Chapter 3: What if the UK fails to secure a deal with the EU?
19.The EU is, by some distance, the UK’s largest trading partner. As we have noted, from June 2017 to June 2018, UK goods exports to the EU accounted for 49% of the total value of UK goods exports, while imports from the EU were worth 54.9% of the total value of all UK goods imports.26 The Prime Minister, in her speech at the Farnborough Air Show in July 2018, reiterated the Government’s commitment to preserving this frictionless trade, stating that friction at the border would “jeopardise the uniquely integrated supply chains and just-in-time processes on which millions of jobs and livelihoods depend”. She concluded that “anything else … will not deliver for Britain as a global trading nation”.27
20.Central to an orderly Brexit will be the ratification of the Withdrawal Agreement28 and the signing of the political declaration on the framework for future EU-UK relations in time for the UK’s exit from the EU on 29 March 2019. Without these agreements, the UK would leave the EU’s structures with no formal arrangements and framework in place for continued co-operation.29 This is popularly referred to as the ‘no deal’ scenario. There would be no 21-month transition period, no future relationship discussions as currently envisaged, and UK-EU trade would need to be conducted on WTO rules. Even if there is a transition period, but the two sides fail to agree on their future relationship by the time it is due to end on 31 December 2020, there could still be a delayed ‘no deal’ Brexit.30
21.The principal difference between ‘no deal’ on 29 March 2019, compared to 31 December 2020, is that in the absence of a Withdrawal Agreement, the UK would, with immediate effect, not only leave the EU’s Single Market and customs union, but also lose immediate access to any trade preferences and customs facilitations it currently enjoys with third countries through agreements secured by the EU.31 From 29 March 2019 trade with those countries, as well as with the EU, would need to be conducted on WTO terms, not leaving time to negotiate the roll-over of existing agreements. At present, the EU has fully implemented preferential trade agreements with 33 countries, and over 40 arrangements are partly in place. 32
Trade with the EU under WTO rules
22.While the UK is an EU Member State, UK businesses can trade with other Member States on the same terms as if they were sending or receiving goods from within the UK. If trade was conducted on WTO rules, tariffs would be applied and routine customs checks would need to be reintroduced.33
23.The UK, no longer tied to the EU’s Common External Tariff, would have discretion to lower its tariffs if it thought it desirable but, under WTO rules, the most-favoured nation (MFN) principle would apply. This states that WTO members cannot discriminate between other WTO members, unless they are part of a preferential trade agreement—such as a free trade agreement or a customs union.34 Therefore, in the absence of such a preferential agreement with the EU, the UK could not, for example, decide to lower its tariffs on a particular product for a specific EU country (or even the EU as a whole), but would have to do so for all other WTO members too.35
Tariffs and their cost
24.The UK’s draft schedule of tariffs submitted to the WTO for certification replicates the concessions and commitments currently applicable to the UK as an EU member.36 While current EU tariffs are, on average, relatively low, certain sectors, such as agriculture and the automotive sector, could be particularly affected by higher tariffs that could result from trading on WTO terms.37 John Foster of the CBI, in evidence to the European Union Select Committee for its Brexit: deal or no deal inquiry, stated that in a ‘no deal’ scenario, “The UK would face tariffs on 90% of our EU goods exports by value”, and estimated that trading on WTO most-favoured nation terms would equate to “an average tariff of 4%, which is about £4.5 billion to £6 billion-worth of increased costs per year on our exports”.38
25.In addition to any tariff costs, from a business perspective, trade on WTO rules means that administrative and customs procedures previously reserved for the UK’s rest-of-the-world trade (for example, with the US or China) would apply to trade with the EU27.39
26.While some businesses are already trading with non-EU countries and may be familiar with the processes involved, others—including many small and medium-sized businesses and newly established businesses generally—may struggle, particularly if lead-in times are short.40 Ms Morley told us that for those companies that only traded with EU countries, “particularly those below the VAT-threshold, it would be a new world altogether”.41 She thought those businesses would “use someone else to do it”.42 Neil Warwick, Brexit Policy Chair, Federation of Small Businesses, expressed concern that businesses “do not know what they do not know”.43
27.HMRC estimates that, currently, there are 145,000 VAT-registered businesses and, potentially, a further 100,000 under the VAT threshold that export only to the EU.44 They are therefore unfamiliar with rest-of-the-world customs arrangements.45 From a survey of their members, the Federation of Small Businesses have found that 20% of members are exporting firms and nine out of ten of those businesses trade with the EU, with 20% doing so exclusively.46 However, they cautioned that these figures may underestimate the number of firms that deal with goods for export. This is because some smaller firms may not actually be aware that their products are part of an export supply chain.47
Current UK customs procedures when trading with non-EU countries
28.On 23 August 2018 the Government provided some clarity for businesses by confirming that, in the case of ‘no deal’, the requirements for ‘rest-of-the-world’ trade would apply to trade with the EU27. This information was not included in either of the UK Government’s two White Papers on customs. It is possible that, in the longer term, some of the administrative processes could be simplified, including through bilateral agreements with the EU, but in the short and medium term at least, the existing ‘rest-of-the-world’ trade processes would apply.48
29.HMRC has based its planning on the fact that, in a ‘no deal’ scenario, “customs controls would operate both ways on goods moving between the UK and the EU, meaning customs declarations and the potential for checks on goods”.49 It has accordingly estimated that there would be a five-fold increase in customs declarations that would need to be submitted, from currently 55 million to 250 million a year.50
Before non-EU goods arrive at the border
30.Exporters—be they UK businesses exporting to non-EU countries or non-EU businesses exporting to the UK—must, as a first step, register for an Economic Operator Registration Identification (EORI) number with HMRC. This is a one-time process that involves completing a short application form. An EORI number is then usually allocated within three working days.51 The EORI number will subsequently be needed to make any customs declarations.
31.Before a consignment of goods arrives at the border, a customs entry for that consignment needs to be built and other forms need to be completed, so that the goods can be cleared following their arrival.
32.The main customs form used to fulfil customs and duty obligations to HMRC is the Single Administrative Document (SAD) for import or export. It contains 54 data fields and comes in eight parts for use at different stages of the trading process, depending whether the goods are being exported, imported or are in transit.52 Information about the goods, their arrival and value is required. Typically, this information must be sourced from a variety of documents, such as invoices and shipping documents. While both exports and imports need to be declared, it is the administration of import processes that is usually more onerous as, when exporting, there is no revenue collection involved.53
33.Mr Broadley, using the import of goods from China as an example, told us:
“The Chinese exporter will … give certain key information, including the shipping document number which is unique to the shipment, the name of the vessel or the flight number, and when it is due to hit the border here. The exporter will then require the shipping invoice and any other commercial documents, such as an origin certificate, a packing list or a quality assurance document. Without that documentation, you cannot begin the process of working up the customs entry that is required to go into the system.”54
Mr Broadley added that the requirement for all this information “can be the source of a delay” when attempting to build a customs entry.55
34.The correct commodity code also needs to be identified and relies on the experience of the importer. Mr Broadley explained:
“It is the commodity code that determines whether duty, a special VAT rate or any other special requirements such as import licences, are required at that stage. One would hope that the importer will know this, but it is not always the case, because they may be inexperienced.”56
35.One particular compliance requirement—obtaining proof of origin—can itself be a complex and time-consuming process, generating “significant additional administration, and therefore costs and delays, to UK businesses”.57 Proof of origin must be presented to the importing customs authority,58 although there are systems that allow for self-assessment and remove “the need for a physical check at the border”.59 Rules of origin are described in more detail in Box 1.
|
Goods imported into a customs territory must follow ‘rules of origin’, which determine where a product and its components were produced, in order to ensure that the correct customs duty is levied. If goods consist of materials from more than one country, special rules apply to determine which country will be judged to be the country of origin. This is based on the origins of the materials, the value added in the process, and where the final substantial production phase took place.60 The rules may require that final processing results in a change to the commodity code of the final product. This is known as ‘sufficient transformation’. The rules may specify the percentage or value of non-originating materials that may be used.61 Such formalities are not necessary for goods manufactured and traded inside a customs union. The precise rule for determining origin differs from product to product. There are two main types of rules of origin: non-preferential and preferential:
|
36.Businesses exporting certain types of goods, such as those that may be used for both civil or military purposes, may also need an export licence or provide supporting documentation.64
37.Once traders have undertaken all the necessary compliance tasks they can submit a customs declaration to HMRC. This can currently be done via CHIEF (Customs Handling of Import and Export Freight), the UK’s electronic customs declarations system.65
Customs controls on non-EU goods at the UK border
38.Once goods from outside the EU reach the UK, they are subject to a number of customs procedures and checks.
39.The Port of Dover, which handles up to 17% of the UK’s trade in goods, provided an example of a recent non-EU customs clearance process for a typical groupage of eight consignments, broken down into various stages.66 Overall, the process from the arrival of the lorry at Dover to its release took one hour and fifteen minutes, with manual tasks taking up much of the time. These tasks included parking, inspecting the exterior of the lorry, keying in information from the driver’s paperwork and waiting for a prescribed period of 30 minutes to give the Border Force personnel an opportunity to attend the lorry in person. The Port of Dover thought that the use of technology was unlikely to reduce this processing time significantly.67
40.It is also worth emphasising that the goods included in the consignment were not sensitive goods—they were textiles, clothing, automotive parts and other tools from Turkey68—and therefore did not require physical checks, for example those that could be required for animal products or plants. Mr Jon Thompson, First Permanent Secretary and Chief Executive, HM Revenue and Customs, told the Committee that processing time depended generally on three things: “The type and volume of goods on the lorry; whether or not the lorry is accompanied or unaccompanied, because it is quite common to get a trailer but no cab with an individual in it; and the method of importation or exportation.” He could provide examples where the clearance process “was shorter, but it might also be longer”.69
Regulatory checks
41.In addition to the customs paperwork checks, a small proportion of goods arriving from outside the EU are physically checked at the border. The Port of Felixstowe told us that “the number of physical examinations” only represented “3% of third-country import containers”.70
42.However, these regulatory checks for non-EU goods take longer than customs checks.71 They can include checks on product standards, safety regulations and phytosanitary and veterinary checks.72 Ms Allie Renison, Head of Europe and Trade Policy, Institute of Directors, thought that there was “not a huge amount that technology can do to mitigate that”.73
43.Considering industrial goods, Dr Peter Holmes, Reader in Economics, University of Sussex, stated that “the European Economic Area agreement provides that all mandatory requirements for industrial goods are essentially the same or equivalent and that common systems are established for testing the conformity of goods to these standards”. However, “Goods from outside the EEA need to be checked. The importer has to take responsibility for guaranteeing they are satisfactory.”74
44.Agricultural products of non-EEA origin are also generally subject to some checks. As Mr Broadley noted, “If you are bringing food or bone, dead or alive, holds may be put on while your inspections and checks are done.” However, he also stated that “if you have a good broker and an experienced importer”, then the goods should be able to “go through the system fairly quickly as it stands”. He saw the “logistical and paperwork side” as more likely to create hold-ups and delay “than the actual clearance through the system”. 75
45.Mr Sam Lowe, Research Fellow, Centre for European Reform, made the point that requirements for checks on animal products could be particularly burdensome on businesses and those ports having to upgrade their facilities to accommodate those checks. Some key ports were currently unable to handle animal products:
“Every product of animal origin imported from outside the EU has to enter the EU via a veterinary border inspection post. The problem that UK exports to the EU have post Brexit is that Calais is not a veterinary border inspection post. The Eurotunnel is not a veterinary border inspection post. The closest is Dunkirk, which has low capacity for physical inspections. After that, we are thinking about Rotterdam and the like. You also have some issues on the UK side at Anglesey.”76
46.This, he explained, would have an impact on the ‘route to market’ chosen by businesses. While Calais and Eurotunnel were being upgraded, goods might need to be shipped via Rotterdam. However, this was not straightforward, as it would be “a different type of shipment and you have to think about whether you are doing it in bulk or in frequency, so refilling the supermarkets becomes a bit of an issue”.77
Existing customs facilitations
47.A range of customs facilitations, designed to make the customs clearance process less onerous on traders, are available to businesses who meet certain qualifying criteria. As set out below, the bar is set high for businesses wishing to avail themselves of these facilitations.
Authorised Economic Operator status
48.The most comprehensive facilitation scheme currently in place is the Authorised Economic Operator (AEO) scheme.78 Mr Thompson told us that the current scheme enables trusted traders to make use of a total of 21 facilitations. 79 Box 2 sets out the principal elements of this scheme.
Box 2: The Authorised Economic Operator scheme
|
The AEO scheme is a voluntary programme that requires participating traders to meet a range of criteria and work in close co-operation with customs authorities. In return, they enjoy various benefits that speed up procedures related to customs, such as simplified customs controls. The UK is part of the EU’s AEO scheme, established in 2008 and based on internationally recognised standards. The scheme’s objective is to ensure the security of supply chains and to facilitate legitimate trade. There are two main types of AEO: economic operators authorised for customs simplification (AEOC), security and safety (AEOS) or a combination of the two. Criteria that need to be met to be granted either AEO status typically include:
Benefits include:
|
Source: European Commission, ‘Authorised Economic Operator (AEO)’ : https://ec.europa.eu/taxation_customs/general-information-customs/customs-security/authorised-economic-operator-aeo/authorised-economic-operator-aeo_en [accessed 6 September 2018]
49.Uptake of the AEO scheme has been low in the UK, with only 638 UK businesses currently registered.80 Stephen Adams, Senior Director, Global Counsel, linked this to the already satisfactory conditions in the UK: “People sign up for AEOs because of the margin of improvement from the baseline treatment.” In the UK, that margin was “not necessarily that great”.81 Ms Morley agreed that UK traders had “already had the benefits. Why do we want to do anything else?”82 Mr Robin Walker MP, Parliamentary Under-Secretary of State, Department for Exiting the European Union, told us that the UK had “one of the most effective customs systems in the world”, which might be the reason for there being “fewer incentives” for some businesses to join a trusted trader scheme.83
50.One of the principal obstacles to increasing participation in the AEO scheme is the requirement to provide a three-year audit trail in order to qualify. For businesses that had only traded with the EU this was difficult to obtain.84 Mr Adams explained: “There is an established audit process for achieving AEO, and it generally requires a company already to be an exporter and/or importer and to have an audited customs profile.”85
51.On SMEs specifically, Mr Adams thought that businesses did “not necessarily have the capacity at the moment to get themselves into an AEO system, to maintain the audit trail or to go back every three years and do it again”. While between 60% and 75% of goods imported and exported into the UK were currently covered by an AEO scheme in the UK,86 it was important to “keep our eye on that long tail of smaller businesses” that were outside the AEO system and ensure they received the necessary support.87 Mr Lowe said it was “not worth their time to try to get AEO status, because they probably could not even qualify for it”. The criteria were difficult to meet “because so much trust is put in a company once they have it”.88
52.Mr Thompson also pointed out that obtaining AEO status “does not suit everyone”.89 It could take about eight months in total to complete, depending on available resources.90 Additionally, accreditation required businesses to free up “internal resource, or the contracting of external consultancy. It may for example require enhancements to physical security, IT, written processes, and management practices”.91
53.Mr Chris Walker, Policy Chair for Trade, Federation of Small Businesses, considered that the reason for the low uptake of AEO in the UK was that “it is such an administrative burden and a liability”.92 The Freight Transport Association also commented on the complexity of the forms and that they could “put off would-be Applicants”.93
54.Ms Morley, on the other hand, did not think that the challenges for SMEs were insurmountable. She told us that “you can get AEO very quickly and very simply”, and that filling in the application form was “not beyond the wit of a human being to do”.94 She thought that getting AEO status was “actually very, very much harder for a large organisation”, due to the amount of information they were required to submit.95
55.The role of AEOs and other trusted trader schemes under the Government’s proposed Facilitated Customs Arrangement, and possible improvements to these schemes, are discussed in Chapter 5.
Special Procedures
56.The Union Customs Code provides for Special Procedures that allow—in certain circumstances and depending on the procedure used—for the relief, reduction or suspension of either customs duties or other taxes due on goods.96
57.Mr Broadley told us that big importers and the automotive sector “may already use” a special procedure called the customs freight simplified procedure (CFSP).97 Under this procedure, authorised importers can defer import duty and VAT payment by setting up a deferment account with HMRC. The advantage of this is that they can postpone payment by an average of 30 days, thus helping their cash flow, and goods can normally be cleared for release more quickly, as there is no need for a full customs declaration at the point the goods are released.98 He explained, though, that not all businesses qualified, as it was “a trusted relationship with customs, and you have to be approved to be competent enough to do that and have the appropriate software and systems in place to be allowed that particular procedure”.99 Ms Morley agreed: “Those authorised to pay less or to defer import duty under Special Procedures have been required to measure up to AEO status in order to run the Procedures even if they were not AEOs.”100
58.Mr Broadley added that deferment accounts were a pre-condition for CFSP. This required a bank guarantee for twice the amount of what is being deferred in a month. Obtaining this, he said, was “a considerable burden on companies”.101 He explained that customs brokers and freight forwarders could offer deferment arrangements to smaller businesses at a cost of 1–3%,102 but only to a certain level. He cautioned: “It is not unlimited and if in a month the deferment has no scope left in it, you [the small business] have to make fast payments into the customs system.”103
What would be the impact of new customs procedures under a ‘no deal’ Brexit?
Cost to businesses
59.In addition to the costs that may result from the imposition of tariffs when exporting to or importing from the EU, our witnesses were unanimous that any departure from current arrangements for UK-EU trade would add administrative costs. Mr Jim Harra, Tax Assurance Commissioner, Deputy Chief Executive and Second Permanent Secretary, HM Revenue and Customs, spoke of “a very substantial new admin burden” if customs controls between the UK and the EU were to be introduced. This was “because all UK-EU traders would have to comply with customs obligations that they do not have to comply with today”.104 Mr Adams explained: “Of course, the problem for the UK is that we are not dealing with frictional costs that are already in the price … Anything new now is an additional frictional cost on the price.”105 Mr Andrew Meaney, Head of Transport Team, Oxera Consulting LLP, agreed that “there is going to be a cost of change”.106
60.Mr Warwick, of the Federation of Small Businesses, told us that “it costs a minimum of £20 to swear the declaration”107—an additional cost which, for small businesses trading lower value goods, might not be sustainable. Ms Morley qualified this by noting that when “sending multiple goods there is no single customs entry for each item. It is per consignment”. But she too accepted that “there would be a cost”.108
61.Businesses would also need to upskill their workforce to ensure they were familiar with the new customs procedures. As Mr Broadley pointed out: “This is not just about how quickly the customs system can process the data … It is about whether you have the correct documentation, processes, knowledge and understanding to complete the declaration in the first place.”109
62.Mr Meaney also reminded us that it would not just be UK businesses that would be affected. As supply chains extend into other EU Member States, EU companies are also likely to be affected by any changes to existing customs procedures: “Remember that at the moment the supply chains are across the UK’s borders with other EU member states. All of that supply chain has to learn the new rules. They have to hire and train people.”110
63.Some organisations, particularly SMEs, may not have sufficient resources to allocate the management of the customs paperwork to dedicated staff. Instead, they may opt for outsourcing this to a customs agent or freight forwarder. This would come at considerable cost—as we noted earlier, Mr Broadley estimated the typical cost of such outsourcing at between £35 and £70 per declaration.111 And even if businesses decide to outsource the management of customs procedures, they cannot outsource everything, as Chris Walker explained: “The certificate of origin, the information about the goods, the tariff code classification—has to come from the small business … You cannot outsource it.” 112
64.Those businesses that do not already trade outside the EU may also need specialist software to enable them to interact with CHIEF/CDS, unless they decide to outsource that part of the process to customs brokers or freight forwarders.113 Either option would come at a cost.
65.Overall, HMRC has estimated that if customs declarations were introduced between the UK and the EU, there would be “between £17 billion and £20 billion of administrative costs per year”.114 By contrast, HMRC estimate the additional administrative burden under the Government’s proposed Facilitated Customs Arrangement to be £700 million a year (see Chapter 5).
66.Other potential costs could arise from lorries having to stop for customs inspections at the border. Mr Broadley estimated that “a driver-accompanied trailer waiting for a day will probably cost £200 in what we call demurrage charges”. Such a wait could lead to a driver missing the next collection slot, which could result in losing a day’s work, “which you can never make up on a truck”.115
Impact on ports
67.Most of the goods traffic between the UK and the EU passes through ports.116 The evidence to this inquiry indicates that roll-on/roll-off ports like Dover are more likely to be adversely affected than container ports, such as Felixstowe. Ports that deal substantially with container traffic, such as Felixstowe, process freight that can be hauled off a ship and wait to be collected.
68.As it is non-EU goods (for example, from the US or China) that are usually shipped in containers to the UK,117 container ports are likely to be better prepared to deal with the processes and checks that would be required if trade with the EU defaulted to WTO rules. The Port of Felixstowe estimated that “if the level of examinations for EU traffic is the same as currently for non-EU traffic, that would result in approximately 10,000 additional examinations per annum”.118 They were “confident this could be handled through the existing facilities and systems with only a small increase in staffing levels”, and their current software “could be expanded relatively easily to cover EU traffic through the port post-Brexit”.119
69.By contrast, the challenges for roll-on/roll-off ports, which mainly deal with EU trade, are much more significant. The Port of Dover, the busiest roll-on/roll-off ferry port in Europe, processes about 17% of the UK’s total trade in goods. Its ability to handle this trade volume “is dependent on all vehicles passing straight through without stopping for any routine customs (or animal/plant health etc) controls”.120 Mr Joe Owen, Associate Director, Institute for Government, pointed out that there was “dwell time … which is time in which authorities can do the necessary checks if they need to. Dover and Eurotunnel market themselves by saying, ‘We are basically a continuous motorway that will take you all the way over to France, non-stop’, so where do you put that dwell time?”121
70.Dover is limited by its geography, wedged between the cliffs and the sea. The Port was unequivocal in its assessment that it would not be able to accommodate additional checks:
“There is no space in the Port for additional checks: no space for more examination sheds, no space for new checkpoints or barriers, and no space for lorries to park awaiting clearance. Any new checks, for Customs or any other purpose, must therefore be conducted away from the Port.”122
71.This point was echoed by Mr Owen:
“Can you just tell people to ‘go and wait over there’ if they do not have the right documentation? Yes, absolutely, and I understand that Eurotunnel has a piece of software or is trialling a piece of software that would allow it to do that quite quickly. But the limitation at both Eurotunnel and Dover is just space. What is ‘over there’? If you are at Dover, ‘over there’ is the sea or the cliff.”123
72.Possible ways of conducting some customs checks away from the Port and taking strain off the border itself are discussed in Chapter 4.
Disruption to the flow of goods
73.The additional customs paperwork and checking requirements that would be introduced as a result of trade under WTO rules would also lead to the flow of goods being disrupted. Mr Lowe expected that “not all trade will stop from day 1, because emergency measures will be put in place on both sides, but after one, two or three months we will go to a new way of trading”.124
74.Such delays occur not only at the border: the Freight Transport Association identified a common reason for delay as the sourcing of the information required for the customs paperwork and errors being made on forms. The Freight Transport Association provided a specific example of some paperwork having to “pass through the bank under something called a letter of credit. There can be delays in that paperwork coming in.”125
75.Congestion at roll-on/roll-off ports could also cause significant disruption to the flow of goods, irrespective of whether customs paperwork has been completed accurately and to time. Mr Lowe gave the example of a company like Airbus, which has the resources and expertise to manage just-in-time production, and cautioned that “they are still going to get stuck behind someone else”.126 We note that congestion at Ports could have an impact on logistics more widely, affecting the availability of transportation to pick up goods or containers elsewhere.
Impact on supply chains
76.Supply chains are often complex and highly integrated, relying on a seamless flow of goods between the UK and the other EU Member States. Examples of supply chains that are highly integrated include the pharmaceutical and chemical sector, the manufacturing sector, the automotive sector, and the food and beverage sector.127
77.Significant delays arising as a result of a ‘no deal’ outcome would disrupt the just-in-time supply chains that food manufacturers and retailers depend on, and could affect the availability of food in the UK, as stated in our report Brexit: food prices and availability.128 Mr Broadley gave the example of a trailer bringing fruit and vegetables from Spain:
“At the moment, it can be in the UK in two or three days, or even faster with two drivers. It does not stop. The produce is in the supermarket probably the day after it has arrived here. If the trailer has to stop, that becomes an impossible supply chain for fresh, perishable goods.”129
78.Mr Lowe warned that the ‘route to market’ “will alter quite considerably”, because of the need for fresh goods to go through veterinary border inspection posts, which neither Calais not the Eurotunnel could currently provide. This would be “incredibly disruptive”.130
79.To illustrate the benefits the car industry derives from the absence of customs requirements with the EU, the Society of Motor Manufacturers and Traders gave the example of the production of a single fuel injector. To make it, there are over 35 components, made in over 15 countries, that require over 39 UK-EU border crossings. 131
80.Mr Lowe cautioned that such disruption could potentially reduce the attractiveness of having UK companies within the supply chain:
“The supply chains that run through the European Union will no longer function as they did before. The UK companies will have to work out whether it is okay to have a component part of that supply chain within the UK, or whether it should go one way or even the reverse, and it completely changes the flow of trade.”132
81.His assessment concurs with recent newspaper reports of warnings from companies like Airbus, BMW, and Jaguar Land Rover that a ‘no deal’ Brexit would lead to them having to scale back their UK operations, or even leaving the country.133
The Northern Ireland/Ireland border
82.While this report does not focus on UK-Irish relations and the Northern Ireland/Ireland land border,134 the customs requirements that would flow from trade under WTO rules could severely affect the border and UK-Irish relations.
83.As set out in our report UK-EU relations after Brexit, a fully open border between Ireland and Northern Ireland requires the avoidance of customs controls.135 This is because customs checks necessitate some form of physical infrastructure. Technology does not yet provide the answer: as Swiss and Norwegian customs authorities told the EU Select Committee during its Brexit: UK-Irish relations follow-up inquiry, many technological developments that could reduce (though not fully eliminate) the need for physical checks at their borders with the EU remain a long-term aspiration.136
84.The UK Government, the Irish Government and the EU have repeatedly stated their commitment to avoiding a ‘hard border’ in Northern Ireland. A ‘backstop’ is therefore envisaged to come into effect if future arrangements cannot be agreed on or turn out to be inadequate. We note, however, that the UK and the EU are still to agree what such a ‘backstop’ would look like. We also note that the Commission’s proposed ‘backstop’ is an integral part of the draft Withdrawal Agreement.137 If there is ‘no deal’ by 29 March 2019, the ‘backstop’ would not become operational. In that situation, there would have to be a separate agreement between the UK Government, the Irish Government and the EU to avoid a hard border.
Conclusions and recommendations
85.Trade with the EU on WTO terms would result in additional tariff costs being placed upon businesses. This could lead to an increase in the cost of goods, adversely affecting consumers and the competitiveness of UK businesses.
86.In addition to tariff costs, UK-EU trade on WTO terms would place a considerable administrative burden on businesses involved in that trade on both sides.
87.Customs procedures do not start at the border, but well before that. This requires resources to retrieve the necessary information, even if the information is not ultimately submitted by businesses themselves, but outsourced to customs brokers or freight forwarders.
88.An estimated 145,000 VAT-registered UK businesses trade only with the EU and there may be up to a further 100,000 businesses under the VAT threshold in the same position. In the case of ‘no deal’, they would have to gain expertise in customs procedures, which they do not yet have. While not an insurmountable challenge, this will require them to train or hire skilled staff, which will have cost implications. This might also apply to businesses that have traded with non-EU countries before.
89.Parts of the customs procedure can be outsourced to customs brokers or freight forwarders, but this too will incur a cost.
90.HMRC have estimated that, overall, the cost to UK businesses under ‘no deal’ would be £18 billion per year. We call on HMRC to provide an itemised breakdown of its figures and we urge the Government to set out its plans for supporting businesses in assessing the additional costs they would face under a ‘no deal’ scenario.
91.There are a number of existing customs facilitations, such as trusted trader schemes. While they may be appropriate for larger companies, we urge the Government to take account of the fact that they could place an unacceptably high burden on smaller businesses.
92.Any technological solutions will not wholly remove the need for checks on some goods at the border in the case of ‘no deal’. This is of particular relevance to the Northern Ireland/Ireland border, where trade under WTO rules risks re-introducing a hard border.
93.Trade with the EU under WTO rules would adversely affect UK roll-on/roll-off ports, in particular the Port of Dover. Any checks at the Port would introduce delays and lead to congestion. This poses a significant challenge to just-in time production and to agri-food businesses, and could lead to the disruption of supply chains.
94.Disruption to UK-EU supply chains could decrease the attractiveness of trading with UK businesses. We urge the Government to set out its plans for protecting existing supply chains in the case of ‘no deal’.
95.Container ports, such as the Port of Felixstowe, would be better able to accommodate the need for extra checks, while allowing time for authorities to carry out such checks. While this means that container ports may be able to absorb some trade from roll-on/roll-off ports, the ‘route to market’ of container goods is different to goods that require fast delivery.
96.In summary, the costs, disruption to the flow of goods and, potentially, the imposition of customs checks on the Northern Ireland/Ireland border in the case of ‘no deal’, all underline the need for the Government to succeed in its attempts to reach agreement with the EU on the future economic relationship.
26 Office for National Statistics, Statistical bulletin: UK trade: June 2018, Figure 10—UK goods exports and imports, percentage split by EU and non-EU countries, 12 months to June 2018 (10 August 2018): https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/june2018#exports-and-imports-of-goods-to-and-from-the-eu-increased-by-more-compared-with-non-eu-countries-in-the-12-months-to-june-2018 [accessed 24 August 2018]
27 HM Government, ‘PM’s speech at Farnborough International Airshow: 16 July 2018’: https://www.gov.uk/government/speeches/pms-speech-at-farnborough-international-airshow-16-july-2018 [accessed 24 August 2018]
28 European Commission, Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, 19 March 2018: https://ec.europa.eu/commission/sites/beta-political/files/draft_agreement_coloured.pdf [accessed 24 August 2018]
29 Article 50(2), Treaty on European Union
30 Further information on ‘no deal’ scenarios can be found in our report Brexit: deal or no deal (7th Report, Session 2017–19, HL Paper 46)
31 By virtue of Article 124(1) of the draft Withdrawal Agreement all these agreements will apply to the UK during the transition period.
32 EU trade agreements are often part of wider political agreements that include an economic dimension (e.g. Association Agreements, Partnership and Co-operation Agreements). While Association Agreements, Stabilisation Agreements, Free Trade Agreements and Economic Partnership Agreements remove or reduce customs duties, Partnership and Co-operation Agreements (PCAs) do not change customs duties and, instead, focus on providing a framework for bilateral economic relations. Figures quoted in the main text therefore exclude PCAs. See European Commission, ‘Negotiations and agreements’: http://ec.europa.eu/trade/policy/countries-and-regions/negotiations-and-agreements/ [accessed 24 August 2018]
33 While distinct from customs checks, time-consuming regulatory checks, e.g. veterinary and phytosanitary, are also likely to be re-introduced at the EU27 border (even if those checks were to be unilaterally waived on the UK side).
34 Article 1, General Agreement on Tariffs and Trade (GATT) and World Trade Organisation, ‘Principles of the trading system’: https://www.wto.org/English/thewto_e/whatis_e/tif_e/fact2_e.htm#seebox [accessed 24 August 2018] Other exceptions apply. For example, developing countries can be given preferential access to markets or trade defence measures can be introduced against a certain product from a specific country if it is considered that it is being traded unfairly.
35 World Trade Organisation, ‘Principles of the trading system’: https://www.wto.org/English/thewto_e/whatis_e/tif_e/fact2_e.htm#seebox [accessed 24 August 2018]
36 World Trade Organisation, ‘United Kingdom submits draft schedule to the WTO outlining post-Brexit goods commitments’, 24 July 2018: https://www.wto.org/english/news_e/news18_e/mark_24jul18_e.htm [accessed 24 August 2018]
37 The EU MFN average final bound tariff on non-electrical machinery, for instance, is 1.7%; it is 2.4% on electrical machinery; and 3.1% on petroleum. Higher tariffs are levied on sugars and confectionery (24.6%); on dairy products (37.4%); and on cars (10%). WTO, World Tariff Profiles, 2018, p 79: https://www.wto.org/english/res_e/booksp_e/tariff_profiles18_e.pdf [accessed 21 August 2018] and European Commission, ‘EU Tariffs’: http://madb.europa.eu/madb/euTariffs.htm?productCode=87032210&country=CN [accessed 24 August 2018] Explaining the discrepancy of tariff levels, Mr Sam Lowe, Research Fellow, Centre for European Reform, said the main aim of tariffs was “to protect domestic industry from outside competition”, rather than to raise revenue. Q 67
38 Oral evidence taken before the European Union Select Committee, 7 November 2017 (Session 2017–19), Q 43
39 HM Government, ‘How to prepare if the UK leaves the EU with no deal: Trading with the EU if there’s no Brexit deal’, 23 August 2018: https://www.gov.uk/government/publications/trading-with-the-eu-if-theres-no-brexit-deal [accessed 24 August 2018]
40 The EU defines small and medium-sized enterprises as employing 249 or fewer persons and having an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million. Q 19 (Neil Warwick). European Commission, User guide to the SME Definition, p 3: http://ec.europa.eu/regional_policy/sources/conferences/state-aid/sme/smedefinitionguide_en.pdf [accessed 13 September 2018]
42 Ibid.
44 Oral evidence taken before the Public Accounts Committee, 5 September 2018 (Session 2017–19), Q 151 (Jim Harra)
48 HM Government, ‘How to prepare if the UK leaves the EU with no deal: Trading with the EU if there’s no Brexit deal’, 23 August 2018: https://www.gov.uk/government/publications/trading-with-the-eu-if-theres-no-brexit-deal [accessed 24 August 2018]
51 HM Government, ‘Get an EORI number’: https://www.gov.uk/eori [accessed 24 August 2018]
52 HM Government, ‘Guidance: The Single Administrative Document for import and export’, 6 April 2017 https://www.gov.uk/guidance/declarations-and-the-single-administrative-document [accessed 24 August 2018]
55 Ibid.
57 European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129) Chapter 5, para 179
58 Written evidence submitted to the EU External Affairs Sub-Committee, inquiry on Brexit: trade in goods, Session 2016–17 (FTG0010)
60 European Commission, ‘General Aspects of Preferential Origin—Introduction’: https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/general-aspects-preferential-origin/introduction_en [accessed 24 August 2018]
61 World Customs Organisation, Rules of Origin—Handbook: http://www.wcoomd.org/~/media/wco/public/global/pdf/topics/origin/overview/origin-handbook/rules-of-origin-handbook.pdf [accessed 24 August 2018]
62 European Commission, ‘Non-Preferential Origin’ https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/nonpreferential-origin_en [accessed 24 August 2018]
63 HM Government, ‘How to prepare if the UK leaves the EU with no deal: Trading with the EU if there’s no Brexit deal’, 23 August 2018: https://www.gov.uk/government/publications/trading-with-the-eu-if-theres-no-brexit-deal [accessed 24 August 2018]
64 Ibid. See also: HM Government, ‘Do I need an export licence?’: https://www.gov.uk/guidance/beginners-guide-to-export-controls#do-i-need-a-licence [accessed 12 September 2018]
65 A new UK Customs Declarations System (CDS) is currently in development to replace CHIEF and is due for a phased roll-out starting in January 2019.
67 Ibid.
68 Ibid.
70 Written evidence from the Port of Felixstowe (BCA0003) We note, however, that the types of goods going through container ports are different to those going through roll-on/roll-off ports. For example, almost 80% of fresh and perishable produce imported into the UK comes from the EU, and most of it through roll-on/roll-off ports for fast delivery. In the event of ‘no deal’, fresh produce might have to be physically examined to establish compliance with sanitary and phytosanitary and other requirements. Written evidence provided by the British Retail Consortium (BRC) to the House of Lords European Union Energy and Environment Sub-Committee, Session 2017–2019, (BFS0007) We note that this could result in the proportion of physical examinations at those types of ports exceeding 3%.
72 European Commission, ‘Safety, health and the environment: customs controls’: https://ec.europa.eu/taxation_customs/business/customs-controls/safety-health-environment-customs-controls_en [accessed 24 August 2018]
77 Ibid.
78 European Commission, ‘Authorised Economic Operator (AEO)’: https://ec.europa.eu/taxation_customs/general-information-customs/customs-security/authorised-economic-operator-aeo_en [accessed 24 August 2018] The EU’s AEO scheme has its legal basis in the ‘security amendments’ to the Community Customs Code (Regulation (EC) 648/2005) and its implementing provisions.
80 European Commission, ‘Authorised Economic Operators: Query page: United Kingdom’:
http://ec.europa.eu/taxation_customs/dds2/eos/aeo_consultation.jsp?Lang=en&holderName=&aeo
Country=GB&certificatesTypes=AEOC&certificatesTypes=AEOF&certificatesTypes=AEOS&Expand=true&offset=1&showRecordsCount=0 [accessed 24 August 2018] In comparison, as of 24 August 2018, there are 6255 AEOs registered in Germany and 1619 in France.
91 Ibid.
95 Ibid.
96 Article 211 of the Union Customs Code (2013): https://ec.europa.eu/taxation_customs/business/union-customs-code/ucc-legislation_en#ucc [accessed 6 September 2018] See also HMRC’s ‘Customs Special Procedures Manual’, 7 June 2018: https://www.gov.uk/hmrc-internal-manuals/customs-special-procedures/spe01030 [accessed 24 August 2018]
98 HM Government, ‘Notice 760: Customs Freight Simplified Procedures’, 20 August 2018: https://www.gov.uk/government/publications/vat-notice-760-customs-freight-simplified-procedures/vat-notice-760-customs-freight-simplified-procedures [accessed 24 August 2018]
106 Ibid.
114 Q 85 (Jon Thompson) Mr Thompson first mentioned this estimate to the House of Commons Treasury Select Committee in June. The figure was challenged by several economists and some Government ministers. See, for instance, ‘Is UK customs chief right that ‘max fac’ will cost £20bn a year?’, Financial Times (25 May 2018): https://ec.europa.eu/taxation_customs/business/union-customs-code/ucc-legislation_en#ucc [accessed 6 September 2018] In evidence to the House of Commons’ Public Accounts Committee, Mr Thompson clarified that the cost to UK businesses under ‘no deal’ would be £18 billion. He explained that this figure was composed of two elements—£13 billion for import and export customs declarations and £5 billion for tariffs. Oral evidence taken before the Public Accounts Committee, 5 September 2018 (Session 2017–19), Q 157 (John Thompson)
116 Around 95% of all UK imports and exports are transported by sea. EU traffic is the most popular international route, accounting for 55% of all international traffic. See HM Government, ‘Port freight statistics: 2017 final figures’: https://www.gov.uk/government/statistics/announcements/port-freight-statistics-2017-final-figures [accessed 12 September 2018]
117 For example, only 19% of containers handled at the Port of Felixstowe contain goods being imported from the EU. Most containers handled by Felixstowe, i.e. 81%, contain goods from outside the EU (see written evidence from the Port of Felixstowe (BCA0003))
119 Ibid.
125 Q 2 (Clive Broadley) A letter of credit is a letter from a bank providing a guarantee that a buyer’s payment to a seller will be received in full and on time. It also provides a guarantee to the buyer that the seller will honour the contract. The bank carries the risk of non-payment. Letters of credit are used frequently in international trade and involve additional costs.
127 For further information on the integration of supply chains, see European Union Committee, Brexit: trade in goods (16th Report, Session 2016–17, HL Paper 129).
128 European Union Committee, Brexit: food prices and availability (14th Report, Session 2017–19, HL Paper 129)
133 See, for example, articles in the Guardian, the FT and the BBC: ‘BMW will shut UK sites if customs delays clog supply post-Brexit’, The Guardian (25 June 2018): https://www.theguardian.com/business/2018/jun/25/bmw-will-shut-uk-sites-if-customs-delays-clog-supply-post-brexit [accessed 24 August 2018]; ‘Jaguar Land Rover says hard Brexit will cost it £1.2bn a year’, Financial Times (4 July 2018): https://www.ft.com/content/d077afaa-7f8a-11e8-bc55-50daf11b720d [accessed 24 August 2018]; ‘Airbus warns no-deal Brexit could see it leave UK’ BBC news (22 June 2018): https://www.bbc.co.uk/news/business-44570931 [accessed 24 August 2018]
134 See, however, European Union Committee, Brexit: UK-Irish relations (6th Report, Session 2016–17, HL Paper 76); a further inquiry in early 2018 gave rise to a comprehensive follow-up letter to the Government, published on 27 February 2018: Letter from Lord Boswell of Aynho to Rt Hon Karen Bradley MP, Secretary of State for Northern Ireland, 27 February 2018: https://www.parliament.uk/documents/lords-committees/eu-select/UK%20Irish%20relations/27-02-18-Lord-Boswell-letter-to-Secretaryof-State-for-Northern-Ireland.pdf [accessed 24 August 2018]; See also: European Union Committee, inquiry on UK-EU relations after Brexit: https://www.parliament.uk/post-brexit-uk-eu-relations-lords-inquiry [accessed 24 August 2018]
135 European Union Committee, UK-EU relations after Brexit (17th Report, Session 2017–19, HL Paper 149)
136 Oral evidence taken before the European Union Select Committee, 6 February 2018 (Session 2017–19), Q113–120 (Lt Col Rebekka Strässle; Dr Christian Bock; Mr Pål Hellesylt; Mrs Hanne Solgaard Andersen)
137 Michel Barnier, ‘Statement at the press conference following his meeting with Dominic Raab, UK Secretary of State for Exiting the EU’, 26 July 2018: http://europa.eu/rapid/press-release_SPEECH-18-4704_en.htm [accessed 24 August 2018]