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In the past months, both the UK and the EU published position papers concerning customs. The UK proposal advanced two approaches for the future customs relationship with the EU after Brexit. The first one entails a highly streamlined customs arrangement, with trade facilitations and domestic simplifications. The second approach aims at a new customs partnership, which would allegedly remove the need for customs checks for goods entering the EU via the UK.
The EU position paper, on the contrary, focused on clarifying the customs status of goods and the applicable legal provisions at the moment of the withdrawal. It does not concern the future customs relationship with the UK. Both papers reflect a wide gap which has marked each round of the negotiations: the UK urges the start of trade and customs negotiations, while the EU contends that sufficient progress must be achieved on the orderly withdrawal before trade talks can start. For companies trading with both the EU and the UK, a clear view of the Brexit risks and opportunities and a pragmatic attitude are key to cope with the uncertainty.
The UK proposal
A. Highly streamlined customs arrangement: trade facilitations and unilateral simplifications
Under the highly streamlined customs arrangement, a customs border between the EU and the UK would still exist, but negotiated trade facilitations and domestic simplifications would eliminate customs formalities as much as possible. One of the trade facilitation measures the UK would seek is a continued waiver from the requirement to submit entry and exit summary declarations between the UK and the EU. The UCC already provides for a possibility to waive these declarations for some specific types of goods or where required by international agreements . The EU granted such a waiver to few third countries - Andorra, Norway and Switzerland -, because the agreements with these countries create a de facto common customs security area between the EU and each one of these countries. The UK would have to apply security rules that are equivalent to those in force in the EU to request such a waiver. However, it is difficult to imagine that the EU would agree with this request outside the framework of an FTA or a customs union, which means that, the UK customs proposal would need to be assessed against the format of the future relationship with the EU.
As for the mutual recognition of the Authorised Economic Operator, this could indeed contribute to reduce the formalities in the exchanges of goods between the EU and the UK, as it is already the applied in the relationship with Norway, Switzerland, Andorra, US, China, Japan and Canada. Nonetheless, this measure may not help SMEs, which represent a significant part of the bilateral trade. Other trade facilitation measures cited are a membership to the Common Transit Convention and a technology-based solution for roll-on, roll-off ports, consisting of a pre-arrival notification which would prevent vehicles to stop at the border. Overall, it is important to retain that the UK will be a third country on 30th March 2019 and, even if the EU would agree with the measures proposed by the UK, some formalities and procedures will apply in the bilateral trade between the partners. The idea that trade can be as “frictionless” as it is while the UK is still a Member of the EU Customs Union simply does not correspond to the reality.
B. New customs partnership
The second approach - the establishment of a new customs partnership - goes even further in selling a deal that would imply leaving the EU Customs Union while maintaining the current facilities. The UK proposal is to eliminate the need for a customs border, by mirroring the EU’s customs approach at its external border for goods that are imported to the UK to be consumed in the EU market. Goods originating in third countries and destined for the UK market, nonetheless, would be subject to the UK’s own MFN tariffs and trade policy. In other words, the UK would work with two different sets of MFN tariffs depending on the final destination of the goods, acting like an extension of the EU customs territory, while outside of the EU Customs Union. This means that like products imported in the UK would be subject to different tariff rates depending on whether they are consumed in the UK or the in the EU market. However, this constitutes a violation the WTO MFN obligation enshrined in Article I of GATT1994. Even if the EU and the UK would conclude an FTA – which would then be covered by the exception of Article XXIV GATT – the UK would not be allowed to apply two sets of MFN tariffs to like products imported from third countries.
Moreover, the UK proposes that this system would be supported by a tracking or repayment mechanism, to determine where the goods were finally consumed and whether the importer would be entitled to a refund. Such a system is not only difficult to manage and prone to fraud, but also contrary to the very objective of ensuring a frictionless trade between the EU and the UK. In sum, the UK proposal for a new customs partnership is contrary to the WTO Multilateral Trade Agreements and it does not answer to the needs of companies trading on both sides of the channel.
The EU proposal
The proposal of the EU aims to clarify the customs status of the goods on the day of the withdrawal and the applicable legal provisions. The core principle is that, with respect to goods that enter, leave or transit the EU customs territory on the day of the withdrawal or afterwards, the customs status of the goods will be determined by the legal provisions applicable when the relevant movement initiates. In that sense, the relevant UCC provisions should continue to be applied by the UK customs authorities with regards to Union goods which, on the date of the withdrawal, are in outward processing, where the procedures is ended or discharged after the withdrawal date. Likewise, the UCC remains applicable in the UK to non-Union goods which are held in temporary storage, under transit, customs warehousing, inward processing, temporary admission or end-use, even if the procedure is ended or discharged on of after the withdrawal date. In sum, the EU position paper addresses customs matters as part of the orderly withdrawal negotiations and does not go further into discussing the future customs relationship. It attempts to bring some much-needed legal certainty to companies involved in the EU-UK trade while respecting the Council mandate to not start negotiating the future relationship until enough progress is achieved on the withdrawal terms.
Coping with uncertainty: call for a pragmatic attitude
The two proposals reflect a wide gap in the positions of the EU and the UK, which has marked the Brexit negotiations since the beginning. On the one hand, the UK urges the EU to start the trade/customs negotiations; on the other hand, the EU refuses to budge until sufficient progress is made on the orderly withdrawal. How to bridge such disparate positions is a question for the two negotiating teams. For companies trying to make sense of the current context the key messages are:
- after Brexit, the UK will become a third country;
- trade between the UK and the EU will not be as frictionless as it is now;
- some formalities and procedures will apply to the movement of goods;
- a trade agreement can only be concluded after the UK has left the EU.
The stakes are very high and businesses cannot afford to wait for more certainty to start acting. The moment is now. The better strategy is to have a clear view of the corresponding risks and opportunities, by establishing the financial, customs and other impacts Brexit will have on your business. From there, you can define an action plan to mitigate the risks in line with your business strategy.
Customs4trade experts can guide you on this journey.