Free Trade Agreement and Customs
It is the UK’s clear position that it wishes to negotiate a free-trade agreement with the European Union (and not a customs union) which is to apply after the effective date of Brexit. Furthermore, the UK’s declared intention is not to have a close regulatory relationship or anything approaching membership of the single market. Therefore, significant regulatory checks will also apply enforced through the customs controls.
Either a no deal Brexit or a Brexit with a free trade agreement would change fundamentally the terms on which trade is undertaken between the United Kingdom and Ireland. EU law and international law World Trading Organisation requirements are very specific in respect of customs control. There are detailed customs controls and rules that apply to all trade from inside the European Union to and with outside the European Union.
WTO rules obligations require that all other members with which there is no preferential trade agreement must be treated the same. After Brexit in the absence of a transitional arrangement, the United Kingdom will be a ‘third country’.
The default position is that all movements of goods will be subject to customs control. Each movement must be declared to the customs authority through the Irish automated entry processing (AEP) in advance. Every export to the United Kingdom is subject to EU / Irish export control as an export and UK import control as an import. Every import from the United Kingdom is subject to EU/Irish import control as an import and UK export control as an export.
In most cases, Irish-based traders would be importers or exporters only and their counterparts in the United Kingdom will have the opposite role. In some cases, there may be movements between associated companies as part of the supply chain.
The new UK customs law will be a mirror image of the EU law, at least initially. There are standardised forms used in international customs practice. They are quite detailed, and it will be necessary for traders to come to terms with particular parts and information which they must complete. Many traders use customs agents.
The EU has offered the Canadian (the CETA Agreement) model to the UK with level playing field requirements which would eliminate almost all tariffs. The Canadian model does provide for some tariffs in the area of food and agricultural products. It remains to be seen whether a future trade agreement will include all agricultural products.
In the event of a trade agreement, there may be no tariffs or almost no tariffs but customs paperwork, with declarations, returns, and other requirements are very likely to apply. A significant issue will be that of proving the origin of goods from an EU and Irish perspective on exports and imports into the other territory.
Two Aspects – Tariffs and Administrative Cost
If there is an EU UK trade agreement even a minimal agreement dealing with goods by the effective date of Brexit, then it is likely that customs duties on most non-agricultural products will be zero in almost all cases. However, customs procedures will still apply for the reasons mentioned in other chapters such as confirmation of origin statistical purposes VAT collection and regulatory compliance
There are two significant aspects of customs. The first is the actual customs duties themselves. They are paid by the importer. The other significant aspect of customs duties is the cost of compliance. There are costs in making customs returns by way of export in the United Kingdom and by way of import in Ireland and vice versa. This can either be directly incurred by traders or passed back to them expressly or rolled into the price or the cost of carriage /logistics.
The costs of undertaking customs declarations are not merely the cost of making the returns. There are additional unavoidable costs for the carriers irrespective of who does the declarations. A certain amount of policing and checking is inevitable with significant disruption knock-on costs likely. Documentary checks require the trader or its agent to be on standby to answer documentary requests or queries when the (e.g. ferry) arrives. Physical checks require that the goods are made available, at the trader’s expense.
Taking on customs obligations involves inevitable costs and possible changes in business models and structures. It is necessary to have an importer of record and exporter record in each case established in the country or state of export and import respectively. It may be necessary for Irish exporters, for example, to deal with the UK intermediary or establish their own entity in the United Kingdom to continue supplying in some cases such as to consumers or business customers which are not prepared to undertake import customs requirements.
Irish Revenue Approach
After Brexit, it is estimated that the number of declarations to Revenue will increase from approximately 1.7 million to 20 million per annum. Many traders will never have dealt with customs before so that there is a significant possibility that there will be considerably more friction in trade than applies to trade by existing businesses with third countries.
The Revenue have indicated that they may undertake interventions, at least initially, away from the land border insofar as possible in the event of a hard Brexit. Revenue indicates they are aware of the challenge involved and will seek to facilitate the free flow of trade insofar as possible. However, Revenue are bound by EU customs rules and indicates that there will be changes and friction does not now exist, in the event of a hard Brexit. They will use facilitation available in EU customs law where possible.
Every export from one territory (the EU) to the other (the UK) is an import into the other. Customs obligations arise both for each export and each import. Because of the risk issues from the respective revenue authorities involved. The controls in relation to exports are lighter than those in relation to imports.
It is likely that most tariffs outside of the areas of food and agriculture will be zero under the future trade agreement or the trade aspects of the more comprehensive feature relationship agreement. The consequence of a negotiated trade agreement being in place on the effective date of exit there would be few tariffs provided that the goods originate in either the UK or the UK. However, there would be significant customs compliance procedures in such cases the cost practicality of which may greatly exceed the tariff cost.
In many sectors, the EU’s most-favoured-nation customs rate is already at or close to 0%. UK may either adopt the EU schedule of rates for third countries or may as it had proposed prior to the hard Brexit risk dates in 2019, unilaterally adopt zero rates across a wider range of product categories for a temporary period. Therefore, the practical difference between a hard no deal Brexit and a negotiated trade agreement Brexit may be very little if any in some sectors.
In many cases, the 0% tariff may not be available under an EU UK free trade agreement. The goods must be of EU or UK origin in order to qualify for the zero or another favourable rate. The preferential zero or almost zero tariffs will be dependent on the goods concerned originating in the EU or UK.
Origin for the purpose of most trade agreements requires that the goods must be manufactured or substantially transformed in the country concerned. Origin does not mean that the goods have travelled or moved from that country. The exact extent of origin required for qualification and the proofs of that origin required is likely to be set out in the trade agreement itself. In some agreement issues of origin take over 150 pages.
The issue of certificates of origin and proof of origin can be administratively burdensome. This requires proof of origin. Proof of origin may require obtaining certification possibly on foot of an application to a governmental body or Chamber of Commerce. In some cases, the cost of certification of origin may not be worth the customs duty saved so that the lower rate is not claimed.
In some cases, self-certification by the manufacturer is permitted. In other cases, an application must be made to a Chamber of Commerce or governmental body which has a trusted status in the other country to certify the position. The actual rules depend on the terms of the treaty and define what exactly is required to meet the origin test
The proof of certification is likely to be rationalised insofar as possible under the trade agreement itself. More modern trade agreements have sought to put in place less onerous risk-based systems such as the registered exporter system applied under the general system of preferences with developing countries and more lately applied in the Canada and Japan agreement. This allows registered exporter is to certify origin including a specific declaration in their invoice or another commercial document where the consignment is below €6000.
Duties Apply if Third Country Origin
In many cases, it may not be possible to qualify for the favourable duties under the UK EU trade agreement because the goods are of non-UK non-EU origin. A large percentage of all goods sold in the EU and UK are manufactured in China South and Southeast Asia and are imported. They would be subject to customs duties in many cases upon import. In the absence of use of a suspensive customs process, they would be subject to duty both on import into the UK or EU and then again on export and import into the EU or UK as the case may be. The consequence may be that such trade flows change or that steps are taken to place the goods under customs control within one territory before moving to the other.
From a trade, in goods perspective, the difference between the direct effect of a UK exit with a trade agreement and UK exit without a trade agreement may be minimal in some sectors. There might be a minimal difference in customs duties. The customs processes would be almost equally onerous. In many sectors and contexts, the costs of the processes themselves are much more significant than the tariffs.
Third Country Trade Agreements
The EU has preferential trade agreements with numerous third countries. Under those trade agreements, goods imported from the EU may benefit from a preferential tariff rate treatment. Under the agreements, the goods must generally be wholly obtained from the EU. This requires that they are to be manufactured in the EU totally or substantially. The particular agreements may define the exact criteria.
After Brexit, goods or parts originating in the UK may no longer qualify as EU content for the purpose of the EU’s trade agreements with third countries. This may cause the loss of the preferential tariffs and duties available under the trade agreement for those goods on import into the third country concerned. They may no longer qualify under the rules of origin applicable. The origin of the goods may be certified by governmental authorities or bodies or in some cases by the exporters themselves, subject to prior authorisation.