Brexit and Trade in Goods: A Lose-Lose Situation

© Fotolia/grigvovan

In 2018, total trade in goods between the United Kingdom (UK) and the other Member States of the European Union (EU27) amounted to 493.28 billion euro. Brexit will have a lasting impact on these close economic ties. A hard Brexit would entail severe costs for both the UK and the EU. But even a Free Trade Agreement (FTA) or a Customs Union (CU) means less economic growth and job losses on both sides of the Channel.

On June 23, 2016, the majority of the population of the United Kingdom of Great Britain and Northern Ireland (UK) voted to leave the EU. The very close trade relations between the EU and the UK go back well beyond Britain’s accession to the European Economic Community. By leaving the EU, the UK is leaving not only the Single Market but also the Common Customs Union. Trade in goods, which has so far run smoothly and efficiently, will be disrupted.

Companies Need Reliability for Planning 

At an EU summit in early April 2019, the EU and the UK agreed to postpone the date for the UK withdrawal from April 12, to October 31, 2019. A few weeks before the end of the new deadline, the EU27 and the UK have still not agreed on a withdrawal agreement with a transitional phase. Such a transitional period is necessary so that the EU and the UK can negotiate the regulatory framework for their future trade relations. At best, the Single Market and Customs Union rules would continue to apply during this period.

What Happens after Brexit?

After Brexit, three scenarios are possible for future trade relations between the EU and the UK:

Hard Brexit: If the UK and the EU27 do not agree on a withdrawal agreement with a transitional period, or if the negotiating partners fail to agree on a new regulatory framework during the transitional period, this would result in a hard Brexit. From an EU perspective, the UK would become a third country (neither an EU member nor an FTA partner). Consequently, the tariffs bound at the World Trade Organisation (WTO) would apply, and non-tariff barriers and other forms of bureaucracy would be introduced. In addition, costly customs procedures and delays would affect trade between the EU27 and the UK.

Free Trade Agreement (FTA): One option for shaping the future relationship is an FTA. The negotiating partners would probably base their negotiations on the agreement between the EU and Canada (CETA) or the FTA with South Korea. An FTA would be preferable to a withdrawal without a deal, but is still not sufficient to ensure smooth trade.

Customs Union: While a customs union would not allow the same degree of economic integration as the Single Market, it would go well beyond an FTA. Politically, this regulatory model is quite unlikely, since the UK would not regain the desired trade sovereignty. The advantage of the customs union would be that no rules of origin would apply to trade in goods between the UK and the EU27 and almost all goods could be traded tariff-free between the EU27 and the UK.

Introduction of Customs Procedures Expected 

Brexit is expected to lead to cost-increasing customs procedures in trade between the EU27 and the UK in addition to any tariffs that may apply. This includes not only the implementation of rules of origin and their documentation, but also transport costs, costs for updating or purchasing new IT structures, and personnel expenses. In order to carry out customs clearance effectively, both the UK and the EU will have to expand their technical, physical and personnel customs control capacities.

Due to the necessary customs procedures, companies have to expect significantly higher costs in the processing of goods, both for the import and export of goods. In addition to import and export declarations, many other customs formalities and capacity constraints must be considered in the future trade in goods between the EU27 and the UK, which can lead to cost increases, delays that are difficult to calculate, and risks in the supply chain.

Further Consequences for the Movement of Goods

With the withdrawal, UK-based companies will also lose their status as Authorised Economic Operators (AEO). The UK must first re-establish such a system so that companies on both sides can continue to benefit from the advantages of risk assessment and the resulting reduced monitoring. In order to implement possible simplified customs procedures, mutually recognised AEO systems are a prerequisite.

Furthermore, the UK loses membership in the 36 EU Free Trade Agreements and the three customs unions with third countries (status 2019) and thus also preferential access to these markets. Trade between EU FTA partners and the EU27 is not affected. However, British components are affected if they are built into a product from the EU27 and exported to a FTA partner of the EU. After the UK has left the EU, British intermediate products no longer qualify as Union goods. It can therefore be assumed that EU27 companies will recalculate their origin quotas and restructure their value chains accordingly to the disadvantage of British inputs.

In addition, with the UK’s departure from the EU, the export of dual-use goods (goods that can be used both for civilian and military purposes) from the UK to the EU (and vice versa) without authorisation will no longer apply. In the future, technical, country-specific and user-specific risk analyses will be carried out in trade with the UK, most of which will take several weeks.