2Trading with the EU after Brexit
9.The EU is the destination for around half of the UK’s exports of air and spacecraft.19 The WTO Agreement on Trade in Civil Aircraft eliminates tariffs on aircraft and most aircraft components and, as a result, the industry is not concerned about the imposition of tariff barriers after Brexit. The aerospace sector is worried, however, about the non-tariff barriers that could arise on trade between the UK and EU.20 In addition to regulatory divergence, which is considered in the next chapter, these primarily consist of any customs procedures at the new UK-EU border, including additional administrative requirements and delays while crossing the border.
Tariffs
10.The UK is a party in its own right to the WTO Agreement on Trade in Civil Aircraft, as is the EU, and legal opinion favours the UK’s ability to retain its membership after Brexit without taking further action.21 The Agreement covers trade in all civil aircraft and civil aircraft engines, including parts and components, as well as ground flight simulators and their components. Parties to the Agreement do not apply tariffs on imports of these goods from all other members of the WTO.22
11.The WTO Agreement does not cover raw materials and unfinished components. However, the EU’s Inward Processing Regime (IPR) has aerospace chapters that remove all duties on imports for processing by the aerospace sector, whether or not they are subsequently re-exported. UK exporters to the EU of raw materials or unfinished components for use in aerospace would benefit from this IPR, and we assume it could be replicated in any future UK customs code for the benefit of UK importers.
12.As a result of the WTO Agreement and the EU’s Inward Processing Regime, tariff barriers are not a significant concern for the UK aerospace sector after Brexit. The Government should integrate the relevant articles of the EU’s Inward Processing Regime into any future UK customs code in order to ensure that the sector can continue to import raw materials for use in aerospace without incurring duties.
Customs
13.The UK’s aerospace sector participates in a complex and deeply integrated supply chain that operates just-in-time processes. In evidence to the Committee, BEIS noted that “it is routine for components and materials to cross borders on multiple occasions”.23 Aerospace trade association ADS has estimated that increased checks at the future UK-EU border could add £1.5bn a year to costs for the UK aerospace sector and calls for “the UK-EU border… to be about flow of goods, not control.”24
14.Suppliers in European aerospace supply chains compete in large part on speed as well as production cost. The Royal Aeronautical Society told the Committee that:
as production is ramping up on these big civil programmes, the battle every day to get the parts out on time, and the penalties for not getting there on time are very severe, and therefore… these non-tariff barriers can very quickly drive up costs. It is also important to understand just how all-pervasive this is.25
A vivid example of the volume of rapid intra-EU delivery times prevalent in aerospace was given by Airbus, who said that:
We have this amazing aircraft in Broughton that flies our wings. It is called the Beluga aircraft. It is called that because the front of the aircraft opens up and the wings go in. It is really important that that has a two-hour turnaround. We have several of those movements a day, so we really do not need any customs paperwork or bureaucracy getting in the way.26
In this context, it is understandable why they regard a potential three hour wait on a lorry at Dover as “a critically bad issue” for them.27
15.The competitiveness of the UK’s aerospace repair and maintenance sector could be particularly vulnerable even to seemingly short delays at the border, since “airlines… rely on the ability to move parts to aircraft requiring servicing anywhere in Europe within a matter of hours”.28 ADS told us that “Companies … will be looking very carefully at where they are, say, warehousing their spare parts and thinking, ‘If it looks like we are going to face additional costs to shift things out of the UK, we may be better to establish a mainland European base.’”29
16.The global aerospace industry, especially in large civil aircraft, is built on continental-scale supply chains and manufacturing hubs that underpin economies of scale and competitiveness. At present, the UK participates primarily in the European aerospace hub, which allows the sector to exploit specialisation and economies of scale that boost its ability to compete for places in extra-EU supply chains. It is unlikely to be practicable for the UK to repatriate supply chains and construct whole civil aircraft. ADS told us that:
a new aircraft is a multi-billion pound investment, so there are huge risks … In terms of large aircraft we have Airbus and Boeing. They have a legacy of other aircraft manufacturers that used to exist. One of the reasons there has been this massive consolidation in the aerospace industry is that the costs and risks associated with developing whole new aircraft are such that it is not practicable for businesses singularly to do that.30
17.Moreover, as explained in more detail below, the absence of tariffs on most global trade in aircraft means that, for the aerospace sector, there is no trade-off between the degree of integration between the UK and EU on customs and the UK’s ability to strike trade deals overseas.
18.It is in the UK’s national interest for its aerospace sector to remain deeply integrated in European supply chains after Brexit, and there is little to be gained for this sector by not having closely-aligned customs. Any additional customs procedures resulting even in relatively short delays could detract from the UK’s industry’s ability to compete for work and investment in those supply chains. We recommend that the Government should seek to secure as near frictionless trade as possible between the UK and EU for the aerospace sector after Brexit, with the minimum amount of customs procedures.
19 HMRC, UK Trade Info, Data by SITC code, retrieved 28 February 2018
27 The Guardian, Airbus may leave UK unless there is urgent clarity on Brexit trade, 5 March 2018
Published: 19 March 2018