Limited functionality available
Brexit news escalated last week as the UK government published more detail in one week than it has since the UK formally left the EU on 31 January.
As we’re currently between the UK and the EU’s formal trade negotiating rounds, and with Parliament in recess, there’s a brief window this week to digest the documents to inform business’s Brexit scenarios. Requiring a slightly longer blog than usual, here’s a summary of the content:
Draft UK-EU trade agreements
The UK released a total of 12 draft agreements from its ongoing negotiations with the EU. These texts were previously shared with the EU prior to the start of the third round of negotiations, but were not made public.
The main document is the Free Trade Agreement (FTA) but the drafts include agreements on fisheries, civil aviation, social security, energy, judicial cooperation and a whole host of other areas. There’s a lot to of detail to turn through in these texts, but the key areas of contention for business to consider include:
Northern Ireland Protocol
The UK’s plans for implementing the Northern Ireland Protocol were also published as a “Command Paper”. Designed as a high-level paper, it accepts the need for additional checks and infrastructure on agrifood trade from Great Britain (GB) and Northern Ireland (NI). It set out a different approach to customs compared to the European Commission’s interpretation. It seeks to avoid any new bespoke customs infrastructure, but with checks, where necessary, potentially taking place whilst the goods are on the market rather than at customs checkpoints. This latter point is the area of most significant difference with the EU, which believes there is a need for the full Union Customs Code to be enforced in respect of trade from GB to NI.
The UK has also said there will be entirely unfettered access from NI to GB on all trade, which will require agreement from the EU to waive the need for any export declaration. The paper does not progress the UK’s position on VAT any further, largely restating the requirements under the Protocol. It looks like HMRC will be charged with design and implementation here.
For the most part, responses have been positive with Manufacturing NI, for example, describing the release as “welcome acceptance and commitment” of the obligations to which the UK has signed up. Question marks still remain for business however, such as how goods at “substantial risk” of entering the Republic of Ireland will be identified, with this being dependent upon the work of the UK-EU joint committee. Any business trading GB to or through NI in particular will need to monitor developments closely and engage with the UK government on any upcoming consultation processes.
The UK Global Tariff
The UK government also announced its new most-favoured nation (MFN) tariff regime, the UK Global Tariff (UKGT). This provides a replacement to the Common External Tariff (CET) scheme that currently applies to the UK through being a part of the EU Customs Union.
Tariffs on the import of around 2,000 products are set to be eliminated under the new regime, with nearly 6,000 tariff lines being streamlined or simplified in total. ‘Nuisance’ tariffs of 2% or less are among those that have been eliminated following a business consultation earlier this year. Protections have been maintained to back UK industry with tariffs on agricultural products, cars and other items remaining unchanged. The outline of this new regime has provided businesses importing goods from abroad with much more clarity on the UK’s future, post-transition period position.
This could provide areas of opportunity for certain manufacturing industries in the UK. Analysis provided by the UK Trade Policy Observatory has, however, cautioned against too much optimism. They note the “weighted average tariff on goods imported from ‘MFN’ countries has fallen only from 2.1% to 1.5%”. The impact for a business will of course depend on the particular products it imports. Again, much rests on the uncertain outcome of the ongoing negotiations.
The differential tariff rates compared to the CET could mean agreeing an ambitious approach to rules of origin (as sought by the UK) becomes more challenging. If there is no negotiated outcome between the UK and the EU, this is the tariff the UK would apply on imports from the EU. Differential tariff rates could pose a particular challenge for trade on the island of Ireland, with more goods potentially seen as “at risk” products. And even if a duty-free quota-free FTA is negotiated, products will need to meet the rules of origin and other rules in the FTA in order to qualify for this preferential treatment.
Now that we have the UKGT, business can get ready. Any business moving goods into or out of the UK will need to review the UKGT to classify goods and determine their rates of duty. Businesses importing into the UK or selling into the UK market will need to factor in changes in tariff costs to future pricing decisions. Changes to contracts and pricing may be required, and sufficient lead time should be allowed to review the accuracy of product classification master data and update systems.
Rest of World trade deals
Finally, the Department for International Trade (DIT) provided an update following the conclusion of the first round of US-UK trade talks on 15 May. The talks are said to have proceeded efficiently with “nearly 30 different negotiating groups covering all aspects of a comprehensive trade agreement”, from market access for goods and financial services to customs and competition policy.
The next round of US trade negotiations is set to commence 15 June. It is worth noting the level of ambition on both sides of the Atlantic. The US is placing emphasis on developing “state-of-the-art” provisions in financial services, “new approaches” to digital trade and delivering “substantial results” for US farmers and ranchers. The UK is similarly upbeat about the potentially “huge gains” for SMEs “on everything from customs and trade facilitation, services sectors and business mobility to telecommunications, digital trade and intellectual property”.
Already the UK’s largest single bilateral trading partner, the US is the UK’s largest export market and the number one source of foreign direct investment into the UK. But despite the depth of the existing relationship, these negotiations are not without significant challenges. US interests on agriculture could prove problematic for the UK’s farming communities. And the US is a complex market – US negotiators need to balance the interests of individual states, each with their own set of aspirations and diverse trading relationships with the UK.
Together with negotiations for an enhanced free trade agreement with Japan, announced on 12 May, and upcoming talks with Australia and New Zealand, the UK’s negotiators will have their work cut out.
Business of all sizes and locations are being encouraged to actively engage with DIT now to learn more about how the UK’s new global trading framework could work for them, and to potentially influence the shape of future trade.
For support in assessing or establishing your Brexit related plans, you can email us.
Amanda is Head of Tax & Trade Policy for Deloitte UK. She leads a team undertaking analysis and preparing insights across the spectrum of tax and trade matters including Budgets, technical consultations, trade negotiations and post-Brexit border rules. Amanda has held a wide number of roles during her career including leading client relationships, global representative to the OECD, mentoring and non-executive board roles. As well as previously being a partner at another Big 4 firm, she was in industry at Vodafone plc as global head of indirect taxes and responsible for managing tax value chain and centralisation initiatives. Amanda has an active home life with four children and is also passionate about horses, riding whenever free time permits and supporting the charity World Horse Welfare including volunteering as Trustee and Treasurer for 7 years.
Raoul works as an Adviser to Deloitte based in the Global Brexit Insights team advising across a range of business lines on topics ranging from Brexit to trade policy, economic policy and the wider political landscape in the UK and EU. He helps businesses understand what the UK’s exit from the EU means for them and how they can best position to mitigate any impact and take advantage of the opportunities. His previous roles include Special Adviser to the Prime Minister on Europe and Special Adviser to the Secretary of State for Exiting the EU. Raoul holds two masters degrees from the University of Chicago in economics and public policy and an undergraduate degree from the University of Manchester.