CHANGE IS COMING IN EUROPE Understanding the future of the UK-EU trade relationship

The outcome of Brexit negotiations could dramatically alter customs and regulatory requirements.

The current state of the UK-EU Trade Relationship

On January 31, 2020, the United Kingdom officially exited the European Union, completing almost five years of domestic and international diplomacy and negotiation over the fate of the two entities’ relationship.

The following day, the UK and EU began an 11-month transitional period, during which time they would attempt to negotiate and finalize mutually agreeable terms of trade for the official post-Brexit period, which is set to begin on January 1, 2021. During the current transitional period, the UK-EU trading relationship remains as it was while the UK was part of the EU, including all regulatory requirements and customs procedures.

According to the terms of the transitional period, if either party intends to extend the transitional period beyond December 31, 2020, it must notify the other party no later than June 30, 2020. With that date now past without a request for extension by either side, the conclusion of the transitional period on December 31, 2020 is definite.

This means that a new customs regime and trading relationship is set to commence on January 1, 2021. Precisely what the trading relationship will look like is still very much in doubt as the parties continue to negotiate the terms of trade for the post-Brexit period.

Scenario 1: A negotiated free-trade relationship

In the event the parties negotiate mutually agreeable terms of trade, the possibility remains that they will conclude a free-trade agreement that reduces barriers to trade and harmonizes regulatory requirements to reduce the volume of administrative requirements demanded by customs and regulatory authorities.

In such a scenario, goods included within a free trade agreement would be able to pass between the two countries with relative ease, though likely not with the same level of ease as today given that customs and security declarations will be required for all movements.

Nevertheless, the elimination of trade barriers would encourage businesses on both sides of the English Channel to continue to engage in trade activity, supporting both economies. Similarly, harmonization of regulatory requirements would allow for regulated goods, such as food products, chemicals, pharmaceuticals and others, to be traded between the two entities with only minimal delay for compliance checks.

The parties have until Oct. 2, 2020 to come to mutually agreeable terms for the post-Brexit relationship in order for any sort of agreement to realistically make it through each entity’s legislative procedures prior to the December 31, 2020 deadline. Mutually agreeable terms with respect to the post-Brexit relationship are not related solely to trade, but also matters of security cooperation, labor laws, fair competition policy, the food and fisheries sectors, environmental policy, and alignment on global issues.

Scenario 2: A complete break

In the event the parties are unable to arrive at mutually agreeable terms for the post-Brexit trading relationship, a complete end to the existing trade regime would occur. In this scenario, all current procedures, regulations, documentation and policies with respect to how goods are traded between the EU and UK would immediately revert to World Trade Organization rules after December 31, 2020.

The outcome of this scenario is anticipated to be significant disruption and delay at major entry points to the UK and EU as customs officials grapple with the introduction of new documentation requirements, processes and tariff regimes, as well as the collection of value-added taxes.

To help ease this transition, officials in both countries have publicized how businesses engaged in trade on both side of the English Channel can effectively prepare for the onset of the post-Brexit trading relationship. The UK is planning to introduce a phased introduction of controls and has provided businesses with opportunities to defer the payment of revenues and the completion of customs declarations. This is of particular significance in the proposed operating model for traffic moving between the UK and Northern Ireland. While the EU has confirmed the UK will be treated in the same manner as all other non-EU member states for import and export controls, special treatment will be provided to Northern Ireland for which EU regulatory and customs rules will continue to apply. This is to ensure goods pass freely across the border of Northern Ireland (a province of the UK) and the Republic of Ireland (an independent EU member state), preventing the need for a hard border.

Despite this guidance, many businesses will likely face a number of hurdles and will have numerous questions about how their specific products may be impacted by Brexit. Many of these businesses are now engaging their trade-services providers, including customs brokers and trade consultants to provide counsel and help with managing the transition.

The Impact of Disparate Regulatory Regimes

Brexit will not only create trade barriers in the form of potential tariffs and/or duties on inbound shipments and reciprocal tariffs and/or duties on the other side of the English Channel, it will also create disparate regulatory regimes.

One of the key reasons Britons voted in favor of leaving the EU was to take back control of certain political and regulatory decision making. For highly regulated industries, such as pharma, food manufacturing, chemicals, etc. that are active in both the UK and EU, that likely will mean adherence to two separate regulatory regimes, which will increase costs and time to market. This applies to UK-based businesses but also international businesses in those markets.

For companies that use the UK as an access point into the EU, incongruent entry processes will require companies to reconfigure their supply chains, as imports into the UK will require a declaration at the time of import and again on re-export  — whether to the EU or anywhere else. This will result in additional costs and regulatory controls as the goods will no longer be in free circulation. The same applies in reverse should goods be received into the EU which are subsequently shipped to the UK.

Impact on Trade with the U.S.

The United States Chamber of Commerce has identified Brexit as a critical issue for American business interests.

The US and UK are each other’s largest foreign direct investors with U.S. companies having invested upwards of $600 billion in the UK, generating more than two million jobs between the two markets. Two-way trade between the countries amounts to $235 billion annually.

In many cases, the investments U.S. businesses have made in the UK have been to service not only the UK market but the broader market of the European Union’s 500 million citizens. The establishment of trade barriers between the UK and EU would generate significant costs for American investors and would make supply chain management far more cumbersome.

As the UK and EU entered their transitional phase, the UK and U.S. began negotiating their own bilateral free trade agreement to take effect with the completion of Brexit at the end of the 2020 calendar year. However, the COVID-19 outbreak has slowed the pace of negotiations and a number of contentious issues continue to divide the parties, including: UK legislation around animal welfare and associated access to its poultry market; the potential introduction of a digital services tax in the UK that would penalize U.S. tech companies; and the liberalization of trade in financial services. Further complicating the status of U.S.-UK trade talks is the looming presidential election in the U.S., which has the potential to bring in a new administration with differing trade priorities.

Impact on Trade with Canada

Canada and the UK have a particularly special trade relationship relative to other EU member states. The UK is Canada’s largest trading partner in Europe. Bilateral trade between the two nations totaled CAD$25 billion in 2016, making up 27% of Canada’s total European trade.

As a member of the British Commonwealth, Canada shares a common heritage with the UK and many Canadian businesses have traditionally seen the strength of Britain’s economy along with its common language and similarities in culture and regulatory environment as a natural entry point for broader European trade.

It’s important to note that most of the imports and exports between Canada and the United Kingdom currently qualify for the elimination of duties under the Comprehensive and Economic Trade Agreement (CETA), a free trade deal between Canada and the European Union. However, once the UK leaves the EU, CETA will cease to apply for goods and services trade between Canada and the UK and the tariff regime will move to Most Favored Nation (MFN, but could be replaced by a bilateral trade agreement.

Supporting our customers’ needs

Livingston will continue to monitor the progress of discussions regarding the Brexit negotiations and will continue to provide updates.

Contact Livingston today at 1-800-837-1063 to learn more about how Brexit might affect your international supply chain and/or how you can mitigate disruption to it, or visit our Brexit Services page to learn how we can support you through the transition.