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.

The UK officially left the EU on February 1, 2020 but remains within the common market and continues to apply EU legislation until the end of the year. In light of the UK’s unwillingness to extend the negotiation deadline, what little time remains should be used efficiently and effectively in order to reach an agreement that can be ratified by the end of 2020, when the UK will fully leave the EU. To that effect, the withdrawal agreement and the political declaration have been agreed upon as the outline of a future partnership. The negotiations must ensure a close relationship that mirrors the proximity in values and geography between the EU and the UK.

Negotiate an Ambitious and Comprehensive Free Trade Agreement  

To govern their future relationship, the EU and UK are currently negotiating a comprehensive and deep free trade agreement (FTA). While such an FTA is better than no deal at all, it does not guarantee frictionless trade and remains far from a common market and customs union. To mitigate the costs of Brexit, the EU and UK should strive for a higher level of integration and smoother procedures at the border than enabled by traditional EU FTAs.

While an EU-UK FTA will most likely set most tariffs at zero, it will create new bureaucratic barriers for two reasons: First, full customs procedures will be necessary for UK-EU trade. Delays are to be expected and will negatively affect supply chain reliability. Second, and in contrast to trade within a customs union, proof of origin is mandatory if traders wish to benefit from preferential tariffs.

Establish Simple Rules of Origin

Rules of origin (RoO) will create a completely new type of bureaucracy in trade between the EU and the UK, which can pose major challenges and barriers to trade, particularly for small and medium enterprises. Due to this, RoO in particular can have a major impact on the utilisation rate of free trade agreements. Simplified and harmonised RoO could mitigate these barriers and facilitate trade and utilisation of the FTA.

German business therefore proposes simplified RoO for an EU-UK free trade agreement:

• The EU and the UK should agree on a RoO chapter along the lines of the Pan-Euro-Mediterranean cumulation area as a regulatory floor in establishing origin for industrial goods. This would particularly benefit small and medium sized enterprises.
• In addition, larger companies or firms with more experience outside the internal market should be given the possibility to use more demanding rules of origin, as in modern FTAs. These rules should include a cross-sectoral value-added rule and sector-specific alternative rules.

 Mitigate Costs of Customs Procedures 

Once the UK leaves the single market at the end of the year, there will be significant changes in EU-UK trade as customs procedures will become mandatory. Brexit is expected to lead to cost-increasing customs procedures in trade between the EU27 and the UK. The costs of these procedures must be mitigated as far as possible. The negotiations should also create opportunities to simplify customs procedures. The requirement for customs procedures is a major challenge not only for economic operators. Brexit also promises to be a challenge for customs authorities on both sides of the Channel. Investment is therefore needed on each side, both in hard customs infrastructure on the main arteries for EU-UK trade as well as in soft customs infrastructure. 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, the UK loses membership to the EU free trade agreements 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 an FTA partner of the EU. After the UK has left the EU, British intermediate products will 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.

Regardless of the outcome of the FTA negotiations between the EU and the UK, the UK leaving the common market will present businesses on both sides of the Channel with new challenges and hurdles.