Brexit and leaving the Customs Union: What it means for business

In the political calendar, the middle of August is usually characterised by silly season, with frivolous and far-fetched news stories doing the rounds as Parliament is in Recess and MPs on holiday. In the past week or so, newspapers have duly obliged, with mounting speculation that Jacob Rees-Mogg could become the next Conservative Party leader (although it is difficult to rule anything out these days).

Today, however, has seen the announcement of some very dry and technical – yet very substantial – policy proposals from the Government in the shape of its proposals for a future customs arrangement with the EU. In economic terms, the implications of this could be massive – potentially affecting every business with UK operations that imports or exports goods to and from EU member states.

The UK Government has already stated its position is to leave the EU Customs Union. Today’s announcement seeks to outline the nature of a future customs arrangement, outside the EU Customs Union. These will be guided by the Government’s ‘strategic priorities’ on Brexit and future trade policy which are (1) to ensure UK-EU trade is as frictionless as possible; (2) to avoid a ‘hard border’ between Ireland and Northern Ireland; and (3) to establish an independent international trade policy (so the UK can strike new free trade deals with other countries around the world).

A number of observations can be made on the political and public policy implications:

1. A sign that the Government is attempting to regain the initiative: After weeks of speculation about cabinet level splits and confusion over its position, the Government will hope that in publishing these proposals it will regain a degree of initiative on negotiations with the EU as well as end the uncertainty within Government and the Conservative Party. These proposals are being positioned as the first of a series of papers on the UK’s future partnership with the EU, published ahead of the third round of formal negotiations in Brussels, which begin on 28 August. This is also being published ahead of key legislation entering Parliament, such as the ‘Repeal Bill’ and the Customs Bill. It may, however, be premature, to assume the UK’s position on the Customs Union is settled. There is no cross-party consensus on this approach (Keir Starmer, Labour’s Brexit spokesman, has described the plans as “fantastical and contradictory”) and this will present challenges in passing the necessary legislation in Parliament.

2. The Government’s two ‘options’ on future customs arrangements are both very complicated: As part of its announcement, the UK Government has outlined two broad approaches the UK could adopt to meet its strategic objectives. These are as follows:

    • Option 1: Implement ‘a highly streamlined’ customs arrangement with the EU as a third party: This arrangement would see the UK and the EU trading with each other as third parties. This would support the UK’s ability to facilitate trade with other countries in the world – but this would see the return of traditional customs processes between the UK and EU member states (eg requirements for documentation, customs declarations, safety and security information, licenses, customs duties and import VAT) which would see an increase in administration for companies trading. However, the UK Government would seek to simplify such requirements and ensure administration and delays associated with these customs processes would be minimised through separate agreements (eg negotiating waivers) and implementing ‘technology-based solutions’ to the movement of goods at ports and airports.
    • Option 2: Agree a new customs partnership with the EU: This option would involve the formation of a partnership between the UK and EU that exists outside the current customs union arrangement, while removing the need for customs processes at the border between UK and EU member states.  In order to achieve this, the UK would need to differentiate between goods passing its external border, as to whether they are destined for the EU or UK markets. For goods intended for the EU market (including any of those in a EU-related supply chain), the UK would essentially mirror the EU’s customs approach (eg same tariffs and same treatment for rules of origin). The UK would then apply its own tariffs and trade policy to exports and imports intended solely for the UK market, in accordance with its trade arrangements with other countries. In this scenario, there is acknowledgement that this is an untested approach and there would need to be a robust enforcement mechanism that ensured goods which had not complied with the EU’s trade policy stayed in the UK.

Both of these options present a number of challenges in terms of their feasibility and implementation. For instance, they would require a complex level of agreements and reciprocal arrangements from the EU and will take time to fully implement. There is also, of course, no guarantee that they will be successful in achieving their stated aims – Option 2 is essentially unprecedented. It should also be noted that they are starting points for negotiation.

3. The UK Government wants an interim arrangement on customs as part of a Brexit transition deal: As part of its approach, the UK would seek to agree an interim period before any new arrangement is implemented. This would provide the necessary time for the UK and EU Member States, as well as business, to put in place long term solutions for the new customs arrangement. This would therefore require ‘continued close association’ with the EU Customs Union for a time-limited period after the UK has left the EU in March 2019. The terms of this interim arrangement have yet to be outlined, although the UK Government acknowledges that free trade deals with third countries could not be implemented while these interim measures were in place.

4. Businesses should speak up: From a business perspective, the Government’s proposals on new customs arrangements will need to be carefully assessed in terms of their potential impact on the trading of goods between the UK and EU and with other countries. In particular, the ‘options’ and process of interim arrangements will need to be examined in terms of any impact on delays in transfer of goods, increased administrative burdens and any costs or disruption associated with adjustment to the new regimes. The Government is inviting views from businesses and there will be opportunities to engage.

5. Agreeing these proposals with the EU will not be straightforward: It should be noted that these UK proposals are essentially a one-sided view and everything will be subject to negotiations. There will be a number of challenges to achieving progress on this. Firstly, the EU Commission has already insisted that there must be sufficient progress on withdrawal issues before a transitional deal or new customs arrangements can be discussed (so serious talks may not begin on this for several months). Secondly, there is likely to be opposition to the UK’s position in the EU Commission, Council and Parliament – and the complexity of the UK’s proposals will place obligations on member states, which may not be welcomed.

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