On July 12, 2018 UK Prime Minister Theresa May has published the long awaited Brexit White Paper. It is a comprehensive and ambitious plan which aims on the one hand to preserve a frictionless trade between the UK and EU and to resolve the Irish border issue, but also to achieve a UK independent trade policy, where the UK is able to conclude its own free trade agreements with third countries such as the USA.
A key corner stone of the UK's proposal is the establishment by the UK and the EU of a free trade area for goods and maintain a common rulebook for goods, including agri-food. It further provides for a phased introduction of a new so-called Facilitated Customs Arrangement (FCA) that would remove the need for customs checks and controls between the UK and the EU as if they were a combined customs territory.
It is the FCA that will create very serious problems and may undermine the wish of the UK to conclude its own free trade agreements with third countries such as the USA.
The FCA tries to mirror the EU's customs approach at its external border. The idea is that goods entering the EU via the UK have complied with EU customs processes and the applicable EU tariffs have been paid. This would be done by the UK customs authorities (which would be the same as currently with UK being an EU member). The thought is, that this would remove the need for customs processes between the UK and the EU, including customs declarations, routine requirements for rules of origin, and entry and exit summary declarations. This means that where a good reaches the UK border, and the destination is clear, the UK tariff will apply if it is destined for the UK and the EU tariff will apply if it is destined for the EU. In case the destination is not clear at the point of import, the higher of the UK or EU tariff will apply. Where the good's destination is later identified to be a lower tariff jurisdiction, it would be eligible for a repayment from the UK Government equal to the difference between the two tariffs.
This proposal triggers various questions.
To ensure the trade in goods between the UK and the EU remains frictionless at the border, the UK proposes arrangements that facilitate cumulation with current and future FTA partners with a view to preserving existing global supply chains. This would allow EU content to count as local UK content in UK exports to its FTA partners for rules of origin purposes, and UK content to count as EU local content in EU exports to its FTA partners. Diagonal cumulation would allow UK, EU and FTA partner content to be considered interchangeable in trilateral trade. And this is where the problem is. Practically no FTA foresees in diagonal cumulation. So this needs to be negotiated and will most likely absorb a lot of time. It is therefore unlikely that if diagonal cumulation will apply for some or all existing FTA's that this will be realized before the end of the transition phase. As a consequence many products that currently meet the rules of origin will after Brexit no longer qualify. The negative consequences will be bigger for UK manufacturers as for EU manufacturers, because for EU manufacturers all EU components qualify and for UK manufacturers only UK components qualify.
The result will be that without diagonal cumulation the benefit of an independent FTA realized by the UK will primarily be for wholly obtained products, such as meat, vegetables etc. and not so much for manufactured or processed goods.
Having said this, the conclusion from all of this is, that the UK can only agree FTA's with third countries which have an FTA with the EU as well. One important Brexit deliverable for the UK is for the UK to conclude its own FTA's. That objective cannot be reached since the UK's bottom line choice will effectively be limited to those countries which have an FTA with the EU already. That is the same result as under the alternative of the UK entering into a customs union agreement with the EU. And this is an option that the UK has always refused. If that is the bottom line conclusion, why not try to negotiate a single market of goods with the EU – also known as the Jersey model? This seems a better solution for the UK, the EU and businesses. The EU will probably consider this cherry picking and one can expect that only an appropriate annual financial contribution into the EU budget can make this acceptable to the EU.
© 2020 KPMG N.V., registered with the trade register in the Netherlands under number 34153857, is a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ('KPMG International'), a Swiss entity. All rights reserved. KPMG International Cooperative ('KPMG International') is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.