Open Britain Background Briefing: The Government’s position paper on “future customs arrangements”

Overview 

Today, the Government published their Brexit position paper on customs relations with the EU titled ‘Future customs arrangements: A future partnership paper.’ This paper can be found here. In it, the Government attempts to set out its vision of what UK-EU customs arrangements might look like after we leave the European Union, as well as during a potential transition phase.

Open Britain have conducted a detailed assessment of this position paper, identifying three key weaknesses that stand out: 

  1. The Government’s proposals would impose mountains of red tape on UK businesses, providing them with a worse trading relationship with the EU than they currently enjoy, which would impact on jobs and growth.
  2. The Government has (once again) failed to include sufficient detail about how it plans to achieve its somewhat vague and abstract objectives.  
  3. The Government is (once again) trying to have its Brexit cake and eat it. The European Union has already ruled out the idea that Britain can keep fully free and frictionless trade while leaving the Customs Union.

Open Britain’s Position: The Government’s stated objective of facilitating the “freest and most frictionless trade possible in goods between the UK and the EU” whilst avoiding a return to a hard border in Northern Ireland will only be achievable if the UK remains in the Customs Union.

In Detail 

The UK’s approach to trade: 

“As we leave the European Union and therefore the EU Customs Union, the Government seeks a new customs arrangement that facilitates the freest and most frictionless trade possible in goods between the UK and the EU…”

“The UK’s traders are a key part of our economy and the Government is clear that any new customs system should be as facilitative as possible to encourage growth in trade with the EU…”

“As we leave the EU, and establish an independent trade policy, the Government will prioritise ensuring that UK and EU businesses and consumers can continue to trade freely with one another… we want to ensure that our future arrangements with the EU maximise our future trade with Europe, including through integrated supply chains.”

  • It is unclear, to say the least, how the Government intends to retain free trade with the EU, and maximise it in future, while in the long-run taking the UK out of the Customs Union. The UK will only be able to enjoy tariff and customs-free trade with the EU by staying in the Customs Union. 

Future customs relationship with the EU:

“Building on this strong foundation the Government has considered two broad approaches to a future customs relationship with the EU that would facilitate these objectives. How we proceed will depend on our negotiation with the EU, but the two models provide different approaches, with a range of subsequent choices underpinning these, to our customs arrangements.”  

“A highly-streamlined customs arrangement between the UK and the EU, streamlining and simplifying requirements, leaving as few additional requirements on UK-EU trade as possible. This would aim to: continue some of the existing agreements between the UK and the EU; put in place new negotiated and unilateral facilitations to reduce and remove barriers to trade; and implement technology-based solutions to make it easier to comply with customs procedures.”

“A new customs partnership with the EU, aligning our approach to the customs border in a way that removes the need for a UK-EU customs border. One potential approach would involve the UK mirroring the EU’s requirements for imports from the rest of the world where their final destination is the EU.” 

  • While Open Britain welcomes the fact that the Government is providing alternatives to existing arrangements, neither arrangement will guarantee the kind of benefits which UK importers and exporters currently enjoy due to the UK’s membership of the EU’s Customs Union.     
  • The second of the two options would be the least disruptive of the two but would still mean lots of increased bureaucracy for UK businesses, where they would need to distinguish between goods purely for the UK market and those being transited through the UK to a destination in the rest of the European Union.
  • However, the Government has not provided nearly enough detail on how either model could work in practice, for example the extra burdens likely to be imposed on HMRC, and new IT systems that may be required.
  • They have also failed to outline how the UK could remain in a “customs partnership” with the EU that “removes the need for a UK-EU customs border”, while still negotiating free trade agreements with third countries like the United States.

 “…we will seek continuity in our existing trade and investment relationships, including those covered by EU Free Trade Agreements or other EU preferential arrangements. Our exit from the EU will provide considerable additional opportunities for UK business through ambitious new trade arrangements and comprehensive trade deals that play to the strengths of the UK economy of today and the future…”

  • This assessment by the Government would appear to suggest that they have misunderstood much of the detail of how the global trading system operates.
  • There is absolutely no guarantee that countries with which the UK currently enjoys preferential trade deals through its membership of the EU will offer the UK the same benefits as it currently enjoys as an EU member state. If anything, global trading partners will see the UK’s position of relative weakness as an opportunity to get better terms for themselves at the expense of the UK. 
  • As concerns the WTO, the Government fail to mention that all existing WTO members would have agree to the UK’s trade schedule and the Government have failed to provide any evidence in this document that that would be the case.

New customs arrangements:

 “Outside the EU Customs Union, the UK will set its domestic customs arrangements to facilitate the flow of trade across its border...These processes will need to:

  • ensure businesses declare goods for import or export and provide HMRC with the required documentation, including customs declarations, safety and security information and any licenses required or supporting documentation (such as that required to demonstrate the origin of goods, as may be required under a future trade agreement between the UK and the EU);
  • enable HMRC to verify that a declaration has been made, that it corresponds to goods arriving and to intervene if necessary; and ensure that any duties, such as customs duties and import VAT, are paid when goods arrive in the UK and the goods are released.”
  • Open Britain would question how the introduction of these extensive customs measures will in any way simplify trade with the EU, the UK’s largest trading partner. The Customs Union guarantees simplicity and ease of access for business of all sizes with the EU, rather than a greater amount of ‘red tape’. 

“First, we would look to simplify the requirements for moving goods across borders, for example: …

through membership of the Common Transit Convention (CTC), which simplifies border crossing for goods in transit, meaning that goods do not need to complete import and export declarations each time they cross a new border - it would allow goods moving between the UK and the rest of the world, and vice versa, to travel via the EU, without paying EU duties, providing cash-flow benefits to traders, and would make border clearances easier at key ports and airports, such as Dover and Holyhead.” 

  • There is no simpler arrangement for moving goods across borders within Europe than the Customs Union, which encompasses the EU28 and has arrangements with other countries. 
  • Open Britain questions whether the European Union would agree to this usage of the Common Transit Convention. While non-EU member states can be members of the Common Transit Convention, they are either part of the EU’s Customs Union, in the EEA, in the Schengen zone, or applying for EU membership.[1] The UK would fall into none of these categories under the Government’s plans for Brexit.  

“Fourth, we would look to reduce the time and costs of complying with customs administrative requirements through exploring the viability of unilateral measures, primarily in respect of imports, for example: simplifications for business, such as self-assessment to allow traders to calculate their own customs duties and aggregate their customs declarations.”

  • Open Britain would question why the Government should shift HMRC’s duties of calculating duty to business owners, which would increase complexity and cost for them. 

“By mirroring the EU’s customs approach at its external border, we could ensure that all goods entering the EU via the UK have paid the correct EU duties. This would remove the need for the UK and the EU to introduce customs processes between us, so that goods moving between the UK and the EU would be treated as they are now for customs purposes. The UK would also be able to apply its own tariffs and trade policy to UK exports and imports from other countries destined for the UK market, in line with our aspiration for an independent trade policy. We would need to explore with the EU how such an approach would fit with the other elements of our deep and special partnership.”

“There would need to be a robust enforcement mechanism that ensured goods which had not complied with the EU’s trade policy stayed in the UK. This could involve, for instance, a tracking mechanism, where imports to the UK were tracked until they reached an end user, or a repayment mechanism, where imports to the UK paid whichever was the higher of the UK’s or the EU’s tariff rates and traders claimed a refund for the difference between the two rates when the goods were sold to an end user in the country charging lower tariffs. Businesses in supply chains would need to be able to track goods or pass the ability to claim a repayment along their supply chain in order to benefit.” 

“We acknowledge this is an innovative and untested approach that would take time to develop and implement. The Government is keen to explore this approach with businesses and other stakeholders to understand the practical complexities involved in making it work and assess which other approaches could have a similar effect, how they would work in practice and whether they could achieve the Government’s objectives.”

  • As the Government acknowledges this is an untried system, which would also put the burden of responsibility on businesses in the UK and hit them with additional costs and bureaucracy. 
  • The proposal would necessitate goods to be tracked all the way from origin to destination by individual UK businesses. This is impractical, burdensome and costly, Far from being the bonfire of red tape promised by Brexiteers, it is a Brexit bureaucracy bombshell for British businesses. It would establish a complex process where businesses would have to invest time, effort and resources in reclaiming overpaid duties. If the UK were to stay in the Customs Union, none of this would be necessary.    

Northern Ireland:

“The border between Northern Ireland and Ireland is the UK’s only land border. We must avoid a return to a hard border, and trade and everyday movements across the land border must be protected as part of the UK-EU deal.” 

“The Government has made clear that the answer to avoiding a hard border between Northern Ireland and Ireland cannot be to impose a new customs border between Northern Ireland and Great Britain. We should avoid any approach that would create new barriers to doing business within the UK (including between Northern Ireland and Great Britain).”

  • Open Britain supports the Government’s aim of avoiding a return to a hard border, either for people or commerce, between Northern Ireland and the Republic of Ireland.
  • However, the Government’s position paper does not clarify how they plan to leave the Customs Union and yet avoid a return to an economic border between Northern Ireland and the Republic at the same time. If the aim is to avoid a hard border, then it is fundamentally important that the UK stays in the Customs Union.  
  • We hope that the Government’s position paper on Northern Ireland, reportedly due to be published tomorrow (16th August 2017) will provide greater detail on these issues. 

No deal/Interim deal: 

“In this scenario, without any further facilitations or agreements, the UK would treat trade with the EU as it currently treats trade with non-EU countries. Customs duty and import VAT would be due on EU imports. Traders would need to be registered. Traders exporting to the EU would have to submit an export declaration, and certain goods may require an export licence. The EU would also apply the customs rules and VAT to imports from the UK that it applies to non-EU countries. The Government is actively considering ways in which to mitigate the impacts of such a scenario. Other EU Member States will also need to make contingency preparations to mitigate the risk of delays resulting from their own customs processes.”

  • Open Britain welcomes the fact that the Government have admitted that a ‘no deal’ scenario would be disastrous for UK businesses and for the UK economy. We call on the Government to abandon its dangerous mantra that ‘no deal is better than a bad deal’. This position paper reveals the truth: when it comes to customs, ‘no deal’ would be a disaster for Britain.

“The Government is keen to explore with the EU a model for an interim period which would ensure that businesses and people in the UK and the EU only have to adjust once to a new customs relationship. This could be delivered through a continued close association with the EU Customs Union for a time-limited period after the UK has left the EU. This could involve a new and time-limited customs union between the UK and the EU Customs Union, based on a shared external tariff and without customs processes and duties between the UK and the EU. The length of the interim period needs further consideration and will be linked to the speed at which the implementation of new arrangements could take place.”

  • Open Britain is glad to see that the Government has finally accepted the need for a transition period to avoid a disastrous cliff-edge Brexit in March 2019. But a much more realistic approach is required from Ministers about what is achievable for that transition period, which is more than simply telling the rest of the European Union that we want to have our cake and eat it.
  • Much more information is required about how this transition period would work in practice. If the Government apparently intends to negotiate a bespoke transition agreement for the UK, alongside its ongoing negotiations to establish the UK’s future relationship with the EU, with the time remaining in the Brexit negotiations (19 months), this is a lot to ask.
  • The Government are naïve to think that they are in the driving seat when it comes to the timings of discussing a transition period, when the European Commission have categorically stated that the divorce settlement has to be agreed first prior to any new arrangements on the future relationship.[2] 
  • The Government must ensure that any transition does not simply push the ‘cliff-edge’ for businesses back from 2019 to 2021, but avoids a cliff-edge entirely. 
  • David Davis has said that the UK will seek to “negotiate and sign” new trade deals with third countries during this transitional period. If the future, post-transition customs deal is unknown at the time, this is likely to be an impossible ambition, as potential trading partners of the UK will want to know the detail of our customs relationship with the EU before signing or even seriously negotiating any trade agreements. 

Stakeholders

“The Government believes that businesses from across the UK have an important role to play in the policy making process and welcomes responses to the content of this paper.”

“The Government is undertaking a comprehensive stakeholder engagement programme as part of our preparations for the UK’s exit from the EU. A wide range of firms, from both the UK and overseas, have already inputted their concerns and priorities for the negotiations and our future customs arrangements.”

  • Open Britain welcomes the Government’s commitment to listen to businesses and other relevant stakeholders, and to take their views into account.
  • Open Britain urges the Government to listen to business groups like the CBI[3], industry groups like the National Union of Farmers[4], as well as trade union organisations like the TUC[5], all of whom have called for the UK to remain fully in the Customs Union for a transitional period at the very least.