Countdown to Brexit: 73 days – As Parliament rejects the ‘deal’ – Trade in a no-deal Brexit
The subject of trade in goods - and even more so in services - in a post-Brexit World is a continual source of questions in to Brexit Partners. For the avoidance of doubt, we are posting the Parliamentary briefing to MPs in the event of a no-deal Brexit on 29 March.
The UK is currently party to over a thousand international agreements with ‘third countries’ as a member of the EU. These cover trade, regulatory and policy co-operation in a range of areas, including fisheries, agriculture, the nuclear sector and transport (including aviation agreements). Leaving the EU without a deal would mean a radical change in UK trade relationships with the both the EU and the rest of the world.
From 30 March, every business will have to submit customs declarations and may be required to provide guarantees to cover potential customs debts. Manufacturers or importers established in the UK will no longer be considered as EU ‘economic operators’.
Trading under WTO rules
Trading under the WTO rules is the ‘default’ option. It would mean that the tariffs on trade in goods apply to trade between the UK and the EU - and between the UK and the ‘rest of the world’ – and vice versa. The UK is a founding member of the WTO in its own right - but as an EU Member State it has been represented in the WTO by the European Commission.
Post Brexit, the UK will no longer operate on the EU terms. It has to apply to become an independent member of the WTO. The UK Government will need to update the terms of its own independent WTO membership - for example, by establishing its own ‘schedule’ of trade commitments at the WTO. This process is not expected to be straightforward.
The WTO represents a ‘rules-based’ trading system - based on multiple multilateral agreements between Member States. Its General Agreement on Trade and Tariffs (GATT) governs how tariffs are applied and addresses non-tariff barriers (such as quotas, rules of origin and various other legal or bureaucratic trade restrictions). The leading principle of non-discrimination requires WTO members not to treat any member less advantageously than any other: grant one country preferential treatment - and the same must be done for everyone else. There are exceptions for ‘free trade’ areas and ‘customs unions’ like the EU, preference schemes for developing countries, and anti-dumping duties - which are not determined on a non-discrimination basis.
Tariffs and treatment that apply to the ‘most-favoured nation’ (MFN) must be applied to all MFNs. In the event of no-deal Brexit – and based on the application of the MFN principle of the WTO - the EU member states would have to apply the same tariff to imports from the UK as they do to imports from any other nation that has no preferential trade agreement. The same would apply to all other countries importing goods from the UK.
Without a deal the UK’s trade in services with the rest of the world would be governed by the WTO General Agreement on Trade in Services (GATS). The MFN principle applies to trade in services in the same way it applies to trade in goods - with more options for exceptions. Members can tailor their commitments under GATS in line with their national policy and schedule their commitments to a handful of sectors or choose to provide market access in a wide range of services.
Most countries do not rely on WTO – they have negotiated bilateral or regional Free Trade Associations and facilitation agreements. FTS’s focus on minimising the burden of regulatory barriers such as customs procedures.
As an EU Member State, the UK is an integral part of both the EU ‘Single Market’ and the ‘Customs Union’. The EU27 states combine to be the UK’s largest trading partner. In 2017 UK exports to the EU were £274 billion (44% of all UK exports). UK imports from the EU were £341 billion (53% of all UK imports). Services account for 40% of the UK’s exports to the EU.
All the trade within the Single Market takes place without paying tariffs or facing quota restrictions on goods. The Single Market also aims to eliminate non-tariff barriers such as differing technical specifications and labelling requirements.
With regard to trade in services, the Single Market provides the freedom to establish and run a company in any Member State. This is facilitated by mutual recognition of professional qualifications, freedom of movement of people and capital, and harmonisation of various rules.
No-deal in March 2019 means the UK will be a ‘third country’ to the EU for the purposes of trade. From exit day onwards, its relations with the EU will be governed by general public international law and both the UK and EU will start trading on the basis of WTO rules. The EU will be obliged to treat the UK no more favourably than any other country that has no preferential trade agreement with the block.
Under the WTO the UK would no longer be obliged to follow the rules applied by the EU. There would be no requirement to implement EU legislation, although UK businesses would still have to comply with EU rules in order to export into the Single Market.
Trade in goods
The EU Customs Union sets the Common Customs Tariff (CCT): all members of the customs union apply the same set of tariffs on goods imported from outside the EU. UK exports to the EU would face the EU’s CCT and imports into the UK from the EU would face whatever tariffs the UK decided to impose. All exports from outside the EU are subject to the Rules of Origin (RoO) checks, even if they come from a country which has a trade agreement with the EU. This ensures that a correct tariff is applied and goods do not enter the EU customs union illegally via a low tariff country. As exporters from a third country, UK companies will immediately face such checks on all goods exported to the EU.
Trading under WTO rules means that the maximum tariff that can be applied to goods coming from the UK is the MFN rate. The EU’s MFN tariffs have generally fallen over time. In 2015 the EU’s average tariff was 2.6% for non-agricultural products. This is an average figure; tariffs on some individual products are higher. The EU tariff on cars, for example, is 10%. While the EU tariffs are low on average, they are still substantial for some sectors, particularly agriculture. The average EU tariff on sugar and confectionery, beverages and tobacco, is around 20%. This could be potentially economically disruptive, as it would increase the cost of the UK products in the EU. However, the MFN principle would prevent the EU from levying discriminatory or punitive tariffs on goods from the UK - or vice versa.
As a third country the UK could face various non-tariff barriers to trade, including administrative and bureaucratic delays at customs, technical barriers to trade, import licensing, standards and rules of origin.
An EU ‘preparedness notice’ for a no-deal Brexit indicates, for example, that imports from the UK entering its territory may be subject to customs controls. Businesses will have to submit customs declarations and may be required to provide guarantees to cover potential customs debts.
Manufacturers or importers established in the UK will no longer be considered as EU economic operators. A former EU distributor will become an exporter and will have to comply with a new set of conformity assessments.
UK industrial products are currently subject to the standards and requirements of EU product legislation on general product safety, public health, environmental safety or energy efficiency requirements, for example. However, a no-deal Brexit may introduce new bureaucratic requirements to prove compliance.
The import of certain goods from the UK and the export of such goods to the UK will become subject to import/export licensing. The EU imposes such restrictions on goods going to and coming from third countries to protect health and safety and the environment. This affects goods such as waste, hazardous chemicals, genetically-modified organisms, live animals, products of animal origin, and some plants and plant products, such as wood packaging. The existing licences issued by the UK authorities will cease to be valid.
The licensing requirements will also apply to controlled goods, such as firearms and dual-use items that can be used for both civil and military purposes.
The Government’s ‘technical notice’ “Trading with the EU if there’s no Brexit deal” and “VAT for businesses if there’s no Brexit deal” clarify that the obligations for businesses that trade with the EU would be broadly the same as those that apply to companies currently trading with countries outside the EU. Businesses would have to register as UK economic operators, submit customs declarations on imports and exports, and might have to pay tariffs or fulfil other administrative requirements. Importers of goods from the EU would have to correctly classify these goods in order to apply the right UK import tariff.
Rules of origin
The EU has preferential trade arrangements with a range of other countries. UK inputs (materials or processing operations) currently count as ‘EU content’ for the purpose of determining if imports benefit from preferential tariffs the EU has agreed with those countries. As of the withdrawal date, in the absence of any other arrangement, goods originating in the UK that are incorporated in EU goods exported to third countries will no longer qualify as ‘EU content’. EU exporters will no longer be able to accumulate the UK share in the product and may thus miss out on the benefits of preferential tariffs.
Trade in services
Without an agreement, the UK’s trade in services with the EU will be governed by the WTO General Agreement on Trade in Services (GATS).
Within the EU Single Market, economic operators are free to establish and run a business in any Member State and can also provide services from their ‘home’ Member State in any other Member State. Professional qualifications acquired in one Member State are recognised across the Single Market. Freedom of movement of people and capital, harmonised rules on VAT, intellectual property rights and data protection all reduce the barriers to providing services across the EU. Many Single Market for Services measures are facilitated by the so-called Services Directive. This Directive aims to remove the legal and administrative barriers to cross-border service provision. It does this using various mechanisms, including:
abolishing “discriminatory requirements” placed on people establishing businesses in other countries, including residency requirements or nationality requirements;
removing other “burdensome requirements”, such as complex authorisation schemes, economic needs tests, or business size and health checks;
requiring Member States to establish a Single Point of Contact so businesses can access all relevant information easily.
The Directive also removes a range of barriers to consumers accessing services in other EU countries or accessing services provided by non-UK EU companies in the UK. Under a no-deal scenario, these provisions would cease to apply to UK operators in EU Member States.
Research by the OECD suggests that, on average, EU barriers to services sector trade with third countries are four times greater than those which apply inside the Single Market.
The Confederation of British Industry (CBI) has noted that if no deal is agreed, the WTO rules would not guarantee the same level of access to the EU market for services industries as there is now.
Mutual recognition of qualifications
A key ‘no-deal’ outcome for the professional and business services sector - which could have a major impact - is the mutual recognition of professional qualifications in the EU and the UK. It is possible that UK professionals working in the EU would no longer be recognised as having valid professional qualifications. This will now depend on the individual Member States’ existing rules on the recognition of qualifications awarded by ‘third countries’.
The European Commission guidance to the remaining EU27 member states on a UK no-deal Brexit in this respect is unhelpful. The UK’s third country status would mean: “recognition of professional qualifications of United Kingdom nationals in an EU-27 Member State will be governed by the national policies and rules of that Member State, irrespective of whether the qualifications of the United Kingdom national were obtained in the United Kingdom, in another third country or in an EU-27 Member State.”