Trade is an area of EU exclusive competence, meaning that the UK’s current trading relationships, both inside and outside of the EU, are largely managed through its membership of the EU. Depending on its nature and form, the UK’s exit from the EU may have significant repercussions for companies trading to and from the UK in a number of areas, in particular:
- If the UK leaves the EU Customs Union with no other arrangements in place, all UK-EU trade would require customs clearance and, absent an EU-UK Free Trade Agreement, the Common External Tariff would be imposed. In practice, this would quickly become costly in terms of tariff (i.e. duty) and non-tariff (e.g. bureaucracy and logistics) barriers. For example, goods need classifying; there are around 15,000 classifications, subject to 135 different duty rates. Classification is only one of around 30 pieces of data from various sources needed, usually in real time, at the border. According to an OECD estimate of trade costs, inefficiencies concerning just border clearance could add costs of up to 10% of the value of goods traded. Moreover, traditional customs processes can take up to three days to complete.
- For companies with interconnected supply chains – especially those designed specifically to work most efficiently on a pan-European basis – the impact of the UK leaving the Customs Union would be significant in the absence of a Free Trade Agreement or other solution that enables “frictionless trade” across the UK/EU border.
- Companies from countries that are not members of the EU Customs Union have to comply with EU rules of origin when exporting to the EU in order to determine the “economic nationality” of a product. Accordingly, if the UK leaves the EU Customs Union, goods manufactured in the UK to be exported to the EU using an international supply chain (as is especially the case in the automotive industry), would no longer be exempt from EU rules of origin. This would require detailed analysis of supply chains and the cost of obtaining “proof of origin” certificates, creating a further substantial burden to businesses.
- The UK government will have the freedom to set the tariffs that the UK will impose on imports from other WTO countries. In the longer term, this may reduce trade barriers to UK businesses seeking to trade profitably internationally (and beyond the EU), and it may facilitate more imports into the UK from countries outside the EU. WTO rules, however, would make industry-specific deals difficult to deliver. For example, if the UK were to agree bilaterally with the EU not to apply tariffs on cars, the WTO’s “most favoured nation” principle would oblige the UK to offer the same tariff-free access to other WTO countries too.
- Tariff-rate quotas (TRQs) allow a certain amount of a good to enter a country or trading bloc at a cheaper tariff rate than the standard rate. The EU has approximately 100 TRQs in place covering a wide range of goods. How, if at all, the EU and UK agree to apportion the existing TRQs could have a profound impact on trade for those goods to and from the UK.
What should businesses be doing now?
Businesses will need to understand the possible implications for them, depending on how the issues highlighted above are resolved. The following questions are intended to get you thinking about how trade-related issues could affect your business:
- Where are your main current markets and where do anticipate greatest future growth?
- Have you assessed your supply chains to identify where products and components originate? Focus on (i) what do you rely on the EU system for; and (ii) what do you rely on the EU’s free trade agreements for?
- What regulatory standard and supervisory arrangements do you currently have to adhere to?
- Will you need to obtain new/additional certificates of compliance (e.g. evidence that a product meets the requirements of the applicable EU directives)?
- Have you calculated the extra costs involved in complying with rules of origin?
- What impact would the imposition of tariffs have on your business trading from and into the UK?
- What impact would the imposition or presence of non-tariff barriers (e.g. protection of IP rights) have on your business in the UK?
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