UK letter to the EU (19 May 2020)
On the 24 July 2019, Boris Johnson became Prime Minster of the United Kingdom (UK). In his first statement, he clarified that if a deal is not concluded between the UK and the European Union (EU) by 31 October 2019, the UK will leave the EU without a deal. The EU has rules out renegotiating a new Withdrawal Agreement, after both parties agreed a lengthy text in the beginning of the year. Many observers believe that it will not be possible to conclude a new deal by 31 October 2019. In this case, the UK will leave the EU and by 1 November 2019 be considered a third country to the EU. This has significant consequences.
This blog entry provides high-level information on what a "No-Deal means for customs & global trade. For additional benefits to Premium subscribers to our services, please see below.
What is the UK leaving?
In general terms, leaving the EU would mean that thousands of pieces of EU legislation (known as primary and secondary law) will stop to apply from 1 November 2019.
For importing and exporting businesses, this means in particular:
1. Leaving the Customs Union of the EU,
2. Leaving the EU Single Market (also known as Internal Market or Common Market) which allows for the freedom of movement of goods, (as well as labour, capital and services) which extends to all EU Member States and Liechtenstein, Norway, Iceland and Switzerland through the separate agreements. This implies that the rules around export controls, Free Trade Agreements and product conformity are also lapsing come Brexit day +1.
How did we get there?
In summary. on 23 June 2016, a majority of voters in the UK referendum on the membership of the European Union, favoured the departure by the UK from the EU. on 29 March 2017, the UK served notice of its departure under Article 50 of the Treaty on European Union (TEU). This began a two-year process whereby the UK would automatically leave the EU on 29 March 2019. On 22 March 2019, the UK and EU agreed an initial extension and, subsequently, a second extension until 11:00 pm on 31 October 2019 if no withdrawal agreement was concluded.
When does the UK leave the EU? This time, for real?
Currently, the default legal position is that the UK will leave the EU at 11:00 pm on 31 October unless:
Another extension is agreed unanimously by the UK and the 27 remaining Member States (now expected to require "a good reason" like a general election or another referendum)
A different agreement with the EU is reached (the EU has ruled this out, and the timing is not favourable - summer recess, entry of a new EU Parliament and EU Commission); or
The Article 50 notice is unilaterally revoked.
The Prime Minister Boris Johnson is on record as saying: “We are getting ready to come out on 31 October". Asked to confirm this, he added: “Do or die. Come what may.”
He also said he would "scrap" Theresa May’s withdrawal agreement and seek a completely new deal before then, as minor changes would not satisfy him: “I mean more than a change” he said. “It’s got to be, we need a new withdrawal agreement – if we’re going to go out on the basis of a withdrawal agreement.”
The EU has said it will not now negotiate a different agreement before 31 October, and that in particular it will not renegotiate the “Northern Ireland Backstop” in the current agreement. This, however, is the most contentious issue in the current withdrawal agreement to the new UK government.
So is a No Deal Brexit unavoidable?
Given the current deadlock between Brussels and London, it appears that way. However, from the UK side, observers point to two ways in which a no deal can be avoided at present:
1. A legislation or motion requiring the government (or someone else) to request a further extension,
2. A vote of no confidence, which could lead to a new coalition (or "unity") government which will seek an extension, followed by a general election.
Although unlikely, the EU Member States may also come forward with alternative solutions to avoid a hard Brexit.
Finally, it needs to be noted that if the 31 October 2019 deadline passes
before Parliament can arrange either option mentioned above, then Great Britain could almost accidentally "crash" out of the EU.
Consequences of a No Deal Brexit for US, EU and UK importing and exporting businesses
It is not possible in this update to discuss all the other potential consequences of a no deal Brexit, but some points, relevant, in particular, for importing businesses, are set out below.
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A number of studies suggest that the UK will be significantly worse off if there is a no deal. In a worst-case scenario, UK GDP could be 10.7% lower in 15 years’ time than if the UK stayed in the EU. One reason is, of course, that currently, the principle of freedom of movement, one of key pillars of the Single Market, facilitates free trade of goods. Thanks to membership in the EU Customs Union and the EU Single Market, UK goods can move freely without tariffs. Products coming from outside the EU, for example from the US, can circulate across all EU 28 Member States once the appropriate customs duty has been paid and the customs import formalities have been completed once only! They could even move across the EU duty-unpaid thanks to harmonized Union Customs rules. In short, the Customs Union and the Single Market largely remove the need for controls at national borders between EU Member States.
What does leaving the EU Customs Union and EU Single Market mean?
Leaving the Customs Union and Single Market means the UK will be considered a third
country regarding imports and exports into and from the EU. There will be no trading agreement or transitional arrangements in place with the EU.
The UK will not benefit from tariff free and equal rules treatment that the membership of the Customs Union entails. Leaving the Single Market has consequences on product standards and conformity and loss of 40+ free trade agreements that other third countries have entered into with the EU, including South Korea, Japan and Canada (Please note that the UK managed to sign some continuity agreements to prepare for a no deal Brexit, although not for bigger markets like Japan, South Korea or Canada yet). All this is, of course, besides the loss of freedom of movement of goods, mentioned earlier
The UK will instead revert to trading on World Trade Organization (WTO) rules (Some continuity agreements with Norway, Iceland and Liechtenstein have been concluded).
What does training under WTO rules mean?
The UK's trade arrangements with the wider world would now be governed by the WTO agreement, the General Agreement on Tariffs and Trade (“GATT”). The key provision of relevance for Customs Managers and Global Trade Professionals is that member countries are obliged to grant most favoured nation (“MFN”) treatment to all other member countries without discrimination. Outside the EU, the UK would be free to set its own tariffs for exports from the UK to the EU or the wider world, but would have to grant the same tariffs to all other WTO countries (unless it has a comprehensive free trade agreements with them): What the UK offers to the EU it has to offer to all other WTO members as well! Consequently, UK agri produce exports to the EU, which currently have no tariff applied, would become subject to tariffs, in some cases well in excess of 65%.
The New UK Tariff Schedule
To prepare for the new tariff regime, the UK government has published a new temporary schedule making 87% of all imports duty free, adopting a zero-tariff regime for these. This will lead to a situation where the UK has to pay tariffs on exports, but does not charge them on imports. This can negatively impact certain industries in the UK which cannot compete within the UK and internationally if they have to pay tariffs on the product they export but tariffs cease to be charged on third county (like US, Japan or Canada) goods imported into the UK. It also makes it more difficult to negotiate Free Trade Agreements.
The Border: friction, delays and costs
The EU is currently a very large trading partner of the UK. According to one estimate, 44% of all UK exports went to the EU in 2017, when no tariffs or border checks were in place. Aside from the potential economic impact that monetary tariffs might have on trade, there are concerns that checks at the UK border (for any reason – e.g. to collect tariffs or to check compliance with standards) could impact and even restrict doing business in the UK and EU, also for those countries who have a supply chain which required goods to land in the UK as a hub to disctrubte accrss the EU. The fact that the EU-UK border become HARD now has the potential to disrupt trade, especially for businesses that rely on “just in time” delivery of manufacturing components, such as the automotive industry. The time involved in submitting customs delcarations, and the possibility of customs check without having the necessary port infrastructure in the UK or the EU, has lead observers to belief that there is a real risk for friction, delays and significant cost increases.
The Trade Agreements
To avoid trading under the basic and often unfavourable WTO terms with other WTO members, the UK would need to negociate and conclude its own free trade arrangements. According to lastest infromation (August 2019), there are temporary “continuity” arrangements in place which aim to replicate the existing arrangements with the EU as far as possible. They have been intalled with Liechtenstein, Switzerland, the Faroe Islands, Norway, Iceland, Caribbean countries, Pacific Islands, Central America, Andean countries, Israel, the Palestinian Authority, Eastern and Southern Africa and Chile. An agreement with South Korea is set to be forthcoming.
Unless otherwise agreed, Brexit will occur on 11pm on 31 October 2019, for Halloween. Present indication points to a "no deal" Brexit, in which current EU legislation stops to apply in the UK overnight. The consequences from EU-UK cross border trade are serious as Brexit would imply leaving the EU Customs Union and the EU Single Market. The UK would revert to WTO trading terms, having to make customs delcarations and pay appropriate tariffs to send its produce to the EU and vice versa. The impostition of border controls will imply friction, delays and costs. Preferential trade agreements that the EU has concluded will no longer apply and this may raise the costs of UK business.
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