The post-Brexit transition period ended on 31 December 2020 and the EU-UK Trade and Cooperation Agreement (TCA) has now come into effect. As the new reality dawns against the past three years of deal or no-deal planning, UK businesses now have an even larger challenge to meet: making a success of Brexit by achieving and maintaining successful trade flows with the EU.
In this article, we consider some of the key barriers for two-way trade in goods between the UK and EU, whilst unravelling some of the key implications arising from the TCA.
Alongside the lack of tariffs and customs duties, membership of the EU delivered the key trade benefit of removing the “red tape” associated with non-tariff barriers to intra-EU trade such as import or export declarations, documentary requirements, product standards and inspection requirements.
Since the UK has left the EU’s single market and customs union, the “red tape” has exponentially increased with the introduction of a hard border between the UK and EU. Any significant change often results in complexity – and the situation with the UK-EU border is no different, as evidenced by the recent scenes of border delays and customs clearance issues associated with incorrect or missing paperwork on both sides of the Channel. Whilst the EU is currently applying full border controls on goods shipped from the UK (remember the confiscated ham sandwich), UK border controls on certain EU goods will be phased in from 1 April 2021 increasing to fully operational controls from 1 July 2021, which could mean more disruption as traders adjust to the full impact.
As a result, whilst businesses adjust to the new reality of post-Brexit life, the risk of border delays for the movement of goods between the UK-EU and GB-NI will remain high, with importers having to understand the process both for customs and for their hauliers (where, for example, hauliers are reluctant to accept groupage consignments in an effort to reduce paperwork and regulatory impacts). If the past month of trade has demonstrated anything, it is clear that that the hidden cost in delays and border congestion – the “friction” – of non-tariff barriers can be equally, if not more costly than the anticipated tariff impacts that might have been incurred under a no-deal Brexit.
Arguably, 1 July 2021 could hit UK importers harder than 1 January 2021.
With the UK’s departure from the EU customs union, tariffs or customs duties now apply to movements of goods across the “new” border. The duty payable will depend on the commodity code declared at import and the corresponding tariff rates contained within the EU and UK’s respective tariff schedules, unless preference or alternative customs reliefs are claimed at the time of import.
There are wide reaching differences between the EU and UK’s tariff schedules for certain commodities, with approximately 60% of goods attracting free rates of duty under the UK Global Tariff as opposed to approximately 47% under the EU Common External Tariff.
Where goods attract positive duty rates, the introduction of tariffs between the UK and EU represents a significant cost and competition issue for UK exporters accustomed to duty-free sales of goods to EU customers (and vice versa).
In terms of goods, the greatest benefit arising from the TCA is the potential for continued tariff and quota free trade between the EU and UK – but it comes with conditions. Imported goods will only qualify for tariff and quota free access where the respective EU-UK producer or exporter of the goods can prove that the goods “originate” from whichever side exported them – proving origin is all about the qualification and application of product-specific rules of origin.
These rules ensure that preference under the TCA can only be claimed on goods that originate and are sufficiently processed in either party to meet the relevant product-specific rules of origin. Where the rules of origin cannot be satisfied (and in certain areas there are “back stop” or tolerance rules that can be used), the full rate of EU or UK duty will apply at the time of importation. However, rules of origin are notoriously difficult – a difficulty which is multiplied by the highly integrated nature of EU-UK supply chains, distribution networks and confusion arising from the transitional arrangements between the EU and UK.
One key impact from the TCA, which is affecting integrated EU-UK supply chains – in unpredictable ways – is its inability to “retain” origin on re-exports. Practically, if a UK company imports a product from the EU under EU origin (paying zero duty under the TCA) and stores, breaks bulk and subsequently delivers some of the product back to the EU, the UK company cannot declare UK origin (as they have not done enough to the goods) and there is no ability under the TCA to claim EU origin for redelivered goods to the EU. The resulting impact means that businesses – that once traded freely between UK and EU markets – could see their goods exposed to new and additional duty costs each time they cross the Channel, unless alternative customs reliefs and duty optimisation strategies are implemented.
Where the publicity machine for the TCA states “duty and quota free” trade, the reality for some commodities may be entirely different – as certain goods under the EU-UK TCA may be subject to interim rules of origin and special rules of origin, that allow for relaxations on certain requirements. For example, aluminium imports into the UK from the EU that would otherwise be required to meet reasonably stringent rules of origin under the TCA, may still meet the rule of origin requirements where only one part of the rule can be satisfied. The ‘catch’ with this special rule however is that it will only apply for a limited volume in the form of quotas (e.g. 95,000 tonnes per year) and where exhausted, the standard rule of origin will apply.
Cumulation allows for goods that originate in one territory (and processes that have been undertaken there) to count towards the “positive” side of the origin assessment in the other territory. Only bilateral cumulation is permitted under the TCA between the UK and EU – as opposed to diagonal cumulation, whereby similar raw materials and components from other countries with similar rules of origin and agreements are allowed to count towards satisfying origin agreements.
The cumulation impact is not only limited to the TCA – the UK’s departure from the EU has significantly impacted upon the use of existing EU preference agreements negotiated between the EU and other countries. Take Japan for example – machinery exported from Japan incorporating a mix of UK and EU components would have automatically been recognised as Japanese originating pre-Brexit when imported into the EU, however this will no longer be the case from 1 January 2021 as the UK components cease to count on the positive side of the origin assessment.
With the shrinkage of the EU territory, third countries that are a party to free trade agreements or other preferential arrangements with the EU have also suffered a loss of market access where origin determinations are dependent on UK manufacturing processes or UK sourced materials. Products that may have once qualified as originating from a third country with the EU pre-Brexit, may find that the incorporation of UK processes causes the goods to lose their originating status post-Brexit.
Whilst in terms of new or continuity agreements with other countries, the UK has provided for diagonal cumulation – allowing EU materials to count towards origin – this appears to be a unilateral approach as the EU has not amended any of its agreements to similarly favour the UK.
We are a few weeks into the new reality of life outside the EU. New rules and new processes can appear daunting, even to the most experienced navigators of international trade. The words, details and interpretation of non-tariff and tariff barriers are crucial for plotting the right course through the narrows and sand bars that are ever present below the surface. Traders may need to accept that in some areas expectations and predetermined strategies require a reset, whereas other areas should be seized as opportunities to push the boundaries against the art of the possible.
Selecting the right partner – a partner experienced in not just academic interpretation but hands-on practical application and implementation – will be key to a successful journey.
Frances Sanders is a Senior Manager in KPMG UK’s Trade & Customs practice – a leading multidisciplinary customs team.