By Gavin Everson
It’s difficult to imagine that the term “Brexit” remains commonplace in the British lexicon. The UK’s divorce from the EU is now two years past, but the post-Brexit period continues to bring about significant changes, many of which create complexity for trading businesses. Yet, the coming year could see some silver lining appear, even as uncertainty continues to characterize the relationship between London and Brussels.
For Britons involved in international trade – particularly trade with the European Union – 2022 will mark another year of difficult adaptation to change. January 1, 2022, brought about the end of the British government’s gradual transition toward the requirement of formal customs entries for goods entering the UK from Europe. There is no longer any grace period or room for error. The stakes are now very high and many businesses are still unprepared.
A survey conducted in November showed a scant quarter of businesses engaged in trade with the EU – the UK’s largest trading partner – are prepared for the new customs regime while one-third weren’t even aware it was set to arrive imminently. The result will be an inevitable shock to many British businesses, potentially depleting cash flows, or creating greater disruption to their supply chains than already wrought by pandemic-related slowdowns, or both. For the past year, those businesses had as much as six months’ grace to submit completed customs entries to HM Revenue and Customs. No longer. Entry documents will now be required at the point of entry, save for the special arrangements at the Northern Ireland border (though that may not be a permanent arrangement either).
Even in its early days, the customs regime is already a source of angst in the food and agriculture sectors where new, pre-notification requirements for many items are anticipated to cause delays at the border, leading to fears of shortages for certain foodstuffs.
The harsh reality for many unprepared businesses will be a crash course in all things customs. There are the lucky few who have secured partnerships with customs brokers or trade consultancies to help facilitate transactions on their behalf; the rest will have to go it alone or pay above-market rates, at least for the time being. To further complicate matters, a poor understanding of the economic partnership put in place between the UK and EU – and particularly the Rules of Origin that govern what qualifies for duty exemption – means that many businesses have been incorrectly claiming preferential duty or duty exemption and may be liable to significant duty repayments and penalties now that full customs checks are in place.
Perhaps most vexing is that the effort required to learn and adapt to the Rules of Origin and other requirements associated with the economic partnership deal between the UK and EU may be for naught. Negotiations between London and Brussels over the fate of how goods between Northern Ireland and Great Britain should be processed remain very contentious. While the parties have agreed to continue negotiating, no resolution appears imminent. A worst-case scenario is that the current impasse could result in the dissolution of the trade deal, reverting trade across the English Channel to Most Favored Nation (MFN) status, reinstating tariffs and rendering obsolete the rules and procedures associated with the current trade agreement. This is no doubt incredibly frustrating to those enterprises that have already invested time and energy into studying the many criteria required to secure preferential duty and to ensure compliance with the trade regime.
Despite the ongoing uncertainty and potential for disappointment, it’s worthwhile noting there are imminent opportunities that are cause for optimism.
There are three potential silver linings in 2022 for businesses engaged in trade. The first is the potential for significant trade diversification through many other, new free trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, but also deals with Japan, several countries in the Middle East and a soon-to-be renegotiated trade deal with Canada. London submitted application nearly one year ago for CPTPP membership and consideration of that application should be forthcoming in the first half of 2022. If the UK is accepted into the CPTPP group, it will provide British exporters with a vast array of sales opportunities to help offset the losses of exports to the EU.
Second, the British government is currently working on the establishment of free trade zones (FTZs) in Britain’s port cities. These hubs of manufacturing activity will allow UK businesses to receive goods from abroad duty free and alter them in some fashion before re-exporting them. The outcome will be a broader range of possibilities for UK businesses to integrate themselves into global value chains.
Finally, London has promised to install a single-window process for customs entries, which would allow for the digitized completion and submission of customs documentation, allowing for a far more streamlined, though far from foolproof, process.
In the short term, UK businesses engaged in import and export will need to be laser focused on the following:
Be in the know: The recent changes to the customs regime will require British importers to understand what’s required of them when goods enter the country. Governmental and third-party resources are available to offer guidance. It’s imperative for businesses to take the initiative to review these and adapt if they haven’t done so already.
Find Cost Savings: The existing partnership between the EU and UK, though tenuous, provides cost savings in the form of preferential duty rates and eliminated duties. Where goods are not eligible for the preferential rates, there are several duty waiver regimes which can benefit EU and UK importers/exporters. Businesses should investigate whether or not their goods are eligible for reduced tariff barriers and, where they aren’t, consider which regime(s) will benefit them. Working with a trade consultancy can often unearth hidden cost savings that can help ease cashflow.
Uncover Hidden Risks: With the reward of cost-savings under the trade partnership also comes risk in the form of non-compliance that could result in time-consuming and costly audits, as well as potential fines, penalties and retroactive duty payments. Trade consultancies can help businesses prepare for customs audits to ensure all documentation is in order, and also to ensure their documentation regime is sound in the future.
Explore New Horizons: London has been actively pursuing and concluding free trade agreements on a bilateral basis with several countries in an effort to diversify trade opportunities away from the EU. Businesses – particularly those who have lost or are at risk of losing customers in Europe due to the complexity in customs administration – should be looking into these markets as alternatives to the EU.
To date, businesses in the UK have had the luxury of time to adjust to the post-Brexit era. Time has now run out and it is critical for businesses engaged in trade to proactively investigate how their enterprises will be impacted by the winds of change taking place across the English Channel while also exploring new trading relationships. Doing otherwise would be at their own peril.
Gavin Everson has more than 35 years of experience in customs, international trade and logistics management, particularly in implementing customs and logistics processes and systems. He has responsibility for advising and delivering Customs solutions to Livingston’s EMEA clients.