Last reviewed 8 July 2016
Sandra Strong examines some of the possible consequences for traders which may arise following the result of the EU Referendum on 23 June 2016.
The UK, the EU and the wider world have been thrown into a period of uncertainty after the UK EU Referendum resulted in a vote to leave the EU, our partner trading nation for 42 years. At the time of writing, it appears there is no going back from this and the UK will, at some stage in the future, implement Article 50 of the Treaty of Rome and start exit talks. These talks can take up to two years and may be extended if all remaining 27 Member States of the EU agree. International trade and business organisations will need certainty to plan and focus, however, this seems unlikely in the immediate and indeed the near future.
So, I have decided to dust off my crystal ball, well two crystal balls actually — one is slightly rose coloured and the other is rather dark and cloudy, but first let’s consider what a trading relationship with the EU has meant in practice. I have limited this review to six key areas, as follows.
Free circulation of goods.
Harmonised tariff rates along with other tariff measures, such as tariff suspensions and tariff quotas.
Embargoes and sanctions, export controls and common security measures.
Common customs procedures and customs regulations, recently updated under the Union Customs Code (UCC).
Free trade agreements (FTAs).
Use of the Europa website.
The aim is not to spread more uncertainty or fear, but to give readers the opportunity to assess the potential impact on their business and to get involved in approaching government in getting this right for them.
Before moving on, it is important to state that nothing is changing immediately, so we have time to address these issues. It is important to not just follow developments, but to become proactive in helping decide future policy once you have assessed what your business needs in these areas.
Free circulation of goods
No duties or taxes are collected within the EU and there are no customs borders between EU Member States, improving the speed of delivery not just for intra-EU sales but also goods transiting the EU for a destination in a third country. Freight companies also benefit within this area as a company registered in any Member State can pick up cargo in any Member State without restrictions on where it can be delivered.
The EU has clearly said there will be no single market deal unless we agree on immigration and the free movement of people. Therefore, we could negotiate a single market agreement which includes free circulation of goods. This could be similar to the Turkish arrangement that uses ATR forms and would require some way of identifying goods that qualify for free circulation. Turkey is suffering from this agreement though, because as the EU signs more FTAs, companies are sending goods into Turkey via the EU where zero customs duty is paid under the FTA. As a result, Turkey is losing vast amounts of customs duty with this trade deflection, but maybe the EU will allow the UK to have a say in how to control this and be party to FTA negotiations, something currently denied to Turkey. Alternatively, it may be possible to work on an agreement similar to those in Switzerland and Norway based on a FTA. Both options would require the UK to pay into the EU and adopt EU laws without being involved in the negotiations.
Currently, there is no requirement for customs presentation on EU movements though Intrastat and EC sales lists are required. Certain agricultural goods are moved using an electronic system called Trade Control and Expert System (TRACES) and excise goods are moved using Excise Movement Control System (EMCS). A single market deal could also mean that we continue to have access to the Electronic Transit System (ETS — formerly NTCS) as does Switzerland and other non-EU countries to register and move goods through the EU. We may also retain access to EMCS and other EU-wide computer systems. It is unlikely that we would have the same “destination reporting” for VAT, so VAT would be chargeable on goods on arrival, but this would mean the end of reverse charging. Would this include an extension of Intrastat reporting to a non-member country by the EU-27? It is unlikely, but that in itself may be seen as positive; nonetheless, data will have to be collected for any potential UK version of Intrastat to be developed that is less burdensome on businesses.
A final scenario to consider is that the UK does not do a deal with the EU and becomes a third country. This would mean paperwork and import duties, taxes (CAP, for example) and VAT charged on arrival into the EU. In its UCC, the EU has clearly stated that the aim is to move from paper-based systems to electronic systems so if we do become a third country supplier we would have to negotiate a way of accessing the EU systems. The terms “indirect exports” and “indirect imports” will no longer be relevant. Customs duties and VAT will be charged on all UK goods entering the EU at, we hope, the most-favoured-nation (MFN) rate. The EU may also reimpose cabotage limiting the collection and delivery of goods to freight companies established in the EU.
The MFN rate is a special World Trade Organization (WTO) agreement for controlled lower tariffs given by members to other members of the WTO. The UK is a member of the WTO in its own right it should be automatic, should not it? Well, no. All members have to negotiate MFN status with the other WTO countries — 161 in total — it is not an automatic right of membership. “No problem” I hear you say, “we can do this while we work out our exit deal with the EU”. Well, actually we cannot. While we are a member of the EU, even an existing member, we cannot negotiate trade deals, talk about them yes, but not finalise trade agreements. So this would mean our goods would be subject to what is known as general rates. This would not be just to EU countries but to all overseas markets until the MFN agreement is in place. For certain goods into China that would mean a difference between 7% and 100% customs duty.
Harmonised tariff rates along with other tariff measures, such as tariff suspensions and tariff quotas
Whatever deal we do with the EU, harmonised tariffs will go. We will lose access to TARIC and all its additional conditions, such as MEURSING codes relating to sugar and milk. We will probably keep the EU structure of the tariff, at least for a while, but we do not have to as long as we comply with the World Customs Organization (WCO) Harmonised System (HS) 6-digits. We do not even have to charge customs duty at the same rate or use the same formulae for calculating duty; we could charge duty based on weight or quantity, which is how most of the Swiss tariff is structured. We will be able to structure the tariff measures, such as tariff suspension, tariff quotas and anti-dumping duties for example in our own way to benefit UK businesses. WTO tariff agreements such as the Information Technology Agreement (ITA-I) in 1996, which removed customs duties on information technology products, such as integrated circuits, computers, etc would have to be re-signed, as would the new ITA-II being implemented in the EU from 1 July 2016, which will make goods in the categories of measuring and checking instruments, medical devices and games duty zero, predominately Chapter 84, 85 and 90 of the tariff.
However, we will lose all the current tariff measures, unless we decide to adopt EU law as UK law. It takes years to negotiate these measures and though we would now be one country discussing anti-dumping duties legislation, for example, and not part of a 28 Member State bloc, we would have to find a way of doing our own investigations into the third countries suppliers which takes time and money. Potentially, more money than one country can afford. There are other tariff measures we could look at adopting, perhaps follow the Brazilian model of having nine different taxes at import or the Argentinian system of pre-registration of imports through an import licensing scheme.
Embargoes and sanctions, export controls and common security measures
Good news! While the UK does not have individual sanctions, treasury controls or embargo laws, it does have the Export Control Order 2008 and UK strategic export control lists. We could rebrand the EU ones, such as the EU Human Rights List, into UK legislation to quickly solve that issue or adopt the USA ones. Eventually, the aim will be to create our own legislation in these gap areas, but the EU will expect us to keep in line with its legislation, as it does Switzerland, or we would become an unsafe market for the EU to trade with.
Back to looking at the UK Export Control Order, the UK Military List and a UK dual-use list. Legislation on dual-use also comes under an EU directive. This directive permits the free movement (without licences) around the EU of dual-use goods listed in Annex I. It also covers the Union General Export Authorisations (UGEAs) which permit the movement of dual-use goods to Wassenaar partner countries such as Switzerland, Norway, USA, Canada and Australia. Once we leave the EU, this directive and the UGEAs will no longer be available to UK companies. There is a seemingly easy fix — the UK, as a Wassenaar member, is added to the UGEAs, and the UK creates an EU-27 dual-use Open General Export Licence (OGEL). It is necessary to register to use OGELs, you are audited and you have to ensure you meet the terms and conditions of the open licence, so administration will increase. A darker view is that the EU may decide that the UK has to prove itself as a safe country for handling dual-use goods, and will not automatically extend the UGEAs making it harder to buy dual-use controlled goods from within the EU.
Common security measures is a big topic. To name just three we have the Common Foreign and Security Policy, the Common Security and Defence Policy and the European External Action Service. How these will be handled on leaving the EU is beyond the scope of this article, but there is a link to supply chain security measures. This includes the introduction of the Economic Operator Registration Identification (EORI) Number and the Authorised Economic Operator (AEO) Safety and Security criteria. As AEO is a WCO scheme, the UK will have to retain this in some form, though the customs simplification side of AEO is not part of the WCO criteria so we could amend that. And as the EORI is used to identify companies trading with third countries it will no longer be relevant — perhaps the UK will reinstate the Trader Unique Reference Number (TURN) system.
Losing EORI and EU AEO status means UK companies will no longer be able to be named as the exporter of goods out of or importer of goods into other Member States of the EU. This could be a blow to companies who have set up warehouses in the Netherlands or Belgium, for example, and are currently exporting goods out under UK paperwork and even with UK issued dual-use export licences. That will end. In addition, the UCC brought in a new definition of exporter that states the business must be physically established in the EU and have a contract with the consignee to be named as the exporter. This might prevent some businesses from operating the way they currently do, but on the plus side when the UK rewrites the customs code, the UK could delete this definition of exporter.
Finally, the EU has introduced over a period of about 10 years an export control system (ECS) and an import control system (ICS). This requires a pre-departure and pre-arrival message being lodged with the EU country of departure/arrival within a set time frame — 24 hours before the goods are loaded for deep sea containerised cargo. The UK has avoided some of the pain of this as the first place of arrival or last place of despatch has been another Member State for movements by road and some sea freight shipments, but once the UK is seen as a third country, UK exporters will have to do these pre-departure messages on goods going into the EU. Whether we adopt similar security schemes at export/import will be up to the UK Government and customs but if we do not then we could be viewed a risky country with which to trade.
Common customs procedures and customs regulations which include harmonised regulations on protecting the market with regard to, for example, product safety and intellectual property rights
In 1993, the EU adopted the Common Customs Code (CCC) and in May 2016 updated it to be the Union Customs Code (UCC). This harmonises all areas of customs procedures and regulations, such as the rule of origin, valuation, special procedures and import controls. The easy fix is to make the UCC the UK customs code and then over time adjust it to suit UK businesses. The contentious areas on valuation could be removed, the first sales price brought back, and the situation on royalties and licence fees as well as on valuing goods out of a warehouse clarified. We might even decide to remove the requirement for financial guarantees to support potential duty liability under Special Procedures. Of course, this requires people to implement it and ensure the UK understands the new regulations so the e-learning and guidance currently funded and produced on the Europa website would have to be replaced.
In the short term, changes to product safety controls, intellectual property rights, etc will remain unchanged, but at some stage the UK will have to adopt its own legislation. Also when any existing or new agreements mention the EU, this should be checked to see whether it is the EU-28 or the EU-27 by looking at the date of the agreement. One of the significant impacts is that after a transition period the UK will no longer be covered by the EU trademark system, though CE marking will still be required for goods sold into the EU. A split from EU copyright laws may have an impact on the broadcasting and film industries — unless the UK negotiates a similar deal to the European Economic Area (EEA) — and as this is one of the UK’s main export areas, this is worrying. We will also be excluded from the technology developments within the EU such as the digital single market, which includes online transmission. Switzerland has over 100 bilateral agreements with the EU to try and make areas such as this work.
Free trade agreements
One of the most significant trading benefits of being a member of the EU is the extent to which companies and consumers benefit from the preferential and FTAs. The UK has no FTAs in its own right.
I would like to be positive here and say that within the transitional period, we will be able to negotiate FTAs with significant trading partners and that could include countries such as China, Japan, USA and Australia. As we will be only 1 country negotiating instead of 28 it should be possible to get an agreement quicker, but there are two things that prevent me being optimistic about this. First, we cannot negotiate trade agreements while we are a member of the EU — we will have to wait until we have exited. The other is why should another country prioritise a trade agreement with a single country of 64 million people over an agreement with the EU that has 500 million consumers. It would also be too little; the UK does nearly half of its trade with other EU countries not third countries. That is 3½ times more than UK-USA trade, 9 times more than UK-China trade and 42 times more than UK-Australia trade.
A reasonable solution here might be to join the European Free Trade Association (EFTA) comprising of Switzerland, Norway, Iceland and Liechtenstein and benefiting from the FTA’s they have in place. This should also mean that we become part of the Pan-Euro-Med Agreement (PEM). “Combining the contractual framework that the EFTA states have with the European Union and the free trade agreements that EFTA has with third countries, approximately 80% of EFTA’s total merchandise trade is today covered by preferential trade arrangements.” This is available at the EFTA website.
Though nothing will change immediately, eventually EUR1 Forms, Approved Exporter Status, ATR forms could cease to be relevant in the UK unless we were part of EFTA. This would also mean we would not need to issue or receive as many Long Term Supplier Declarations (LTSD), a plus in some business’s eyes. If we did negotiate UK only FTAs, the added value qualification criteria would be based on UK origin goods only, not the 28 origins we have now. Though, of course we could look at including cumulation within these FTAs and including regional cumulation would bring us back to being able to include EU origin material as part of the qualifying rules. If we do negotiate FTAs with regional cumulation then back comes the LTSDs or something similar. Until we have access to FTAs our exports will, at best, incur MFN rates of customs duty.
Many UK importers rely on and benefit from preferential agreements that reduce customs duty. The UK did have a generalised system of preference (GSP) scheme before joining the EU as GSP was stated in Resolution 21(ii) taken at the UNCTAD II Conference in New Delhi in 1968. Therefore it is feasible that we could implement GSP quite quickly. It is a unilateral agreement aimed at benefiting lesser developed countries (LDC) by giving them duty reduced access to development markets and there are currently 13 national GSP schemes notified to the UNCTAD secretariat including Norway, Switzerland and Turkey.
A wild thought … alternatively, instead of introducing GSP perhaps the UK should apply to be on the list of beneficiary countries once it leaves the EU as a small island developing states (SIDS). One of the things that will go is the requirement for REX, registered exporters. This is part of the UCC and will begin in the EU from 2017 so the UK will have to be part of the scheme initially and if it works well we may decide to continue to use it for identifying goods complying with preferential rules of origin rather than requiring a GSP Form A.
Access to the Europa website
The Europa website gives free information relating to the TARIC, Market Access Database (MADB), anti-dumping duty laws, etc and the guidance and training packages on the UCC.
This may seem to be a minor point, but UK companies have come to rely on information posted on the Europa website, especially the MADB. Currently, the MADB is only available in full to EU Member States as are other pages on the Europa website. Of course UK customs can duplicate all this, but it will have a significant effect on the day-to-day operations of businesses.
So what is my conclusion having reviewed these six areas of international trade and customs? We all need to work towards the best possible solutions if/when Article 50 is signed and this means businesses, not just Government and civil servants. Start work now on what is important for your business, and as I said earlier, get involved in approaching Government and trade bodies in getting this right. If we know what we want it is more likely to happen.