A process not an event: trade after Brexit transition
4 January 2021: While the UK-EU trade deal is a positive step towards ensuring the ongoing flow of goods between the two partners, many questions remain on how it will affect business operations in the current COVID climate.
The UK’s future relationship with the EU is now enshrined in UK law, a law which implements the Trade and Cooperation Agreement – and its accompanying agreements – and formally changes the trading landscape between the UK and the EU.
“The fact that a deal has been agreed is a positive one,” says Iain Wright, ICAEW’s Director for Business and Industrial Strategy. “A no-deal would have led to significant disruption at the border and imposition of tariffs which would have led to much higher prices – and would have probably wiped out the competitiveness of large swathes of our economy, particularly agriculture and manufacturing. Higher prices for a narrower choice and supply of food would have been noticeable very quickly. That this has been avoided is a welcome relief.”
Wright also hailed confirmation that the deal has zero quotas on the movement of goods between the UK and the EU as hugely positive, stating that the agreement should ensure ongoing flow of goods between the two partners to the agreement.
“However, we should not ignore the fact that this new arrangement will not be frictionless,” says Wright. “It is undeniable that there will be short-term disruption in the first weeks of the new year. Mistakes will be made. That is inevitable – you cannot have a deal agreed on Christmas Eve, see the precise wording of the agreement a day or so after that, and then decide how it will impact upon your business operations, and devise and roll-out new processes in a matter of days, while also combatting the impact of what is essentially a new national lockdown.”
Key documents such as the revised UK “border operating model” and the procedures for trading and moving goods in and out of Northern Ireland were published only on 31 December.
Moreover, while the Trade and Cooperation Agreement addresses trade in services (including investments in services and legal services), the provisions, taken overall, are more limited. In some areas, particularly in relation to financial services, the detail will depend upon the outcome of European equivalence decisions.
It is worth a reminder that the services sector makes up approximately 80% of UK gross domestic product. The UK is the world’s second-largest exporter of services, selling more than £297bn worth of services in 2018, an increase of more than two-thirds since 2008. The EU is by far the UK’s largest trading partner – in terms of services – when taken as a bloc.
The trade agreement tells us state subsidy will look different too – it will be interesting to watch this unfurl in a post-COVID environment. Further, the agreement hints loudly that the UK will pursue a high labour environment and strong climate standards. Again, the detail on how this translates into government policy is awaited, but we can already see strong trajectories in these directions.
“Environmental protection in the UK could now diverge from the EU,” points out Wright. “Although there is a risk that this could ensure a race to the bottom for such protection, resulting in real damage to the planet, this is unlikely to happen. The Prime Minister has firmly stated that the move to net-zero will be at the heart of a refreshed industrial strategy, with the UK leading on a green industrial revolution. The hope is that the new arrangement will lead to a race to net-zero and a push for competitive advantage for the UK.”
Level playing field
Changes in regulatory regimes could trigger another measure incorporated in the deal, that of the level playing field. Zero tariffs only continue if it is agreed by both parties that the other side has not become unfairly competitive. Wright comments: “It is unclear at this stage how this will play out – there are brand new arbitration institutions, such as the Partnership Council, that will need to be introduced –this reinforces the view that Brexit is not a one-off event but a process which will evolve and develop over a much longer period than a single date.”
Origin of goods
While the agreement establishes zero tariffs or quotas on trade between the UK and the EU, the goods must meet the relevant rules of origin to qualify. Only “originating” goods can benefit from these liberalised market access arrangements, and what this means on a case-by-case basis will undoubtedly vex manufacturers as they try to work out the origin of assembled products, and how these fit into the new trading landscape.
“Zero tariffs are very much contingent on details relating to rules of origin. If a certain proportion of your finished product is derived from a third-party country, tariffs could apply,” points out Wright. “This may impact upon many sectors, such as food production and automotive manufacturing. For the latter, one can anticipate a scenario whereby a business manufacturing in the UK needs to import advanced high-value components, which would attract EU tariffs. That in turn could trigger EU tariffs on the products made in this country from those components, rendering our product uncompetitive.”
For a product to qualify as “originating” in the UK it must follow the rules in the Trade and Cooperation Agreement. Those rules are product specific and can be highly technical, setting out maximum thresholds for “non-originating” components or processes that must be undergone to transform a material, so it is deemed to originate in the UK. Navigating these rules will undoubtedly be a challenge for those businesses unfamiliar with them.
There was an indication of these issues in the debate in the House of Commons last week. The former Business Secretary, Greg Clark, stated that he had been in touch with the Chief Executive of Toyota, who had assured him that rules of origin measures would not adversely affect British-built cars. “That is reassuring, but companies will need to thoroughly understand their supply chains to undertake the self-assessment required to ensure tariffs are not imposed,” says Wright.
“This was obviously not required when we were part of the Single Market, but absolute clarity and transparency as to how your supply chain works and where it derives from will now be essential. Greater awareness of the supply chain will be an even bigger driver of business success, because failure to understand where you are getting components from will trigger tariffs and will undoubtedly make your product uncompetitive against a rival who manages this better,” he says.
But there will be a long period of bedding in as companies and their advisers scour the agreement, the legislation and the guidance, trying to fit their circumstances into an unfamiliar regime at the height of the pandemic. It is not often that businesses are required to fit their output into a new trading model at a few days’ notice and that is going to be uncomfortable.