By Gavin Everson, Director, Global Trade Consulting
It’s been a banner year thus far for British importers. The completion of Brexit ushered in a new era rife with customs complexities, the likes of which enterprises within the UK hadn’t seen in more than a generation. What’s more, by mid-year, the ongoing row between Brussels and London over the fate of the Northern Ireland Protocol had hit a fever pitch.
Lurking in the background as all of this has taken place, has been an aggressive push by London to establish free trade – or at least more favorable trade – with other countries.
Since the onset of the transitional Brexit period in February 2020, the UK has either pursued or concluded trade deals with Japan, Australia, New Zealand, Canada, India, the Gulf Cooperation Council (made up of six states in the Persian Gulf). In addition, London has formally applied to join in the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP), a trade bloc of 11 Pacific Rim countries and has informally floated the suggestion of joining the recently enacted United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA.
The effort is to a great extent a means of compensating for the absence of a comparable agreement with the U.S., which has long been considered the grand prize of Brexit. For a variety of reasons, Washington has expressed muted enthusiasm for a deal with London. However, the effort to secure new deals elsewhere is also a means of London looking for ways to diversify trade after plunging import numbers from its largest trade partner, the EU. Between January and August of 2021, EU imports into the UK have dropped -16.7%, precipitating a massive 42% increase in the UK’s trade deficit with the EU. The shifting trade trend is undoubtedly related to increased complexity of trade across the English Channel brought on by the UK’s separation from the EU.
Diversification is good, but …
The desire by Whitehall to pursue new trade agreements around the world isn’t something to be viewed with cynicism. Indeed, breaking down barriers to trade can only serve to spur competition, improve productivity and temper inflation.
Yet, at the street level, there are critical considerations for businesses, especially those accustomed to doing business with vendors in the EU. As it stands, the closure of the Brexit process brought about significant complexity in the form of new regulatory requirements, new taxation and new tariffs. In many cases, however, businesses are able to circumvent tariffs by making use of the Trade and Cooperation Agreement (TCA). To do so, they must navigate a long list of requisite documentation and the not-so-simple classification system that goes along with them. Failure to effectively classify goods and/or meet the Rules of Origin set out by the TCA can result in retroactive duty payments, fines and penalties and even the revocation of import licensing.
In the event the UK is successful in its bid to secure bilateral or multilateral free trading arrangements with other countries, businesses will be able to take advantage of eliminated or reduce tariff barriers, but also will face entirely separate sets of Rules of Origin.
Navigating these rules isn’t for the impatient. In the post-Brexit period, businesses that have been fortunate enough to secure customs brokers have been able to lean on those brokers to facilitate entry of goods into the UK. However, adherence to Rules of Origin and proper classification is an entirely separate matter that falls into the realm of legal or consultative review.
More than just due diligence
Effectively using any new trade agreement will require businesses to strongly consider what they’re bringing into the country and its composition. For example, in some cases Rules of Origin may impose Tariff Rate Quotas (TRQs), which limit the total volume of imports from a country. Once the quota is exceeded, a tariff will apply. For some businesses, this may mean watching national import volumes or, conversely, the import or use of a different product or material.
In other cases, Rules of Origin will put in place specific requirements for regional values (e.g., requiring a set percentage of a product is manufactured in the UK). Precisely how that percentage is calculated isn’t often easily discerned.
As trade agreements don’t necessarily remove all tariffs, importers will need to evaluate whether or not it makes sense to import an intermediate good in its traditional form, or if it might make more sense to further develop the intermediate good in its place of manufacturing origin to avoid having to pay a tariff on the traditional form.
There are myriad other considerations, including geographic indications, product labelling, transport times (including assessment of the originating country’s port and roadway infrastructure) and, of course, the safety and quality standards.
All this may seem intuitive to businesses already accustomed to using trade agreements. But for those that have relied on the EU’s open market for more than 20 years, these issues are an enigma and not easily navigated, particularly in instances where the product is coming from a part of the world where quality standards and regulations may be rather disparate.
Preparing in advance
The complications associated with new trade agreements shouldn’t negate the value of those treaties. On the contrary, Rules of Origin are put in place to provide transparency around trade practices and outcome so that businesses can trade with confidence, knowing that adherence to the Rules will result in the removal of often significant costs.
Nevertheless, the degree to which navigating Rules of Origin will be a struggle shouldn’t be underestimated. British businesses that are looking forward to accessing new sourcing origins to replace European vendors should be considering today the resources (both human and financial) they will need to optimize their use of these FTAs. Failure to do so will only result in delays, unexpected costs and tremendous frustration.
Gavin Everson has more than 35 years of experience in customs, international trade and logistics management, particularly in implementing customs and logistics processes and systems. He has responsibility for advising and delivering Customs solutions to Livingston’s EMEA clients.