UK Government sets out White Papers on the customs and trade regimes post-Brexit


25 October 2017

On 9 October, the UK Government published a White Paper on the future customs, VAT and excise regimes (the “Customs White Paper”), as well as a White Paper on the UK’s future UK trade policy (the “Trade White Paper”).

The White Papers outline the Government’s approach to the Customs Bill expected to be issued later this autumn and explore the emerging approach to establishing the UK’s independent international trade policy post-Brexit.

 

Customs White Paper

The content of the Customs White Paper repeats many of the proposals covered in the UK Government’s ‘Future Customs Arrangements Paper’, published in August this year (please see our commentary on this paper here). In particular, the Customs White Paper repeats the UK Government’s three strategic objectives of: ensuring that UK-EU trade is as frictionless as possible after Brexit; avoiding a hard border between Ireland and Northern Ireland; and establishing an independent international trade policy.

Importantly, however, the Customs White Paper seems to be more focused on the contingency scenario of a ‘no deal’ Brexit – in other words, on the possibility of leaving the EU with no free-trade agreement in place. This approach is likely to be the result of a lack of progress in Brexit negotiations to date, or it could also be a strategy in itself, seeking to persuade Brussels to expedite trade negotiations with the UK. Nonetheless, the Customs White Paper seems to try to offer some comfort to businesses by reassuring them that the UK Government is indeed preparing for every eventuality, including an exit without a free trade agreement with the EU, however undesirable such a scenario might be.

The Customs White Paper explains that the Customs Bill will not presuppose any particular outcome from the Brexit negotiations. Rather, it will allow the UK Government to create a standalone customs regime by ensuring that, among other things, the UK can:

  • levy customs duty on goods (including on goods imported from the EU);
  • define how goods will be classified to establish the amount of customs duty due; and
  • establish a new UK tariff and set out additional tariff-related provisions, for example, the tariff applicable to developing countries.

The UK Government confirms that the new customs legislation will mostly be based on the Union Customs Code, with administration of the VAT and excise regime remaining largely the same as today. However, the Customs White Paper states that the Customs Bill may make provisions that allow for divergence from EU law where it is necessary to do so, or where there is a clear benefit to businesses to diverge from it and such divergence is consistent with whatever bilateral arrangements the UK Government agrees with the EU. As such, the Customs Bill is intended to form a general framework for a stand-alone UK customs regime, with flexibility for the Government not to levy customs duties or to accept other limitations on its ability to impose trade barriers, as may be agreed with the EU or other countries in the future.

The references to the “new UK tariff” and classification rules which the Government will be able to establish post-Brexit are interesting, in that they do not refer to the UK’s international obligations resulting from its membership of the World Trade Organisation (“WTO”). We comment further below on the need for the UK to re-establish its trading conditions within the WTO framework post-Brexit.

The Chancellor of the Exchequer confirmed in the Foreword to the White Paper that a ‘cliff-edge’ at the end of the 2-year period for Brexit is in the interest of no-one, and the UK will push hard to avoid it. A Brexit without a trade agreement with the EU would indeed be likely to be very disruptive for businesses. The UK Government has acknowledged that time-dependent supply chains (such as fresh foods, e-commerce, or just-in time manufacturing) have benefited from the absence of routine customs controls in intra-EU trade, because they are particularly sensitive to administrative burdens and delays caused by customs procedures. Indeed many business sectors in the UK operate complex supply chains, which can involve components crossing borders between EU Member States multiple times during the production process. As such, the imposition of a full customs border, with the need to pay customs duties, submit certificates of origin and customs declarations, would impose pressure on businesses to restructure their current logistics, warehousing, delivery and payment structures, and potentially result in the relocation of some businesses to other EU Member States.

The UK Government recognises that the impact is likely to be the greatest where goods are travelling in vehicles, partly due to the limited time available for processing declarations in a roll-on roll-off terminal. The White Paper notes that, because the majority of such terminals are space-constrained, it would not be desirable to hold vehicles for any amount of time in order for customs declarations to be lodged. Accordingly, the Customs Bill will enable the UK Government to require that consignments are pre-notified to customs. Such a requirement, however, could potentially increase (rather than decrease) the burden on importers and exporters, especially for time-critical deliveries.

 

Trade White Paper

The Trade White Paper sets out the following key principles, which will govern the UK’s future trade policy:

  • transparency and inclusiveness;
  • rules-based global trading environment;
  • boosting the UK’s trade relationships;
  • supporting developing countries to reduce poverty;
  • ensuring a level playing field; and
  • leading by example through the UK’s liberal economy and pursuit of free trade.

One of the underlying themes of the Trade White Paper is ensuring that international trade works for everyone. The Foreword from the Secretary of State for International Trade mentions that there continues to be a widespread concern about the benefits of free trade and how evenly these are spread across the whole of the UK. Despite this concern, the Trade White Paper confirms the UK’s willingness to continue to be a global champion for free trade and to advocate in favour of trade liberalisation, removal of ‘red tape’ across borders, and the phasing out of distortive subsidies.

The Trade White Paper also confirms the UK Government’s ambition to secure greater access to overseas markets for UK goods’ exports as well as to push for greater liberalisation of global services, investment and procurement markets. In this context, the UK Government has confirmed that it intends to ensure that the UK remains part of the WTO Government Procurement Agreement as it leaves the EU. The UK Government also wants to seek ambitious digital trade packages, including provisions supporting cross-border data flows, underpinned by an appropriate domestic data protection framework. It remains to be seen whether the UK will be able to negotiate some form of access to the EU digital single market as part of the Brexit package. Certainly the bringing into UK law of the EU General Data Protection Regulation (GDPR) and staying close to the obligations contained within it post-Brexit should help ensure that data sharing between trading partners in the UK and the EU Member States is not impeded.

The Trade White Paper also refers to the need for the UK to re-establish itself as a stand-alone WTO member post-Brexit. The UK Government states that it will work closely with the EU and other WTO members to secure a simple, fair and transparent transition, including replicating, as far as possible, the UK’s current obligations in setting out its tariff schedules. It explains that the UK is minded to maintain current levels of market access and keep changes to a technical nature. In this context, we note that on 4 October a US-led group of seven countries (US, Argentina, Brazil, Canada, New Zealand, Thailand and Uruguay) rejected a plan provisionally agreed by the UK and the EU to split their WTO quotas after Brexit, and instead suggested that full negotiations with other WTO members were needed. Therefore, it is questionable whether the UK will be able to seamlessly re-establish itself as a full-fledged WTO member without lengthy negotiations with other countries.

The UK Government also confirms in the Trade White Paper that it will need to put in place an independent trade remedies framework after Brexit, in order to protect domestic industry against unfair and injurious trade practices or unexpected surges in imports. The paper states that the UK’s trade remedies’ framework will be consistent with the WTO principles and will be implemented by a new mechanism to investigate cases and propose measures that offer proportionate protections for domestic producers. In addition, the UK Government intends to issue a call for evidence to identify existing EU trade protection measures (of which there are over 100) that are essential to UK business and will need to be carried forward. However, adopting the existing EU trade protection measures post-Brexit may be difficult in practice. China, for example, may object to the imposition of anti-dumping measures on Chinese steel imports by the UK after it leaves the EU and it may demand that the UK carry out a new investigation in order to demonstrate domestic injury and unfair trade. It is also expected that the UK Government will need to recruit trade law specialists to ensure that, by the time the UK leaves the EU, it will be ready to act independently through the WTO’s existing trade dispute settlement mechanism to resolve trade conflicts with other countries and defend any disputes brought against the UK.

One of the more interesting statements in the Trade White Paper is confirmation of the UK Government’s intention to transition all existing EU trade agreements and other EU preferential arrangements as the UK leaves the EU. The UK Government wants to seek continuity in its current trade and investment relationships, such as those covered by the EU third country free trade agreements (“FTAs”). This includes introducing measures through domestic legislation which will allow the UK Government to fully implement any EU FTAs which are transitioned post-Brexit. It will be interesting to see whether the countries which are parties to the FTAs will indeed be willing to transfer the terms of the existing agreements into a new deal with the UK. According to a European trade source, South Korea has provisionally agreed to roll over the terms of its FTA with the EU into a new agreement with the UK after Brexit, without lengthy negotiations. However, when asked to comment on the information, a South Korean official said that Seoul was in discussion with the UK on a ‘new free trade agreement’ for when it leaves the EU, “rather than a transfer from the existing Korea-EU FTA”. In reality, we anticipate that any future deal with South Korea is likely to be subject to extensive negotiations, affording businesses no continuity of trading conditions in the interim, particularly, in circumstances where a transitional arrangement with the EU cannot be agreed. As to the other countries with whom the EU currently has FTAs, we consider it likely that a number of them will view Brexit as an opportunity to strike a more robust trade deal, not least because transferring the existing terms might result in asymmetrical trading conditions (the EU had better leverage negotiating as a block with third countries as was probably able to obtain superior trading terms due to the sheer size of its economy, as compared to the UK on its own).

 

Commentary

The White Papers certainly do not contain detailed proposals for the UK’s future customs and trade regimes. Rather, they describe the principles and policy considerations which the UK Government intends to use when proposing new legislation.

The Customs White Paper explains that the Customs Bill, expected to be issued later this autumn, will form the basis for a stand-alone UK customs regime, giving the UK Government flexibility to make future amendments regarding customs duties and allowing the regime to keep pace with future developments in trade.

As such, the final form and impact of the Customs Bill will depend on precisely how changes to the customs, VAT and excise regimes are implemented in secondary legislation made pursuant to powers in the Bill, which, in turn, will be shaped by the negotiations with Brussels, as they develop.

As to the Trade White Paper, is provides little information about the details to be included in the Trade Bill. Nevertheless, it confirms the UK Government’s intention to continue to be a global champion of free trade, pushing for trade liberalisation and negotiating ambiguous trade deals with third countries. It remains to be seen how quickly the UK will be able to agree with third countries any transfer of the existing EU’s FTAs into new deals with the UK. However, given that many of the UK’s existing trading partners could see Brexit as an opportunity to obtain more robust trade agreements, gaining access to overseas markets may be impossible without lengthy negotiations. We therefore consider it imperative that the UK Government secures transitional arrangements with the EU, as this may be the only way to afford businesses continuity of trading conditions as they prepare for Brexit.

 

For more information please contact James Lindop or Monika Zejden-Erdmann.

James Lindop, Partner
e: jameslindop@eversheds-sutherland.com
t: +44 207 919 4718
Monika Zejden-Erdmann, Associate
e: monikazejden-erdmann@eversheds-sutherland.com
t: +44 207 919 4910