The latest Brexit announcements – what should business know?

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:

• Rules of origin. On this front the UK has made a sizable ask of the EU for ‘diagonal cumulation’. This would mean products from any country with which both the UK and EU have an FTA can essentially count as UK products when it comes to assessing eligibility for preferential tariffs with the EU. If this is not agreed, some manufactured products would not be eligible for preferential tariffs, increasing costs or resulting in adjustments to supply chains to take advantage of preferential tariffs.
• Technical barriers to trade. The UK has outlined proposals on the mutual recognition of conformity assessments which could continue to allow UK bodies to test whether products meet EU standards, thereby streamlining the process. The EU has so far resisted any such recognition. If this is not agreed, business will need to appoint both UK and EU-approved bodies to test products.
• Sanitary and phytosanitary standards. On this front the UK has set out the possibility of recognising each other’s standards as equivalent to reduce the proportion of checks. The EU has so far strongly resisted this. If this is not agreed, business will need to ensure products destined for both markets conform to both sets of standards and will face additional border checks.
• Customs. The text calls for the mutual recognition of Authorised Economic Operators. Though the EU has rejected such proposals thus far, it could be a possible area for agreement, smoothing the transport of goods particularly through Dover-Calais. Provisions to continue to allow port trade to function on a roll-on, roll-off basis are also a sensible inclusion by the UK government, but regardless there will still be a significant change from how the border operates now, especially for these ports. And there will be new, pretty extensive, additional customs compliance processes for business trading UK-EU or EU-UK.
• Services. Here the draft agreement seeks to ensure no local presence is required for cross-border service provision (excluding financial services and air services), which is usually a prerequisite for third countries selling into the EU. This is another potentially mutually beneficial area, but the prospects for the EU agreeing are slim. The impact will vary business to business, but could be significant for those that do not currently have any local presence in their EU markets, particularly regulated businesses.
• Mutual recognition of professional qualifications. The draft sets out criteria under which authorised bodies should mutually recognise professional qualifications. This goes beyond the EU’s approach and the precedent in other FTAs which simply set out a high level framework under which authorised bodies can agree to mutual recognition if they wish. This is of key importance to a number of professional services sectors, e.g. legal services, presenting a new barrier to services trade if not agreed.
• Audio visual. The UK has included a chapter on this sector, while the EU has excluded this whole industry from trade deals in efforts to protect the cultural diversity of Europe. If not agreed, it means those operating in this sector will need to restructure their business models and comply with two sets of regulators.
• Financial services. According to the UK draft, cross-border purchases of financial services would be allowed as long as the businesses involved avoid soliciting and doing business directly in the other party’s location. Additionally, the draft text sets out detail on an arbitration panel that would consider equivalence issues. This wouldn’t provide the UK any say in EU proceedings but would allow the UK to follow discussions and be given notice of any changes. Both would be positive steps, with the former potentially providing significant market access and the latter giving greater clarity over equivalence decisions as well as more time to prepare for any changes. However, the EU is currently rejecting both proposals.
• Aviation. While not a huge distance apart, the UK text does seem to go further than the EU’s proposals. The wording implies UK airlines could operate flights internally in the EU, which would bring them much closer to the rights they currently enjoy. It is also something which the EU has explicitly ruled out in its text. If not agreed, UK-based businesses in this sector will need to change their operating model to continue to operate flights EU-EU.
• Social Security. Social security co-ordination is an area on which the UK and EU positions are largely in alignment. The current draft legal texts from both parties propose what is, in effect, a continuation of current arrangements – such that social security is only paid in one country - so this is looking positive.

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.