Brexit and a new customs arrangement between the UK and the EU
Posted in WTO and international trade
The UK published yesterday a paper on “Future Customs Arrangements” with the EU, as part of a series of papers that will provide the Government’s vision for the “new, deep and special partnership” with the EU.
The paper starts by reiterating that the UK will leave the EU single market and the EU Customs Union. In an echo of the Prime Minister’s Lancaster House speech, the paper also reiterates that the Government seeks a new customs arrangement, different from and outside the EU Customs Union. For this purpose, the Government outlines two approaches: a highly streamlined customs arrangement and a new customs partnership with the EU.
In both cases, the Government objectives are to avoid the cliff-edge for business and individuals, to facilitate the free-est and most frictionless trade possible in goods between the UK and the EU, to avoid a ‘hard border’ between Ireland and Northern Ireland and to pursue its independent trade policy objectives.
Under the first approach - ‘A highly streamlined customs arrangement’ - customs processes will apply to all UK trade with the EU and the rest of the world, customs declarations and additional documentation will be required and rules of origin will be verified. This option also proposes negotiating trade facilitation with the EU, including simplified requirements for moving goods across border, reduction of delays at ports through mutual recognition of “Authorised Economic Operators” to enable faster clearance of goods at the border, a bilateral implementation of a technology-based solution and enhanced customs cooperation, mutual assistance and data sharing.
Under this approach the UK will set its domestic custom system to work on a cooperative basis with the EU. This kind of arrangement could function on its own, such as the customs cooperation agreement in place between the EU and the US, for example, or could be part of a broader partnership or free trade agreement - as we suggested in our previous blog post. However, as the paper states, this option implies an increase in administrative burden and costs and depends on a negotiated outcome.
It is also important to note that the development by the UK of its domestic custom system should also be part of the contingency plan the UK is preparing in case there is no agreement with the EU27: the country would then be able operate a standalone customs VAT and excise system, to be developed through a Customs Bill.
The second, alternative, proposal - ‘A new customs partnership with the EU’ - proposes to support bilateral trade by removing the need for customs processes with the EU. Under this approach, the UK customs system would align with the EU’s external border for goods that will be consumed in the EU market. The UK would apply the same tariffs the EU applies and keep rules of origin treatment for goods arriving in the UK and destined for the EU. At the same time, according to this proposal, “the UK would also be able to apply its own tariffs and trade policy to UK exports and imports from other countries destined for the UK market”.
A customs union is a form of trade agreement with two elements: (i) trade liberalisation between the parties so that they form one customs territory in which goods circulate free of tariffs and customs checks and (ii) the application of a common external tariff to trade with third parties.
Under this ‘innovative’ approach the UK is proposing an arrangement that keeps the first element of a traditional custom union, so that trade in goods between the UK and EU continue enjoying the same treatment as they currently enjoy under the EU Customs Union –no tariffs and no customs checks - without the second element, so that the UK is free of the common external tariffs that currently restrict its ability to conclude free trade agreements with third countries. This difference with a traditional customs union would be at the core of the new customs partnership the UK is proposing.
While the Government acknowledges that “this is an innovative and untested approach that would take time to develop and implement”, the more immediate question is whether this is a feasible and realistic approach that could be further explored during negotiations with the EU. Leaving aside the sequential order of the negotiations proposed by the EU, the proposal might raise some operative issues concerning rules of origin, the application of differentiated tariffs - EU tariffs as opposed to UK tariffs for goods destined to the EU - and control of circumvention efforts. Particularly for agricultural products that are protected by high and complex EU tariffs, the proposed customs partnership might prove challenging to implement. As the paper indicates, this approach would need a robust enforcement mechanism to ensure that goods not in compliance with EU trade policy stay in the UK. All these issues would not only involve a complex negotiation but also high implementation costs that will need to be weighed against other options.
While businesses adapt to new customs arrangements and to facilitate their implementation, in a smooth transition and minimising disruptions, the Government is proposing a new model of close association with the EU custom union for a time-limited period. This interim model is to be different but similar to the EU custom unions. Hence, the Government is ruling out remaining in the EU Customs Union for a transitional period until new customs arrangements are in place. The paper is proposing a different kind of association - not defined yet – that will allow the UK to negotiate and conclude trade agreements with third parties although those agreements are not to enter into force if found to be inconsistent with the interim agreement while in force.
Although the development of the approaches proposed in this paper would depend on the course of negotiations with the EU, the innovative factor sought through both the new customs partnership and the new interim agreement seems to converge around the need for avoiding the application of the common external tariff after March 2019 so that the UK can exercise its independent trade policy.
As the paper emphasises, the new interim agreement that aims to provide certainty and stability for business needs to be explored across several dimensions and will need to sit alongside other interim agreements. An interim or transitional agreement related to the implementation of a negotiated free trade agreement between the UK and the EU might incorporate the facilitating, modernising and co-operation features of a new customs arrangement embedded in the proposed approaches, while allowing the UK to follow an independent trade policy with third parties.
 Authorised Economic Operators or AEO are economic agents established in the customs territory of the EU recognised as reliable in their customs related activities throughout the EU and entitled to certain benefits such as simplified customs procedures. For more information, see: Notice 117: Authorised Economic Operator, HM Revenue & Customs, or Authorised Economic Operator (AEO), European Commission.