Here are some extracts from a recent report by the Bruges Group, a UK think tank that has long favoured Brexit, which outlines some of the difficulties that will arise for UK exports to the EU (including Ireland), and probably for EU exports to the UK (including Northern Ireland) .
It was based on primary research carried out by the Bruges Group with managers in the logistics industry. It is long, but well worth reading in full.
It sets out, in alarming detail, the way in which the costs of doing business will be increased by the UK initiative to leave the European Union;
“Exporting into the EU requires a convoluted process to be completed. Goods must have assigned to them an identification number, inputted at the port of destination. The larger exporters find the process easier. They can make their declarations at the end of the month. Those who export less to the EU will, however, be faced with bureaucratic hurdles.
Clearance for use, allowing the product to go into circulation to be sold in the UK, or an EU country, needs to be obtained. The process for assessing this, even in the EU, will differ from country to country. Mostly, however, this is often just a theoretical problem, rarely do customs officials demand compliance with national standards and rarely do they conduct a strict examination of documentation declaring that an item conforms to national or EU standards.”
“ It is legally possible to detain goods on the grounds of differing standards, but in practice this only usually applies to items that are deemed to be dangerous, illegal, or subject to anti-dumping duty (a tax on products suspected of being sold substantially below their normal value in market in which it was produced).”
Still, the process of shipping goods to and from the EU is not without other bureaucratic impediments. The freedom of the items is also strictly regulated. From outside the EU, any goods entering the EU, if not cleared at port, which can be a laborious process, must be stored in a bonded warehouse, also known as an Enhanced Remote Transit Shed (ERTS) warehouse, until they are declared to customs for an approved treatment or use.
“ Transhipped cargo not in free circulation will also require what is known as a CMR document. The CMR is a consignment note with a standard set of transport and liability conditions, which replaces individual businesses’ terms and conditions. It confirms that the carrier (i.e. the road haulage company) has received the goods and that a contract of carriage exists between the trader and the carrier. It derives from the Convention on the Contract for the International Carriage of Goods by Road. The process of clearing customs is increasingly becoming electronic. Systems used by exporters that integrate with the British customs system are the CNS and Destin8 computer systems.
Value Added Tax (VAT) is often charged on imported goods, that is in addition to any customs duties. The details must be entered onto the Customs Handling of Import and Export Freight (CHIEF) system. This system records the declaration to the customs authorities details of the goods whether they are transported by land, air and sea entering or leaving the UK/EU. It allows importers, exporters and freight forwarders to complete customs information electronically. This is not without charge.
“ If there is no prior agreement for each consignment, going to a specific destination, to clear customs the importer must produce customs records for each, pay VAT and the customs duty, if any. This will be calculated per the value of the item at its final point of sale. The VAT rate will differ from country to country, and even item to item. In some cases, a product will be exempt, VAT will not apply. In other cases, an item will be zero-rated, requiring the documentation to be completed but with no final payment. Even where tariffs are eliminated when importing from outside of the EU there is still the requirement to pay Value Added Tax. If the exporter is registered for VAT then this can be claimed back but only if they registered. There is also the requirement for an input VAT certificate to be completed.
“ Remaining a part of the EU’s customs union (having its trade rules apply) without being in the EU, does not eliminate the requirement to complete form filling. The requirement to clear customs and complete documentation, known as an ATA Carnet, to validate the origin of goods and confirm that they are free from tariffs even applies to Turkey. This country is considered a part of the EU’s customs union and therefore has tariff free access for industrial products; but it is not bureaucracy free access.
“ David Davis’ Department for Exiting the European Union must focus on addressing the logistical trade hurdles of delays at customs posts. The alternative will be even worse congestion on the M20 after Brexit than that which exists at present. Concern five: There will be complex new ‘rules of origin’ and additional paperwork for British goods
Another area in which the EU could try to ‘punish’ the UK would be in the form of new red tape and potentially costly and complicated new ‘rules of origin’ (ROO) for British exporters. If a business is sending produce to the EU from a country that has a free trade deal it must prove that they were mostly manufactured or re-worked in a country that has such an agreement with the EU. If the business cannot confirm the origin of the goods, then the tariffs will apply. This can be sidestepped by making some modifications to the products in the exporting state, yet this may be subject to investigation. This is an infrequent occurrence, yet the need for paperwork to prove its provenance is not rare. If the goods are of UK origin and if Britain has a free trade agreement, namely no tariffs to pay, importing into an EU country will require a Certificate of Origin. Such documentation can be obtained from a relevant countries chamber of commerce, they are however, expensive.
Anything that is already inside the customs union that has originated from a non-member will have been charged at its original port of entry and can therefore circulate freely within the EU. At present, as the UK is an integral part of the EU’s customs union, British exporters to the other 27 do not have to prove that they comply with the EU’s rules of origin. Goods entering the UK from outside the EU will have been charged the relevant customs duty when entering Britain. As supply chains are becoming increasingly globalised the need to demonstrate an item’s origins can be a complex burden.
The Trade Policy Research Centre argued that ‘the process of adapting to rules of origin based duty-free trade under a new UK-EU free trade agreement would be tedious, costly and disruptive to trade.
However, some developments are making this concern less relevant. The reduction in tariffs, where many goods are zero rated, reduces the need to complete the administrative duties. The EU has extended the area in which origin can be accumulated to not only cover more states but also to allow for an item to be obtained and manufactured in a number of countries without the final product losing the benefit of being tariff free when it enters the EU. This system has been in existence in the EU and European Free Trade Association since 1997 and for Turkey since 1999. Over time the EU does grant greater allowance to other countries to claim exception from rules of origin.
And from 2017 under World Customs Union rules the procedure declaring a products origin will be simplified. As WTO members, the UK and EU are signed up to the WTO agreement on Rules of Origin in which signatories ‘Recognizing that it is desirable to provide transparency of laws, regulations, and practices regarding rules of origin’ affirm that they are committed: ‘…to ensure that rules of origin themselves do not create unnecessary obstacles to trade. ‘Agree that: ‘Members shall ensure that their rules of origin are not used as instruments to pursue trade objectives directly or indirectly; rules of origin shall not themselves create restrictive, distorting, or disruptive effects on international trade.
‘They shall not pose unduly strict requirements or require the fulfilment of a certain condition not related to manufacturing or processing, as a prerequisite for the determination of the country of origin. ‘The rules of origin that they apply to imports and exports are not more stringent than the rules of origin they apply to determine whether or not a good is domestic and shall not discriminate between other Members, irrespective of the affiliation of the manufacturers of the good concerned. ‘Their rules of origin are administered in a consistent, uniform, impartial and reasonable manner.’ Rules of origin disputes in the WTO system are overseen by the WTO Committee on Rules of Origin and the WCO Technical Committee.
The UK is also a member of the WCO (World Customs Organization) an international body which works closely with the WTO and WCO member countries to identify, minimise and resolve problems such as rules of origin and other customs issues.
The EU is also a member of the WCO, as are its member states. The European Commission website confirms that: ‘On 30 June 2007, the Council of the World Customs Organization (WCO) decided to accept the request of the European Union to join the WCO as of 1st July 2007. This decision grants to the European Union rights and obligations on an interim basis akin to those enjoyed by WCO Members. The EU is a contracting party to several WCO Conventions, and contributes to the work of this organisation.’
The EU cannot therefore; arbitrarily impose red tape or inordinate Rules of Origin requirements upon the UK and still meet its WCO obligations. The EU is also signed up to the GATT agreement which states that: ‘The contracting parties also recognize the need for minimizing the incidence and complexity of import and export formalities and for decreasing and simplifying import and export documentation requirements. ‘No contracting party shall impose substantial penalties for minor breaches of customs regulations or procedural requirements. In particular, no penalty in respect of any omission or mistake in customs documentation which is easily rectifiable and obviously made without fraudulent intent or gross negligence shall be greater than necessary to serve merely as a warning.’
When we combine all these points with the fact that the EU and its member states are also signed up to the WTO agreement on trade facilitation, the potential risks of additional red tape and paperwork for importers and exporters look less and less likely, post Brexit.
Even if the EU wished to try to impose trading barriers in this way, there would be a substantive knock-on effect to the EU-UK cross border supply chains as a consequence. They will be aware of this, and all sides will wish to minimize this possibility from occurring by ensuring ROO requirements and other forms of red tape are kept to a minimum.
Finally, imposing difficult new ROO procedures upon the UK would be going against the EU’s ‘direction of travel’ in this area, which is to simplify and relax their rules (with a special focus on simplifying them for developing countries)40. In 2010, the European Commission admitted that:
‘The present rules of origin are old and outdated, having been drawn up in the 1970s.”
These difficulties will impact disproportionately on Ireland, and on smaller firms who will not easily be able to spread these costs over a large volume of business.
It is remarkable that these matters are being brought to light by a group that favours Brexit.
One does not get the impression that Thesesa May, who seems to think the UK can have a “seamless” trade relationship with the EU after Brexit, has read this Bruges Group paper.
As the reader will have seen, the Bruges Group itself hopes that the difficulties it has identified will be overcome by non enforcement of the rules in some cases or by goodwill from the EU on the general issues.
As competing commercial interests will be involved, this seems to me to be unduly optimistic.
It is important that Ireland examine all these matters for itself.
It will be Irish Customs authorities that will have to implement these rules.
New facilities will have to built at Irish ports which do business with the UK, and along the land border.
Additional staff will have to be recruited . The cost will be substantial.
A fast track for shipments direct to the EU, not going through the UK, may have to be provided at Irish ports. This would reduce the cost for business but this will involve substantial infrastructure investment by the Irish taxpayer. EU funds ought to be deployed to assist this.