Any withdrawal agreement must look at these issues and find practical solutions to make sure that goods enter the EU as seamlessly as possible.
5th December 2016
Brexit negotiations must aim to prevent the complexities of trade slowing the free flow of goods after Britain leaves the EU. Any withdrawal agreement between the EU and the UK, must look at these complexities and find practical solutions to make sure that trade enters the EU as seamlessly as possible.
The Bruges Group has already explored the solutions to ease the trade in services, click here to read the research. In this piece the practicalities of trade in goods is explored.
The biggest challenges to resolve are the practical logistics. Few, if any, so far, have looked at these issues from the perspective of eliminating, or at least mitigating, the real hurdles that would appear after Brexit.
Inside the EU, exporting to Berlin is effectively not any different from sending goods to Birmingham, just that the transportation will, due to the distance involved set a slightly greater logistical challenge. There is no requirement for burdensome bureaucracy when moving goods between EU member states. When goods from Britain are transported to the EU, just like those destined to our shores from the European Union, they come and go via our ports, be they channel ports like Dover or airports such as Heathrow. Presently this is with no let or hindrance. No administration is involved. In fact, national borders in terms of trade can be said to no longer exist within the European Union. At least some red-tape, has been eliminated. Yet, without a practical agreement businesses that are involved in either exporting to the EU, or importing from it, will face costly delays.
The enormous mutual dependency, between British and continental firms, rightly cited by many as a reason why an agreement will eventually be reached on issues such as trade tariffs, have, however, not considered that the high volume of trade can be a source of problems. This centres around the fact that all imports to the EU must go through customs posts.
The UK’s trade in goods with third countries outside the EU is often relatively unfettered because it is in bite-sized portions. The trade from Britain through the many customs posts of the numerous states around the globe to which Britain exports is in manageable quantities. However, the sheer scale of goods going through for instance French ports is staggering. Quite simply they do not have adequate facilities in place to deal with the enormity of post-Brexit trade. Ports in the UK and Europe are not up to managing the high volume of freight, they lack the necessary infrastructure. The UK does not at present have the capacity to dramatically improve the UK’s customs facilities to deal with trade coming from the remaining EU states. Planning for what would be a series of major construction projects has not yet begun, and nor have the financial resources been allocated. Serious question marks exist over France’s ability, let alone willingness, to upgrade their facilities to deal with trade coming from the UK. Furthermore, a special UK-EU agreement on customs clearance must be in place by Spring 2019. Without such an agreement there will be trade gridlock.
Tariffs in themselves are not the issue, time is. The cost of collecting the customs duties, a set percentage of their sale price agreed with the WTO and charged to the importer, makes any financial benefit for the EU almost irrelevant. Any ‘benefit’ comes from increasing rivals' costs to protect EU producers. However, with increasingly interdependent markets, with global value chains where the genesis of a manufacture rests in many nations which have supplied the numerous parts, such a strategy makes little economic sense.
The real advantage of eliminating tariffs for the exporter, and the business importing the product, is not the removal of this tax on trade. The main benefit is that without the need to produce the paperwork and payments to meet these customs duties, the item will be subject to less delays at customs posts.
Before solutions can be found to ease the process of trade the hoops and obstacles need to be explored. All non-EU companies that send good to the EU must either pay tariffs, complete paper work, and clear customs; sending the goods to be approved via what is known as a designated port of entry. Even if a free trade agreement is in place customs officers checking products and making sure the necessary bureaucracy is complete is a common place occurrence.
The trade process
Designated port of entry
When exporting goods to another territory the host nation can stipulate a designated port of entry for the product. At present Britain and the European Union are one trade zone the UK has free access to any and all established places where both people and produce can be admitted. The EU has the hypothetical ability in the short term to prescribe a port of entry, and terms, that are inconvenient for British exporters. However, this will be a serious breach of international trade law. Articles XI:1, XIII:1, V:2, V:6 and I:1 of the 1994 General Agreement on Tariffs and Trade now administered by the World Trade Organisation. Under these rules one country cannot be treated less favourably than any other state in the export and transit of goods. What is more, as both businesses and consumers on the continent depend upon British imports there is no reason to believe that such problems will arise. Regardless of how the UK leaves the EU it should be business as usual via the existing ports of entry. Indeed, Brexit negotiations should seek to expand them to include more destinations accessible via HS1, the Channel Tunnel.
So far so good. However, there are other serious issues.
Exporting to the EU from outside is not bureaucracy free
Exporting into the EU requires a convoluted process to be completed. Goods must have assigned to them an identification number, inputted at the port of destination. The larger importers find the process easier. They can make their declarations at the end of the month. Those who export less to the EU will, however, be faced with bureaucratic hurdles.
Clearance for use, allowing the product to go into circulation to be sold in the UK, or an EU country, needs to be obtained. The process for assessing this, even in the EU, will differ from country to country. Mostly, however, this is often just a theoretical problem, rarely do customs officials demand compliance with national standards and rarely do they conduct a strict examination of documentation declaring that an item conforms to national or EU standards. It is legally possible to detain goods on the grounds of differing standards, but in practice this only usually applies to items that are deemed to be dangerous, illegal, or subject to anti-dumping duty (a tax on products suspected of being sold substantially below their normal value).
Still, the process of shipping goods to and from the EU is not without other bureaucratic impediments. The freedom of the items is also strictly regulated. From outside the EU, any goods entering the EU, if not cleared at port, which can be a laborious process, must be stored in a bonded warehouse, also known as an Enhanced Remote Transit Shed (ERTS) warehouse. Until they are declared to customs for an approved treatment or use.
Transhipped cargo not in free circulation will also require what is known as a CMR document. The CMR is a consignment note with a standard set of transport and liability conditions, which replaces individual businesses' terms and conditions. It confirms that the carrier (i.e. the road haulage company) has received the goods and that a contract of carriage exists between the trader and the carrier. It derives from the Convention on the Contract for the International Carriage of Goods by Road.
The process of clearing customs is increasingly becoming electronic. Systems used by exporters that integrate with the British customs system are the CNS and Destin8 computer systems.
The VAT hurdle
Value Added Tax (VAT) is often charged on imported goods, that is in addition to any customs duties. The details must be entered onto the Customs Handling of Import and Export Freight (CHIEF) system. This system records the declaration to the customs authorities details of the goods whether they are transported by land, air and sea entering or leaving the UK/EU. It allows importers, exporters and freight forwarders to complete customs information electronically. This is not without charge.
If there is no prior agreement for each consignment, going to a specific destination, to clear customs the importer must produce customs records for each, pay VAT and the customs duty, if any. This will be calculated per the value of the item at its final point of sale. The VAT rate will differ from country to country, and even item to item. In some cases, a product will be exempt, VAT will not apply. In other cases, an item will be zero-rated, requiring the documentation to be completed but with no final payment. Even where tariffs are eliminated when importing from outside of the EU there is still the requirement to pay Value Added Tax. If the exporter is registered for VAT then this can be claimed back but only if they registered. There is also a requirement for an input VAT certificate to be completed.
Remaining in the EU’s customs union, bit being in the EU, does not eliminate the requirement for form filling to be completed. The requirement to clear customs and complete documentation, known as an ATA Carnet, to validate the origin of goods and confirm that they are free from tariffs even applies to Turkey. This country is considered part of the EU’s customs union and therefore has tariff free access for industrial products; but it is not bureaucracy free access.[i]
The EEA is not the answer on its own
The EU’s internal market, open to the EFTA states of Iceland, Liechtenstein and Norway, have sought to resolve some of the problems through the European Economic Area agreement. Beyond granting the theoretical access to the single market in services and the right to bid for public procurement, the EEA seeks to remove all technical barriers to trade. There is regulatory conformity and most importantly the European Economic Area has the mutual recognition of standards. Regulation EC 764/2008 of 9th July 2008 demands that all members allow goods that are legally sold in one country to be sold in another EEA state.
One of the main benefits of being part of the single market comes through the principle of mutual recognition. This allows businesses to export to the entire European Economic Area, the internal market, without having to seek standards approval. As the Single Market is still not complete some member states still have differing standards. The principle of mutual recognition is that if a product has been approved as safe and saleable in one member state then it can be sold in all. This bypasses potentially costly and time consuming safety and regulatory checks in each country where the good is sold.
The EEA agreement also abolishes customs duties between the states participating in the single market. However, EFTA/EEA members must still go through a customs clearance process and outlay for VAT. These time-consuming procedures apply even to states such as Norway. Britain renouncing its EU membership but retaining, through membership of the European Free Trade Association, its status as a part of the European Economic Area will not on its own answer the practical and bureaucratic trade hurdles.
Tariff free trade
Whilst every possibility exists of there being an agreement(s) on reducing tariffs between the UK and the does not in itself eliminate all the bureaucratic hurdles.
If a business is sending produce to the EU from a country that has a free trade agreement it must prove that they were mostly manufactured or re-worked in a country that had a free trade agreement with the EU. If the business cannot confirm the origin of the goods, then the tariffs will apply. This can be sidestepped by making some modifications to the products in the exporting state, yet this may be subject to investigation. This is a rare occurrence, yet the need for paperwork to prove it is not rare.
Rules of origin
If the goods are of UK origin and if Britain has a free trade agreement, namely no tariffs to pay, importing into an EU country may require a Certificate of Origin to show its provenance. If its tariff free origin cannot be proved, a customs charge will be applied. Certificates of Origin can be obtained from a relevant countries chamber of commerce, they are however, expensive to obtain.
Anything that is already inside the customs union that has originated from a non-member will have been charged at its original port of entry and can therefore circulate freely within the EU. At present, as the UK is an EU customs union member, British exporters to the other 27 do not have to prove that they comply with the EU’s rules of origin. As supply chains are becoming increasingly globalised the need to demonstrate an item’s origins can be a complex burden.
The Trade Policy Research Centre argue that ‘the process of adapting to rules of origin based duty-free trade under a new UK-EU free trade agreement would be tedious, costly and disruptive to trade.’[ii] However, some developments are making this concern less relevant. The reduction in tariffs, where many goods are zero rated, reduces the need to complete the administrative duties. The EU has extended the area in which origin can be accumulated to not only cover more states but also to allow for an item to be obtained and manufactured in a number of countries without the final product losing the benefit of being tariff free when it enters the EU. This system has been in existence in the EU and European Free Trade Association since 1997 and for Turkey since 1999. Over time the EU does grant greater allowance to other countries to claim exception from rules of origin. And from 2017 under World Customs Union rules the procedure declaring a products origin will be simplified.
These are hurdles but they can be overcome, through effective negotiation. Furthermore, the application of these rules does present opportunities for Britain. If a tariff free trade agreement is in place UK businesses can corner the profitable market for business assembling goods. The now complex supply chains that dominate global production can create jobs in the UK. Gate way Britain.
Britain obtaining tariff free access to the remainder of the EU, along with measures designed to speed the passage of goods through customs, and developing trade links with the third countries around the world, will benefit Britain. Having a more liberal regulatory regime and tariff free access to the EU’s single market will make the UK a base by which third country producers, who have entered preferential trade deals with Britain, can access the EU without being subject to tariffs.
Within Britain value can be added to goods and re-exported from the UK to the EU. This will allow exporters to sidestep the EU’s rules of origin regime. Britain will be able to become a regional value added production hub. The British economy will therefore not only benefit from the additional bilateral trade with other territories but will also capture a number of benefits:-
1. Increased trade
2. Increased freight and haulage through the UK as a pass through onto final destination
3. Increased assembly and manufacturing within the UK (to meet rules of origin that require a declaration to be made that at least partial reworking has occurred to the produce)
4. Increased economic activity and employment and the resulting fiscal benefits
5. Increased use of a made in Britain mark makes the UK’s regulatory regime more internationally relevant
Even in the EU, technical requirements on import processes as well as standards will differ from each country. However, the fear that EU legislation prejudicial to the UK may queer the pitch against British sales to the continent is probably unfounded. As Britain conforms to EU standards at present there is little, if any, divergence. Further, as an increasing proportion of technical standards originate from global bodies, agencies of the United Nations, or relate to international agreements on technical barriers to trade, there will not be a sudden deviation from permissive regulations. These international agreements are designed to encourage cross border trade. It is worth reiterating the fact that rarely do customs officials demand compliance with national standards and rarely do they conduct a strict examination of documentation declaring that an item conforms to national or EU standards.
David Davis’ Department for Exiting the European Union must, however, focus on addressing the bureaucratic trade hurdles that can cause delays at customs posts. The alternative will be even worse congestion on the M20 after Brexit than that which exists at present.
[ii] Ronald Stewart-Brown and Felix Bungay, Rules of Origin in EU Free Trade Agreements, Trade Policy Research Centre, 2012