate that agreement on this important issue will preserve the best of the existing relationship for the benefit of all parties.
In any event, trade deals tend to be complex and usually take many years to negotiate. CETA, the EU/Canada deal, took seven years to negotiate and was over 20 years in the making. Deals with larger economies are even more difficult. The US/EU Transatlantic Trade and Investment Partnership (TTIP) is proving so complicated and controversial that very limited progress has been made in over three years of negotiations.
It is likely that an EU/UK free trade agreement would take at least seven years to negotiate and it is difficult to see such an agreement being reached in the two year period that will follow once article 50 has been triggered. Therefore, it is likely that some form of transitional trade arrangement will be struck while negotiations continue. Any trade agreement will also have to be ratified by all member states, adding further complexities and delays to any trade agreement.
If the UK cannot reach a free trade agreement with the EU, the WTO rules will apply. The WTO rules incorporate the ‘most favoured nation’ (MFN) principle, which means that countries cannot discriminate between their trading partners. Owing to the MFN principle, the UK will be obliged to impose the same duties on imports from the EU as it applies to those from all other WTO members.
In the event of a hard Brexit without a reciprocal free trade agreement, UK exports to the EU would become subject, as they crossed from the UK to the EU, to the rates of duty set out in the CTT. Further, goods entering the UK from the EU will also be subject to customs tariffs. In addition, there will also be higher non-tariff barriers. As the EU is the UK’s largest trade partner (around half of the UK’s current trade is with the EU), a hard Brexit will double the amount of export declarations currently completed, which means significant additional costs will be incurred by businesses completing such declarations. Businesses will have to update their IT systems and procedures to cope with these changes.
The businesses most affected will be those which trade heavily with the EU, such as the automotive, agriculture, food and drinks, and energy industries. Even seemingly small tariff changes can have a significant impact on businesses.
The automotive industry will be one of the biggest manufacturers affected. Last year, Renault-Nissan (the largest motor vehicle manufacturer in the UK, employing over 7000 people) advised it will make no further investments in its UK Sunderland facility until it received assurances from the UK government that it would be compensated if it had to pay tariffs on motor vehicle exports to the EU. (Exports to the EU account for a substantial majority of the plant’s production.) In response, the government provided certain assurances to Renault-Nissan. The exact nature of these assurances is unknown. It may be that Brexit will result in a custom tailored sector-by-sector approach by the UK government; however, it is hard to see how such an approach would work in practice.
Customs law is governed by EU law. Post-Brexit, the UK will have to introduce its own customs legislation to encompass customs procedures, customs declarations, tariff codes, customs duty levels and simplifications. The EU is currently in the process of implementing the new Union Customs Code (UCC), which has caused significant change for businesses and increased compliance costs. Given the UK has been part of forming this new customs legislation, we can expect the UK to adopt most of the UCC in a simplified version. The drafting of new UK customs legislation provides businesses with an opportunity to lobby the government regarding areas of the UCC and customs policies which they consider to place an unnecessary burden on UK trade.
One of the major areas of contention with the UCC, which HMRC unsuccessfully lobbied the EU against, is the provision of customs financial guarantees for potential duty on goods in special customs procedures and temporary storage. The UCC’s predecessor, the Community Customs Code (CCC), allowed EU customs authorities to require a customs guarantee for special procedures where it was deemed necessary. HMRC rarely required such a guarantee. The UCC removed this discretion, which has caused major frustration and financial cash flow consequences for many UK businesses. Given that HMRC did not support guarantees, it is hoped that post-Brexit customs legislation will not include guarantees.
Another significant area of contention with the UCC is the removal of the first sale provisions which were present in the CCC. These allowed the customs value of imported goods to be based on a previous sale for export, rather than the last sale before import. The UCC introduced a last sale rule, where the customs value is assessed using the price paid in the last sale prior to the physical introduction of goods into a country. This has increased customs duties for current first sale rule users. Again, HMRC opposed the withdrawal of this rule, so it is hoped it will be reintroduced.
After Brexit, the UK will become an independent player, free to seek its own trade deals with the rest of the world and potentially opening up new markets for exports and providing new opportunities for UK businesses. The UK could use this freedom to negotiate new preferential trade deals with countries such as China, India and the United States. Since the Brexit referendum vote, sterling has depreciated against many currencies, which has contributed to the price competiveness of UK exports.
Businesses involved in international trade will continue to face considerable uncertainty surrounding the UK’s trading relationships post-Brexit, not just with the EU, but also with the rest of the world. Until Brexit takes place, the current trading position and customs legislation remains in place. While it is difficult to predict the future with any degree of certainty, businesses may wish to:
On 17 January 2017, the UK government finally announced its Brexit intentions. The government confirmed a so-called ‘hard Brexit’, making it clear that the UK will not remain a full member of the EU customs union and will instead seek a free trade agreement with the EU, enabling it to negotiate its own trade deals with the rest of the world. It is unlikely that the EU will agree to such a customs agreement. If a new customs deal is not reached, stiff World Trade Organization (WTO) tariffs will apply to trade with the EU. Uncertainty remains for many UK businesses and there can be little doubt that a hard Brexit will provide challenges to international trade. There will also be opportunities for businesses in the form of new markets to which to export their goods and services; and potential amendments to current customs legislation to remove unnecessary burdens.
Michelle Sloane (RPC) considers key questions on international trade, following the government’s announcement of a ‘hard Brexit’.
After many months of uncertainty, the government has finally announced its Brexit intentions and objectives. The UK Prime Minister Theresa May confirmed during a speech on 17 January 2017 that the UK will be heading for a so-called ‘hard Brexit’. The term ‘hard Brexit’ means that the UK will leave both the European Union (EU) and the European Economic Area (EAA), and as a result will then be outside the single market.
May confirmed that the UK will not remain a full member of the EU Customs Union after Brexit, preferring the UK to negotiate its own trade deals directly with the rest of the world. She advised that she will seek a ‘bold and ambitious free-trade agreement’ with the EU and wants the UK to retain a form of ‘associate membership’ of the Customs Union, limiting the increase in red tape for businesses which export to the EU. May would also like the UK to continue tariff-free trade with Europe and for cross border trade to be as frictionless as possible.
May warned that the UK could ‘change the basis of Britain’s economic model’, if denied access to the single market in a post-Brexit world. She warned too that, for the EU, this would mean new barriers to trade with one of the biggest economies in the world.
The EU Customs Union allows goods to circulate within the EU’s 28 member states without checks, duties and tariffs. For example, a car manufactured in England can be shipped directly to Italy as easily as it can be sent elsewhere in the UK. The EU member states also apply the same import duties on goods arriving from the rest of the world, pursuant to the Common Customs Tariff (CTT). Once any applicable import duty is paid on goods passing customs controls as they enter one member state, the goods can then move freely within the EU. One of the major advantages of the Customs Union is that it cuts the costs of doing business and speeds up trade, avoiding the bureaucracy of customs declarations and checks at the border of each country.
May does not want the post-Brexit UK to retain full membership of the Customs Union, as she considers this would prevent the UK from negotiating its own trade deals with the rest of the world, as it would have to apply the CTT.
May has suggested a customs arrangement with the EU involving reciprocal tariff-free trade with no customs duties flowing between the EU and UK, but without the CTT. This is a significant political ask and it is difficult to envisage the EU agreeing to what the UK is seeking, which would allow the UK to enter into agreements with countries outside the EU in relation to external tariffs and quotas, while at the same time retaining tariff free trade within the EU. The EU has already warned the UK against cherry picking, while the EU’s chief Brexit negotiator Michel Barnier has stuck to the EU’s negotiating line that the ‘single market and its four freedoms are indivisible’. This highlights the difficulty that the UK will encounter in seeking to secure tariff-free trade. However, a post-Brexit outcome which reduces trade and increases the cost of trade would be damaging for both the EU and the UK. In negotiations with the EU, the UK will have to demonstrate that agreement on this important issue will preserve the best of the existing relationship for the benefit of all parties.
In any event, trade deals tend to be complex and usually take many years to negotiate. CETA, the EU/Canada deal, took seven years to negotiate and was over 20 years in the making. Deals with larger economies are even more difficult. The US/EU Transatlantic Trade and Investment Partnership (TTIP) is proving so complicated and controversial that very limited progress has been made in over three years of negotiations.
It is likely that an EU/UK free trade agreement would take at least seven years to negotiate and it is difficult to see such an agreement being reached in the two year period that will follow once article 50 has been triggered. Therefore, it is likely that some form of transitional trade arrangement will be struck while negotiations continue. Any trade agreement will also have to be ratified by all member states, adding further complexities and delays to any trade agreement.
If the UK cannot reach a free trade agreement with the EU, the WTO rules will apply. The WTO rules incorporate the ‘most favoured nation’ (MFN) principle, which means that countries cannot discriminate between their trading partners. Owing to the MFN principle, the UK will be obliged to impose the same duties on imports from the EU as it applies to those from all other WTO members.
In the event of a hard Brexit without a reciprocal free trade agreement, UK exports to the EU would become subject, as they crossed from the UK to the EU, to the rates of duty set out in the CTT. Further, goods entering the UK from the EU will also be subject to customs tariffs. In addition, there will also be higher non-tariff barriers. As the EU is the UK’s largest trade partner (around half of the UK’s current trade is with the EU), a hard Brexit will double the amount of export declarations currently completed, which means significant additional costs will be incurred by businesses completing such declarations. Businesses will have to update their IT systems and procedures to cope with these changes.
The businesses most affected will be those which trade heavily with the EU, such as the automotive, agriculture, food and drinks, and energy industries. Even seemingly small tariff changes can have a significant impact on businesses.
The automotive industry will be one of the biggest manufacturers affected. Last year, Renault-Nissan (the largest motor vehicle manufacturer in the UK, employing over 7000 people) advised it will make no further investments in its UK Sunderland facility until it received assurances from the UK government that it would be compensated if it had to pay tariffs on motor vehicle exports to the EU. (Exports to the EU account for a substantial majority of the plant’s production.) In response, the government provided certain assurances to Renault-Nissan. The exact nature of these assurances is unknown. It may be that Brexit will result in a custom tailored sector-by-sector approach by the UK government; however, it is hard to see how such an approach would work in practice.
Customs law is governed by EU law. Post-Brexit, the UK will have to introduce its own customs legislation to encompass customs procedures, customs declarations, tariff codes, customs duty levels and simplifications. The EU is currently in the process of implementing the new Union Customs Code (UCC), which has caused significant change for businesses and increased compliance costs. Given the UK has been part of forming this new customs legislation, we can expect the UK to adopt most of the UCC in a simplified version. The drafting of new UK customs legislation provides businesses with an opportunity to lobby the government regarding areas of the UCC and customs policies which they consider to place an unnecessary burden on UK trade.
One of the major areas of contention with the UCC, which HMRC unsuccessfully lobbied the EU against, is the provision of customs financial guarantees for potential duty on goods in special customs procedures and temporary storage. The UCC’s predecessor, the Community Customs Code (CCC), allowed EU customs authorities to require a customs guarantee for special procedures where it was deemed necessary. HMRC rarely required such a guarantee. The UCC removed this discretion, which has caused major frustration and financial cash flow consequences for many UK businesses. Given that HMRC did not support guarantees, it is hoped that post-Brexit customs legislation will not include guarantees.
Another significant area of contention with the UCC is the removal of the first sale provisions which were present in the CCC. These allowed the customs value of imported goods to be based on a previous sale for export, rather than the last sale before import. The UCC introduced a last sale rule, where the customs value is assessed using the price paid in the last sale prior to the physical introduction of goods into a country. This has increased customs duties for current first sale rule users. Again, HMRC opposed the withdrawal of this rule, so it is hoped it will be reintroduced.
After Brexit, the UK will become an independent player, free to seek its own trade deals with the rest of the world and potentially opening up new markets for exports and providing new opportunities for UK businesses. The UK could use this freedom to negotiate new preferential trade deals with countries such as China, India and the United States. Since the Brexit referendum vote, sterling has depreciated against many currencies, which has contributed to the price competiveness of UK exports.
Businesses involved in international trade will continue to face considerable uncertainty surrounding the UK’s trading relationships post-Brexit, not just with the EU, but also with the rest of the world. Until Brexit takes place, the current trading position and customs legislation remains in place. While it is difficult to predict the future with any degree of certainty, businesses may wish to:
