The new normal

From the April 2021 print edition

Brexit, the UK’s departure from the EU, happened on January 1, after several years of uncertainty. With an exit agreement on December 24, 2020 and the UK’s abrupt departure days later, there was little time for businesses to prepare. The UK left the European Single Market, the EU Customs Union, the Common Agricultural Policy, the Common Fishery Policy, EU Laws, Regulations, Directives and the European Court of Justice. The EU-UK Trade and Cooperation Agreement governs the new relationship. Until that agreement, there was uncertainty, with consumers and businesses stockpiling products in the event of a “no-deal’’ exit, which would have increased costs by re-introducing MFN tariffs/customs duties on products. This would have been detrimental as UK exports to the EU account for 45 per cent of total UK exports and UK imports from the EU represent over half of UK imports.

The EU-UK Trade Continuity Agreement applies to goods, not services. It re-introduces a border between the UK and the EU, and goods now have to go through customs and other regulatory clearances. Although this creates complications, delays and extra costs, it’s a boon for customs brokers, as customs declarations are now required on both sides. Customs controls and inspections are required for many products, since the UK is no longer bound by EU standards. This applies particularly for food products, with UK exporters having to supply health certificates for many exports to the EU, which they didn’t need before, adding delays and costs. All products of animal origin entering
the EU and Northern Ireland now need an EU Export Health Certificate (EHC).

Like all free trade agreements, the EU-UK TCA contains product-specific rules of origin and exporters must provide an origin certification to avoid customs duties. The regional value content required for most products is 50 per cent of the EXW price. For gasoline and diesel automobiles, it is 55 per cent. For electric and hybrid vehicles, the RVC is 40 per cent, going up to 45 per cent in 2026 while for batteries, it is 30 per cent, going up to 50 per cent by 2026. Unlike in CETA, there is no mutual recognition agreement for testing and certification, so products have to be tested and certified in the destination country.

Northern Ireland now has special status and the UK is split in two: Northern Ireland remains in the EU single market while Great Britain (England, Scotland and Wales) are out. This is to avoid re-introducing a hard border between Northern Ireland (part of the UK) and the Republic of Ireland (a full EU member). The Brexit TCA leaves an open border between Northern Ireland and the Republic of Ireland to preserve the Good Friday Agreement of 1998. These provisions, called the Northern Ireland Protocol, establish an unofficial “border” between Northern Ireland and the UK, with import-export controls in both directions. Northern Ireland must follow EU customs rules, with special rules applying for trade, as it remains in the EU single market for goods.

Canada’s role
Canada and the UK signed a memorandum of understanding in December, laying the foundations for
a trade continuity agreement governing Canada-UK trade. It mirrors our CETA Free Trade Agreement with the EU. Temporary measures began January 1 to ensure continued preferential tariff treatment for goods shipped between the countries until a full CUKTCA is agreed upon. CBSA issued a remission order so UK products still enjoy tariff-free entry. UK origin goods are now accounted for in our B3s under MFN tariff treatment code 02, with mention of Special Authority OIC number 20-1135 in field #26. The TCA replicates the CETA rules of origin and allows for accumulation with the EU on a transitional basis for three years: materials sourced from the EU used in production of goods in Canada or in the UK continue to count as originating goods.

It was important for Canada (and the UK) to reach a quick, though incomplete, agreement as the UK is our first export market in Europe. Gold and precious metals represent three quarters of our exports to the UK and are duty-free anyway. But the UK is a major supplier, our third one in Europe, after Germany and Italy, and ahead of France.

Tariff-free access to the EU and the UK are maintained and that’s good news. Brexit adds complexities for exporters, since it is no longer efficient to serve all of Europe through a single base. Companies doing business in both markets must rethink their distribution strategies due to the border complications, delays and costs. Customs is not the only issue: standards for products are now different (CE in the EU and UKCA in the UK), there are two channels for IP protection (UKIPO and EUIPO), changes with VAT and challenges on direct shipment rules. Companies must now treat these markets separately and establish separate distribution channels.

Whether Brexit benefits the UK’s economy is an open question but studies, including from the UK Government, point to a decline in GDP. “Frictionless trade” doesn’t exist with a border, as it involves customs formalities, processes, controls, additional steps, delays and costs. This was shown at the beginning of 2021 when UK goods exports fell by £5.3 billion (19.3 per cent) in January, mainly because of a £5.6 billion (40.7 per cent) fall in exports to the EU. UK imports fell by £8.9 billion (21.6 per cent) in January, driven by a £6.6 billion (28.8 per cent) fall in EU imports. The January 2021 fall in UK goods imports and exports was the largest monthly fall since records began in 1997.

Christian Sivière is president at Solimpex.