This article considers the government’s paper on future customs arrangements and the impact of trade and tariffs in the UK food and drink sector after Brexit.
Brexit and trade with the EU
With just over 18 months to go until we leave the EU, the UK government has published a series of papers regarding its position on trade. This article considers the government’s paper on future customs arrangements with the EU, what its proposals mean for the UK's food and drink industry, and what businesses should do to prepare in the event that those proposals are (or are not) accepted by the EU.
The UK’s departure from the EU in March 2019 will involve leaving the EU’s Customs Union. Unless a trade deal can be reached, Brexit is likely to lead to tariffs being placed on goods moving between the UK and EU.
What are tariffs?
Tariffs are customs or duties that countries impose on goods crossing its boundaries. Tariffs are usually applied to imports into a country in order to give an advantage to local businesses producing the same goods, as well as to provide a source of revenue for that country.
Tariffs are typically calculated as a percentage of the product’s value. The UK’s current membership of the EU’s Customs Union means that goods travelling between the UK and other EU member states are able to cross those borders without incurring any tariffs.
UK export statistics for the food and drink sector
Over 60% of the UK’s food and drink exports in 2017 were to the EU, with stronger growth reported for EU than non-EU countries. Furthermore, a report by the Food and Drink Federation (FDF) shows that 70% of the UK's food and non-alcoholic drink imports in 2015 came from the EU.
Leaving the frictionless trade provided within the EU Customs Union may result in the imposition of tariffs that could have a significant impact on the food and drink sector.
The government’s future customs arrangements paper
On 15 August 2017, the government published a paper outlining its position on a future customs relationship with the EU. However, the paper cannot be treated as more than a guide at this stage; the EU has made it clear that it does not intend to start Brexit trade negotiations until the first phase of the discussions has been completed.
The UK’s trade proposals will require all remaining EU member states' approval to go ahead, which will not be easy or quick to achieve. Realistically any future UK/EU trade agreement must be reached by Autumn/Winter 2018 if it is to come into effect before the UK leaves.
The paper proposes two possible approaches to a customs relationship with the EU going forward:
Option 1: A highly streamlined UK/EU customs arrangement
- negotiating a continued waiver from the requirement to submit entry and exit paperwork for goods being moved between the UK and the EU
- the UK becoming a member of the Common Transit Convention (CTC), which simplifies the procedures for goods in transit via the EU to the rest of the world
- negotiating mutual recognition of Authorised Economic Operators (AEOs), enabling faster clearance of AEOs’ goods at the border
- bilateral implementation of technology-based solutions to make it easier to comply with customs procedures at borders
- unilateral measures to reduce the time and cost of complying with administrative procedures, such as self-assessment for traders to calculate their own duties.
The paper recognises that this option would involve an increase in administration, compared to remaining inside the EU Customs Union. While the proposals are likely to provide some comfort to traders on both sides of the Channel, it may be hard to persuade all remaining EU member states to accept this proposal if it provides the UK with benefits of being within the Customs Union after it has left the EU.
Option 2: A new EU-UK customs partnership
The paper envisages this would involve:
- removing the need for a customs border by mirroring the EU’s requirements for imports from the rest of the world where the final destination is the EU
- applying the same tariffs and same rules of origin treatment as the EU for goods travelling to the EU
- the UK applying its own tariffs and trade policy to UK exports and imports to other countries destined for the UK market.
The paper itself says that this second approach is “unprecedented”, “untested” and could be “challenging to implement”. A key concern, and one which the paper itself recognises, is ensuring that the correct tariffs are applied to goods travelling on to the EU market. While the paper addresses this by suggesting a tracking system for all goods, it is unclear how this would work in practice, particularly regarding individual components of goods being imported into and assembled in the UK. It is therefore uncertain how realistic this proposal will be to implement in practice.
Interim period of trading
The paper proposes that the EU and UK agree an interim period of trading, along broadly the same lines as now, to avoid a cliff-edge in March 2019. The government states that it is keen to explore a model for this, which could involve a “continued, close association with the EU Customs Union [...] based on a shared external tariff and without customs processes and duties between the UK and EU”. The proposal would also allow the UK to pursue independent trade deals with non-EU countries during this interim period.
The paper concludes with a request to businesses across the UK to give their views on the proposals.
What happens if the UK and the EU do not reach a trade agreement?
The government’s proposals show that the UK intends to leave the Customs Union and that tariffs will therefore be applicable to goods moving between the UK and EU, whether or not a deal is reached. What those tariffs will be will depend on the final trade deal.
If the UK exits the EU without a deal in place, the most likely situation is that the UK would trade with both the EU and other countries under the World Trade Organisation’s (WTO) rules. This would mean using the EU’s current tariffs for trade between the EU and non-EU countries.
WTO rules and tariffs
WTO rules mean that unless the UK remains in the EU Customs Union, or agrees a Free Trade Agreement with the EU before March 2019, tariffs will be imposed on all imports into the UK and UK exports into the EU, in addition to other countries after that point.
It is anticipated that the UK will "copy and paste” the tariff schedule it is currently required to apply as an EU member state when it leaves. However, these schedules were negotiated by the EU and other WTO states may consequently not agree to the UK adopting the same. Also, such tariffs are typically high for food, drink and agricultural products, and would be likely to increase costs and cause administrative obstacles to trade. Tariffs for goods vary significantly, but the average tariffs for food and drink products entering the EU (as set out in the WTO World Tariff Profiles 2017) are as follows:
- Animal products: 16.2%
- Dairy products: 37.4%;
- Fruit, vegetables and plants: 11.3%;
- Coffee and tea: 6.1%;
- Cereals and preparations: 15.9%,
- Oilseeds fats and oils: 5.8%;
- Sugars and confectionary: 24.6%;
- Beverages and tobacco: 19%; and
- Fish and fish products: 11.4%.
One option regarding imports into the UK would be for it not to levy any tariffs, which would make it an attractive market for traders from outside the EU and would be likely to provide cheaper products for UK consumers. The WTO rules permit this, but require member states to apply the same approach to all countries. This means the UK would have to accept goods on the same terms from all countries. While this could benefit consumers financially, there are concerns within UK industry that this approach could undermine quality and damage UK businesses that would not be able to compete at the same prices where these face higher employment and production costs, as well as more stringent welfare and food safety requirements.
What does this mean for businesses?
Businesses should prepare for the imposition of tariffs on goods moving between the UK and EU, which could happen from as early as March 2019. Tariffs vary significantly between goods, so it will be vital for businesses to familiarise themselves with those that will affect them.
Businesses importing goods from the EU should factor future applicable tariffs into their product costings now and consider how this will affect them (and whether local suppliers could become more cost-efficient in the circumstances). Equally, businesses exporting goods to the EU should consider the tariffs that are likely to apply. In both cases, many businesses may face having to cut overheads in areas including labour, production and transport costs, and consider ways of increasing efficiency in order to remain competitive.
Businesses should continue to voice any concerns by responding to the government’s requests for stakeholder participation and/or liaise with trade associations regarding issues that will affect them.