Firstly, we should note that the paper deals just with issues associated with a new customs border: customs declarations, tariffs/Rules of Origin and routine customs controls for UK/EU trade. For all those complaining that that this ignores issues arising from regulatory barriers - note that this paper states (para 24) these will be covered in a subsequent report.
Much of the paper is familiar territory which I've covered in detail on my EU Question blog:
- A repatriated trade policy where UK seeks continuity of existing trade agreements and replicates the EU's WTO schedules;
- A new customs border mitigated by streamlined customs processes and requiring an interim period to implement new infrastructure / systems / processes;
- A customs agreement with EU is required to carry over existing arrangements (e.g. mutual recognition of Authorised Economic Operators (AEOs), Common Transit Convention, (CTC) continued exchange of data/information etc. ) and implement an interim customs arrangement based on mirroring the EU's external tariff and third country agreements.
The interim customs agreement will seek to extend current customs arrangements - the UK will replicate the EU's external tariff and not implement any new FTA's concluded under the UK's newly independent trade policy. To completely mirror the current situation, diagonal cumulation will be required - allowing distributed supply chains to continue to benefit from tariff-free trade. The EU's proposed FTA with Japan includes proposals for "extended cumulation", i.e. extending cumulation (hence tariff-free supply chains) to third countries where the EU and Japan have tariff-free arrangements in common.
Of course, it is possible that the EU will agree new FTA's to which the UK will not be party (having left the EU). In that case, the UK will probably have to provide tariff-free access to the EU's new third country trade partner without any guarantee of reciprocated tariff-free access for the UK to the third country in question. The best re-assurance against this is that it is an unlikely scenario, given the EU's famed inability to conclude FTA's quickly.
"A new customs partnership with the EU"
The interim customs arrangement breaks down once the UK implements any new FTA's which the EU is not party to. The Governments paper includes a radical proposal of "A new customs partnership with the EU" to address the issue raised by new UK FTA's. Imports would be separated into 2 customs streams:
- Imported goods destined for consumption in the EU will be charged the normal tariff (as per the external tariff and FTAs that UK and EU have in common) - essentially a continuation of current arrangements;
- Goods imported under a new UK FTA that are destined to be consumed in the UK will qualify for tariff-free access.
Companies with complex supply-chains are anxious to avoid the complexities of Rules of Origin (RoO) and have much to gain from this proposal. The UK's annual goods export to the UK amounts to £122 billion, of which £38 billion (over 30%) is content originally sourced from outside the UK (see update at bottom of post). Not only can RoO result in a significant administrative burden, (estimated as equivalent to a 4% tariff by Open Europe), but also some current supply chains may not qualify for tariff-free trade under the complex rules around product content and origin.
Smaller businesses focussed on trade with the EU would also wish to avoid the administrative burden of customs formalities and RoO. The impact on marginal costs may well be enough to make exporting / importing uneconomical. This is particularly relevant for companies operating across the Irish border on an "island of Ireland basis".
This proposal will need a "robust enforcement mechanism" to reassure the EU that goods imported from the UK do not contain goods that have evaded the EU's tariff (i.e. goods imported to the UK tariff-free via one of the UK's independent FTAs). The Governments paper suggests either a"tracking mechanism" where imports to the UK via a new UK FTA are tracked until they reach an end user, or a "repayment mechanism" where all goods are charged the higher of EU or UK tariff on entry to the UK, but traders reclaim the excess paid for goods when sold to an end-user in the UK.
It is possible to see similarities with current customs processes such as transit (where goods are securely transported across national borders with customs formalities suspended until the final destination is reached) and inward processing (which provides relief from import duties for goods that are imported solely for incorporation into a product to be re-exported). It may even be possible to implement this proposal as a trade facilitation available to trusted/accredited traders whose accounts and supply chain management would be subject to audit - this is similar to some ideas proposed for companies operating across the Irish border.
This proposal is an attempt to benefit from customs union membership for current trade and add the benefits of new UK FTAs for UK consumers. EU traders will also benefit in avoiding disruption to UK trade and the proposal has the potential to be applied to other trusted third countries - the EFTA states would be obvious candidates given the volume of EFTA-EU trade and their status as highly developed economies. Theoretically, the concept of "extended cumulation" could be replaced with this approach - so that where partners have FTA's in common, low-friction customs-union style trade could be enabled.
However, it is difficult to see the EU accepting such a proposal lightly. It would not be unreasonable for the EU to demand that import duties levied by the UK are forwarded to them - certainly for goods imported via new UK FTA's that are destined for consumption in the EU - possibly for all imports in a continuation of the current customs union regime. Nor is it difficult to envision the EU rejecting this proposal as simply another British attempt at "having our cake and eating it too".
Agreements & Timing
The biggest issue with the proposed new customs partnership is perhaps time. Negotiating such an agreement with the EU and implementing the required enforcement mechanisms is not likely to be quick.
Moreover, the Government paper also emphasises the need to be ready for "every eventuality", including the failure to agree a negotiated settlement with the EU. Brexit at end March 2019 is just over 19 months away. The EU's continuing insistence on its rigid negotiating sequence of settling the exit bill before discussing future trade agreements puts this deadline in severe peril.
As such, preparations for March 2019 must be the priority. Is the UK Government progressing with streamlining the customs process (new infrastructure / systems / processes) ? The Government paper suggests that the new Customs Declaration Service (CDS) is on track to deliver by January 2019 - I along with many commentators remain sceptical. Are UK importers / exporters preparing for routine customs controls and Rules of Origin ? Are the UK Government and business blithely assuming an interim customs agreement will be reached ?
There is also public concern that any interim agreement could turn into a permanent agreement - with UK Government and business eternally delaying the issues associated with leaving the EU's Customs Union. It seems to me the Government needs to actively demonstrate the UK's readiness for March 2019 in order to strengthen it's negotiating position.
Of course, if no negotiated settlement is reached with the EU and no FTA is agreed, then tariff-free trade with the EU will end - at which point the complexities and costs of Rules of Origin are moot - importers will simply have to pay the tariff. As I discussed in detail on my EU Question blog "Tariffs & Origin", tariffs in most sectors outside agriculture are actually quite low. Finished cars are one of the highest tariffs for manufactured goods at 10%, but car components typically have much lower tariff rates. Furthermore, "inward processing" can avoid impact on complex supply chains, e.g. where car parts or part-finished cars are shipped across the channel multiple times in the manufacturing process - only the tariff on the finished car will apply.
It may just be that the path of least resistance ends up being acceptance of tariffs offset by lower currency and lower taxation for UK exporters - combined with some repatriation of supply chains (a process that is already underway in the UK car industry). Unless of course, the UK Government & EU are able to make headway on trade and customs arrangements - but we are fast running out of time for that - UK Government and business really do need to be prepared for every eventuality.
This post originally stated "The UK's annual goods export to the UK amounts to £122 billion, of which £38 billion (over 30%) is content originally sourced from Asia, America and the rest of the world." Having been prompted to check this figure and finding the source (Credit Suisse research quoted in a uk business insider article), the £38 billion figure seems to apply to UK exports to the Eu that were of all non-UK origin, including the EU.
The uk business insider article also points out that "many of the raw materials that go into the $158 billion (£121.9 billion) worth of UK-made goods exported to the EU are likely sourced overseas too". So, there would appear to be no clear figures on non-UK or non-EU content of UK exports to the EU.