One year on—Trade in goods between Great Britain and the European Union Contents

Summary of conclusions and recommendations

Introduction

1.We note the complexity and diversity of Government departmental responsibilities for matters related to GB-EU trade in goods. It is vital that the coordinating role played by the Cabinet Office is exercised effectively to prevent this diffuse spread of competencies from causing practical problems.(Paragraph 9)

Economic context

The impact of the COVID-19 pandemic

2.We note that the available Office for National Statistics (ONS) trade figures suggest that there was a sharp fall in UK-EU trade immediately after the end of the transition period, with a partial recovery since. However, this trade data should be interpreted with caution, given the complications created by the COVID-19 pandemic, stockpiling before the end of the transition period, and the general difficulties in interpreting volatile trade data shortly after the fact. While it seems clear that the imposition of trade barriers had a pronounced initial impact on trade flows, more time is needed to fully assess the macroeconomic impact of Brexit on UK-EU trade in goods. (Paragraph 29)

3.We agree with our witnesses that, at a macroeconomic level, it is very difficult to fully disentangle the impacts of Brexit and the COVID-19 pandemic on UK-EU trade so far. We do note that the falls in UK-EU trade seen this year are greater than those seen in UK trade with the rest of the world.(Paragraph 30)

4.Nevertheless, difficulties in interpreting macroeconomic trade data should not obscure the challenges and extra costs that some companies have faced on the ground, which are little to do with the pandemic and are instead a direct result of the new non-tariff barriers associated with the end of the transition period. (Paragraph 31)

Labour shortages

5.The ongoing labour shortages add additional complexity to the multiple challenges facing supply chains and may have been further exacerbated by the new non-tariff barriers to trade. The Committee welcomes the Government’s efforts to address these problems in the short term but urges continued focus and attention to ensure that it does not further hinder business in adapting to trading as a third country with the EU.(Paragraph 37)

The TCA and the end of the transition period: impact to date

Adjusting to the new trading landscape

6.Since the agreement of the TCA and the end of the transition period, businesses trading goods between Great Britain and the EU have faced challenges as a result of new non-tariff barriers. Although the worst-case scenario of widespread disruption did not come to pass, GB-EU trade in goods is now more complicated and expensive than it was before January 2021. (Paragraph 57)

7.There has been some business adjustment to the new trading landscape as the year has progressed, with initial ‘teething problems’ subsiding. Nevertheless, traders continue to experience challenges and costs. In many cases these appear to be inherent in the new relationship with the EU and are, therefore, unlikely to be entirely eliminated with more time or experience. (Paragraph 58)

8.The impact of the new trade barriers on business has been uneven. Smaller businesses, which often lack the resources to adjust to new costs, and the agri-food sector, which faces an additional set of trade barriers in the form of SPS requirements, have been particularly hard hit. Any additional government support for business must take this uneven impact into account. (Paragraph 59)

Rules of origin

9.Rules of origin are an important part of any free trade agreement as they allow a trader to claim tariff-free access, and have an inherent level of complexity. Although the TCA’s rules of origin requirements posed a significant challenge for traders at the start of the year, there is some evidence that businesses have since been able to adjust to them, for example by absorbing the costs or by moving aspects of their distribution infrastructure to the EU. However, with the expiry of the grace period for suppliers’ declarations on 1 January 2022 fast approaching, we are concerned that there may be a further wave of short-term difficulties in this area in the new year. (Paragraph 66)

Sanitary and Phytosanitary (SPS) requirements

10.Sanitary and Phytosanitary (SPS) requirements have continued to present a major barrier to GB exports of agri-food products since the agreement of the TCA. The administrative complexity of these requirements is exacerbated by the perishable nature of many agri-food products, and the volume and nature of existing trade flows. As a result, GB exports of agri-food to the EU have become slower, less competitive, and more costly. (Paragraph 79)

11.Unless the UK and the EU are able to reach a more comprehensive agreement, which will require flexibility on both sides, SPS checks and controls will continue to be a serious barrier to agri-food trade. Notwithstanding the long-standing and well-rehearsed differences between the Parties’ preferred outcomes in this area, we call on the UK Government to seek an agreement on SPS rules with the EU as an urgent priority. The Government should provide further detail on its efforts in this regard in their response to this report. (Paragraph 80)

Customs

12.New customs formalities have added additional complexity to GB-EU trade, which will increase further with the requirement for full customs declarations for imports from 1 January 2022. However, we received evidence that issues around customs intermediary capacity have improved since the start of the year, and we welcome the action the Government has taken in this area. (Paragraph 92)

13.There are further steps the UK and EU could take to reduce the customs burden on traders through co-operation. We regret the fact that the TCA’s Specialised Committee on Customs Cooperation and Rules of Origin did not meet until October, and we urge the Government to utilise the platform that this forum provides to the fullest extent. In particular, this could include exploring with the EU the possibility of implementing a single customs office model, similar to that currently operational on the Norway/Sweden border (albeit within the context of the European Economic Area). (Paragraph 93)

VAT

14.The recent change to EU rules on VAT has been a significant concern for smaller businesses and e-commerce retailers exporting into the EU, in particular the need to hire an EU fiscal representative when using the EU’s Import One-Stop Shop (IOSS). (Paragraph 100)

15.We welcome the Government’s raising of these matters with the EU, and we urge them to continue to do so. Given the evidence we have received regarding the burden placed on small firms, we hope that the Government is successful in persuading the EU to adopt the same ‘listing’ approach to the UK as it has done with Norway, so that GB businesses can export goods via IOSS without a fiscal representative. We look forward to an update from the Government on this matter when it responds to this report. (Paragraph 101)

Transporting goods

16.Although the TCA’s provisions on road transport work well for most hauliers, they are wholly inadequate for those whose business model relies on the temporary movement of goods to multiple locations in the EU, particularly to large sections of the performing arts sector. We retain a close interest in this matter and intend to continue pursuing this in correspondence with the Government. (Paragraph 105)

17.We are concerned by the continuing issues that smaller businesses have faced with exporting via groupage. We invite the Government to set out how it intends to address this issue in their response to our report. (Paragraph 107)

Guidance and support

18.Business feedback on government guidance to date has been mixed, with praise in some quarters but concerns over a lack of consistency and coordination between government departments. This may be a consequence of the diffuse and complex division of responsibilities across government departments. (Paragraph 112)

19.We are encouraged, however, that the Government appears to be receptive to business feedback about improving its guidance and we hope that this continues. We particularly welcome the creation of the new Export Support Service as a single point of contact for exporters to the EU. (Paragraph 113)

20.The Government closed its £20m SME Brexit Support Fund because of low take-up, but we heard that this reflected the Fund’s limited eligibility criteria, not low demand among small businesses. Our evidence suggests that SMEs have been disproportionately affected. We therefore recommend that the Government restore a version of the Support Fund, but with wider eligibility criteria, so that businesses who trade mostly but not entirely with the EU are also eligible. If the Government does not accept this recommendation, they should explain their reasoning when they respond to this report and, in doing so, outline the other steps they are taking to help small businesses access professional support. (Paragraph 118)

EU Member State implementation of the TCA

21.We received considerable evidence of inconsistent treatment of GB exports by authorities in different EU Member States, which has been a source of major frustration, uncertainty, and cost for businesses exporting goods to the EU. However, neither our witnesses nor the UK Government viewed these inconsistencies as being a targeted and deliberate policy, or a breach of the EU’s obligations under the TCA. (Paragraph 129)

22.We welcome the ongoing work in government to identify these issues and raise them with the relevant Member States, including through the TCA Specialised Committees where necessary. We encourage them to continue this work. (Paragraph 130)

23.We heard calls for further Government action in this area, particularly by facilitating intelligence gathering and monitoring of instances of inconsistent treatment. In their response to this report, the Government should set out in detail the steps that they intend to take in this regard, including the role that the new Export Support Service will play in facilitating the monitoring of inconsistent treatment. (Paragraph 131)

Delays to import controls

Merits of the decision

24.The Government’s decision to further delay the introduction of import controls has both real advantages and real disadvantages, which were reflected in the evidence we received. We note that the decision allows businesses additional time to prepare for the new requirements at a challenging time. However, we also note the concerns of some businesses, particularly in the agri-food sector, that the additional delay undermines business certainty and does not resolve the issues at hand. (Paragraph 144)

25.Despite the Minister’s confidence otherwise, we remain concerned that the delay to the introduction of Safety and Security Declarations could undermine UK border security. As the Government’s own Border Operating Model states, the requirement for these Declarations “protects the UK against potential threats such as terrorism and the trade from illicit goods such as guns and drugs”—yet these will not be required until 1 July 2022, 18 months after the end of the transition period. We call on the Government to clarify what steps it is taking to protect the UK border from these potential threats in the absence of Safety and Security Declarations. (Paragraph 145)

Timing of the decision

26.Notwithstanding the merits or otherwise of the decision itself, we regret the fact that that the Government only announced the delay to import controls less than three weeks before the first set of controls were due to be introduced. Announcing the decision at this late stage undermined business planning and may have reinforced the impression among many businesses that these checks and controls will never be introduced. Any further changes to the timetable, if they are needed, should be announced at the earliest possible opportunity. (Paragraph 148)

The reasons for the decision

27.The Government argues that its preparations were on track for the original timetable and were not a factor in the decision to delay import controls. However, we note the scepticism of several of our witnesses regarding this claim, particularly with respect to physical infrastructure.(Paragraph 157)

The consequences of the decision

28.There is clearly a concern among some UK businesses that the asymmetry in the import controls applied by the EU and the UK has placed GB exporters to the EU at a competitive disadvantage compared to EU businesses exporting to GB. However, some UK businesses import to export, meaning that less paperwork and fewer controls may have helped them and may also have mitigated more severe disruptions in UK supply chains. We recognise the very real supply-chain imperatives that have driven this state of affairs and note that the current level of asymmetry is temporary, and ought to be rectified by the scheduled introduction of full import checks and controls from January and July 2022. (Paragraph 172)

29.With respect to the longer term, we ask the Government to explain how it will take a calibrated and strategic approach to its use of asymmetry at the border, in such a way as to maximise the UK’s competitive strength as a trading nation. (Paragraph 173)

30.We heard concerns over repeated delays damaging business confidence in the Government’s timetable, with a risk that they send the message that import controls will be delayed again or never be implemented at all. It is vital that the Government takes steps to address this. Ensuring the 1 January 2022 deadline for customs controls is adhered to and goes as smoothly as possible would build confidence ahead of the later deadlines from July. (Paragraph 174)

31.We also heard that the decision to delay had penalised those who prepared, at a cost, for the original deadlines. Although these preparations for the original deadlines were not wasted entirely, it would have been preferable in terms of business certainty if the Government had set out a realistic timetable at the outset and stuck to it rather than repeatedly moving deadlines. (Paragraph 175)

Further delay

32.Although we view the arguments for and against the most recent delay to import controls as finely balanced, we agree with the majority of our witnesses that there should not be a fourth delay. Now that it has set out its new timetable, we urge the Government to stick to it. (Paragraph 184)

33.We note that the deadline for the Government to respond to this report will fall after 1 January 2022, when full customs controls are due to be introduced. If either these controls or those scheduled for 1 July 2022 are delayed in the interim, we will expect the Government’s response to address the reasons and impact of such a decision in detail. (Paragraph 185)

WTO compliance

34.The National Audit Office (NAO) has warned that, in delaying the introduction of import controls, the UK risks the possibility of legal action under the auspices of the World Trade Organization (WTO) for a potential breach of the latter’s ‘most-favoured-nation’ principle. The Government told us, however, that it was confident that its decision to employ a short, time-limited extension was in line with the UK’s WTO obligations. We agree that, so long as the situation is time-bound, there is a low risk of adverse legal consequences flowing from this delay. We remain to be convinced, however, that this would remain the case if the status quo persisted indefinitely, without these checks and controls being introduced. (Paragraph 189)

Preparedness for January and July 2022

Overview

35.There may be some temporary disruption when new import controls are introduced from January and July 2022, as traders adjust to a further set of new requirements. However, the extent of this disruption will depend on Government and business readiness, and on the Government’s approach to enforcing compliance after the deadlines pass. The Government should extensively test and trial procedures with traders ahead of the deadlines to help keep any disruption to a minimum. (Paragraph 196)

January 2022: Customs and rules of origin

36.Business compliance with the new requirement for full customs declarations from 1 January 2022 is a source of concern and could have long as well as short-term consequences. Much will depend, however, on the approach that the Government takes to enforcement. (Paragraph 205)

37.We are encouraged to learn that HMRC intends to take a supportive approach that seeks to help and educate non-compliant traders, rather than punish them. However, we call on the Government to clarify how this approach has been communicated to traders, how long it will last, and how they intend to balance a ‘light-touch’ approach to enforcement with the need to incentivise compliance in the medium-term. (Paragraph 206)

38.Given that the Government’s response to this report will not be due until after the deadline for full customs declarations is due to expire, we ask that an assessment of how businesses are adjusting to the new requirements is included in the response. (Paragraph 207)

39.We have significant concerns about the imminent expiry of the grace period for suppliers’ declarations on rules of origin. Firms that have misunderstood the grace period, or are unaware of its expiry, risk facing tariffs from 1 January 2022. We urge the Government to do all it can to communicate this deadline to businesses, especially SMEs. As with customs controls, the Government should take a pragmatic and supportive approach to enforcing compliance. (Paragraph 212)

40.We note that this grace period will already have expired by the time the Government’s response to this report is due. In its response to this report, the Government should set out the approach it is taking to monitoring and enforcing compliance, as well as its assessment of how businesses are adjusting to the requirement for suppliers’ declarations. (Paragraph 213)

July 2022: SPS checks and controls

41.The delay to the introduction of SPS controls provides the Government with extra time to ensure that the introduction of the new requirements on 1 July 2022 goes as smoothly as possible. We retain an interest in these matters and will monitor the implementation of the new controls closely. (Paragraph 219)

42.In particular, the Government should ensure that sufficient Border Control Posts (BCPs) are operational in time, and that contingencies are in place if not. Clarity should also be provided on how each BCP will operate and the fees that will be charged for BCP inspections. We request that the Government provides an update on its progress in operationalising BCPs when it responds to this report. (Paragraph 220)

43.The Government should also prepare to ensure that each port applies the controls consistently, and to introduce procedures to resolve difficulties as soon as they arise. (Paragraph 221)

Cross-cutting issues

44.The Government should use the additional time ahead of the introduction of import controls to further update, consolidate and publicise its guidance to traders, in response to stakeholder feedback. It is vital that guidance is accessible and user-friendly, with the level of detail differentiated according to target audience. (Paragraph 227)

45.We welcome the publication in November 2021 of the updated Border Operating Model. It would have been preferable if this had been done much more rapidly following the announcement of the new timetable in September 2021, rather than more than two months later, to avoid any confusion in the interim. We do not expect this delayed publication to cause any major difficulties, as most of the latest updates are in relation to the July 2022 deadlines. Nevertheless, a prompter approach to updating guidance would be good practice for the Government in future. (Paragraph 228)

46.Government communications are an important tool in ensuring businesses are ready for the new controls. It was therefore welcome to learn that the Government is relaunching its “Check, Change, Go” campaign ahead of the new import requirements. (Paragraph 231)

47.In terms of Government preparations for the new border requirements, physical infrastructure is by far the area of greatest concern, despite £470m in allocated funding. The Government must use the extra time to ensure that these preparations are on track or, where they are not, that sufficient mitigations are in place. The Government should provide this Committee with an update on its infrastructure preparations when it responds to this report, including information on how much of the £470m in allocated funding for infrastructure has been spent to date. (Paragraph 238)

48.We also call on the Government to provide further clarity on the interim inland arrangements that will be in place to support Welsh ports next year, informed by engagement with the Welsh Government as necessary. (Paragraph 239)

49.In terms of government IT systems, most of the major changes have already been introduced. However, implementing and expanding IT systems carries an inherent level of risk, and we will continue to monitor the Government’s progress in this area. (Paragraph 243)

50.Government recruitment of additional staff appears to be on track with respect to customs, but we heard some concerns over staffing levels with respect to the veterinarians needed for SPS controls. We invite the Government to explain the steps it is taking in this area in further detail when it responds to this report. (Paragraph 247)

51.Readiness and awareness among EU exporters will be crucial to ensuring the implementation of import controls goes smoothly, and this is currently a major area of concern. While this is not directly within the Government’s control, it must take all possible steps to engage with EU traders and the relevant Member State authorities in a targeted manner ahead of the forthcoming deadlines. Some work is already being done in this area, which we welcome. (Paragraph 253)

Longer-term questions

The UK’s long-term approach to border controls

52.We welcome the Government’s ambition to implement a light-touch border regime with a higher risk tolerance than the EU. While we see the ability to do so as being a potential benefit of the UK’s exit from the EU, the Government’s plans in this area currently lack detail. We urge the Government to set out its approach in full as soon as possible. (Paragraph 260)

53.We share the Government’s hope that the EU will choose to emulate the UK’s light-touch approach to border arrangements in the future. However, we encourage the Government to engage in an active dialogue with the EU on these matters, with the aim of agreeing mutually beneficial simplifications as soon as possible, rather than hoping that this will be achieved passively in the future. (Paragraph 261)

54.We welcome the UK Government’s 2025 Border Strategy, which is strongly supported by industry and contains some excellent innovations to the UK’s future border regime. While the Strategy itself will not remove non-tariff barriers, it will simplify processes for traders. It does mean, however, that the UK’s border regime will continue to evolve for some years beyond the immediate deadlines in 2022. (Paragraph 266)

Regulatory divergence

55.It is clear that most businesses are not, in principle, opposed to divergence. We welcome the Government’s assurance that it will consider the impact on trade before it takes any steps in this regard, and request that it explains how this impact will be considered in further detail in its response to this report. (Paragraph 275)





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