- Executive summary
- Virtually frictionless trade under WTO rules
- Intra-EU trade not without frictions
- Imports from the EU under WTO rules
- UK exports to the EU under WTO rules
- No ‘hard border’ in Northern Ireland
- No long queues at Dover
- EU tariffs and potential regulatory checks not significant
- Transportation and travel will not be disrupted
- Annex: Solutions being implemented by HMRC to minimise trade frictions as part of no-deal Brexit customs planning
1. EXECUTIVE SUMMARY
1.1 Leaving the EU under WTO rules is repeatedly described, whether through ignorance or deceit, as ‘crashing out’ or ‘going over a cliff’. This report shows that the reality of a WTO exit is nothing like this.
1.2 There is a myth that our present trade with the EU is ‘frictionless’, while trade on WTO terms is beset with ‘frictions’. We show why this is a false dichotomy, and why in practice intra-EU trading arrangements are not very different from those on WTO terms.
1.2 We already have virtually frictionless trade with the rest of the world through electronic customs declarations, goods pre-clearance and trusted trader schemes, all operated under the EU’s Union Customs Code. This would in future apply to our trade with the EU.
Imports from the EU under no-deal
1.3 The only additional physical checks on EU imports after Brexit would be customs duty checks, but they are unlikely to exceed the current threshold – less than 3% of imports are checked on entry (see para 4.1). If necessary, the UK could unilaterally suspend duties for a short period to avoid any immediate difficulties. In addition, HMRC is implementing a range of technical solutions (see Annex 10) to minimise trade frictions.
British exports to the EU under WTO rules
1.4 Most exporters are already used to Union Customs Code (UCC) export processes, and HMRC has issued guidelines for ‘no-deal’ trading with the EU. The EU has established customs systems (already used on the Swiss border, for example), and new technology is available to trace and identify cargoes (paras 2.4-2.6).
No ‘hard border’ in Northern Ireland
VAT and excise duties are already collected in the UK and the Irish Republic without any border control. A study commissioned by the European Parliament found that ‘international standards and best practices and technologies’ can be used to avoid a ‘hard border’, and this has been confirmed by both Irish and British authorities. Where necessary, inland inspection facilities can be established. Technology exists for tracking cargoes (paras 2.5-2.6).
Will there be queues at Dover?
This is theoretically possible but in practice highly unlikely. WTO rules prohibit checks undertaken for political reasons or for competitive advantage. French officials have dismissed fears of a Calais ‘go-slow’ and suggested that as few as 1% of UK lorries would be subject to a physical check. New technology is already being installed at Calais to avoid delays, with automated checks (paras 7.7, 7.8).
HMRC is preparing for all scenarios post-Brexit, and has set up inland inspection facilities to divert traffic away from Channel ports for targeted checks if necessary. The UK accedes to international transit conventions in its own right, and these enable simplified customs transit procedures right across the world and cover all countries in the EU (paras 7.9-7.11).
Can we take the risk that next April UK firms will be faced with EU tariffs and potential regulatory checks?
Tariffs and regulatory checks could be disruptive for a minority of UK businesses, namely, those connected with dairy products and meat. This works both ways. British producers are likely to increase their share of the domestic market by reducing EU imports subsidised at higher rates than they receive. Moreover, the impact can be mitigated by government action (paras 8.2-8.5)
Most engineering firms will be little affected. Car companies can withstand 10% tariffs on sales into the EU and 4.5% tariffs on components from the EU since they have benefited from a 15% depreciation in sterling. Border checks on their components from the EU will be illegal under WTO rules which prohibit unnecessary checks.
Travel and transportation
The EU has already made a reciprocal offer to the UK in respect of air traffic rights and the validity of aviation safety certificates in the event of no-deal.
Reciprocal visa-free travel has already been agreed. The EU has announced that the mutual recognition of driving licences and road vehicles will continue. So taking one’s car abroad or hiring a vehicle on holiday should be no more complicated than it is now (section 9).
2. Virtually frictionless trade under WTO rules
- We already have virtually frictionless trade with the rest of the world through electronic customs declarations, goods pre-clearance and trusted trader schemes, all operated under the EU’s Union Customs Code.
- There is no reason to turn back the clock to paper checks when goods arrive at the border, as implied by the ‘cliff edge’ doomsday prophets.
- We start from a strong position. The UK in 2016 was ranked 5th in the world by the World Customs Organisation for the ease of its import and export processes.
- Customs can operate with no technology at all using well tried customs techniques including the EU’s own TRANSIT and TRACE systems. The heads of UK and Irish customs concur with this judgment.
2.5 Example: most goods crossing the Swiss borders use established customs systems (TRANSIT and TRACE systems) to drive through customs without stopping and without any monitoring at the border.
2.6 New technology in the form of tamper-proof chips can be used to connect the physical cargo with the import declaration. This would highlight incorrectly declared goods, and allow for differential taxation based on the location/declaration combination.
3. Intra-EU trade not without frictions
- 10.1.EU goods are not exempt from certain controls on import, so there is no truly ‘frictionless’ trade in place even now.
- 10.2.Targeted checks where criminality is suspected are required even on intra-EU trade. This is to satisfy member states’ obligations to the EU to tackle fraud.
- 10.3.In the Withdrawal Agreement backstop (NI Protocol, Annex 3), the EU has mandated the creation of a paper document (the A.UK movement certificate) to accompany all goods traded between GB, NI and the EU. This will in fact add trade friction to an arrangement supposedly designed to avoid the need for border controls.
4. Imports from the EU under WTO rules
- Less than 3% of total imports are checked on entry into the UK. This percentage is unlikely to change in a no-deal Brexit.
- Even in 2008, 99% of goods entering the UK were cleared electronically.
- Imports from the EU are already subject to checks (see section 3).
- The only additional physical checks on EU imports after Brexit would be customs duty checks. But these are unlikely to exceed the current threshold required to ensure compliance with our current EU obligations.
- 10.5.Given the same level of EU imports after 29 March 2019 as currently, the level of physical checks that will be required on EU imports is unlikely to increase.
5. UK Exports to the EU under WTO rules
- HMRC has issued no-deal guidance for exporters.
- Exporters to the rest of the world (i.e. the majority of UK exporters) will already be used to the system under the EU’s Union Customs Code (UCC) rules, which will be adapted to UK law.
- Traders who currently export ONLY to the EU27 will not be familiar with UCC export processes, so this procedure will be new to them, but this is a very small number of exporters (only 8% of all UK businesses trade with the EU, and of those, many also export to the rest of the world under UCC rules).
- However, the EU’s Union Customs Code (UCC) was introduced across the EU on 1 May 2016. Anyone who intends to export to the EU after a no-deal Brexit can find out now about how it works from the European Commission website.
- All UCC requirements on UK exporters to the EU will be familiar to the customs authorities in the EU27, since there will be no change other than implementing the existing UCC import procedures for goods from the UK.
6. No ‘hard border’ in Northern Ireland
- VAT and excise dues are already collected by the authorities in both countries without anyone ever being stopped at the border.
- Smuggling and excise fraud already takes place across the NI border, e.g. fuel in tankers disguised as milk lorries, excise goods shipped through bonded warehouses. This is combatted by police and fraud investigators in targeted operations almost always away from the border itself.
- WTO rules do not require border checks on goods – that is a matter for each country to decide. The only requirement is to treat all third countries equally (the ‘most favoured nation’ rule – MFN).
- Physical checks can be conducted away from the border, as they already are for fraud and other non-duty checks in NI. Inland inspection facilities are now established in mainland UK and could also be set up in NI.
- A study commissioned by the European Parliament found that ‘international standards and best practices and technologies’ can be used to avoid a ‘hard border’ in NI.
- Hans Maessen, a Dutch customs specialist: technical solutions can ensure no hardening of the Irish border in ways that damage the Belfast Agreement and peace process.
- The customs technology to minimise or avoid border checks is available and is being used in many other applications (see 7.7, 7.8, Annex 10).
- At both the Norway-Sweden border and the Canada-US border, low friction borders have been created by sharing data and facilities, and the creation of electronic environments for trade and travel.
- Both the Irish Republic and HMRC already operate electronic customs clearance systems under the UCC (para 5.4), a key aspect of invisible borders. HMRC is domesticating UCC provisions into UK law, so procedures will remain the same for customs, VAT and excise.
- Ireland has already published guidance with links to electronic systems for no-deal trade with the UK post-Brexit.
- The head of UK customs, Jon Thompson, has repeatedly confirmed in select committee hearings that there is absolutely no need for the UK to erect a hard border under any scenario, including leaving without a deal.
- Irish Taoisech Leo Varadkar has also repeatedly confirmed that the Republic of Ireland will not erect a hard border in the event of no-deal.
- The heads of a number of prominent UK and Irish businesses have asserted that invisible borders are now possible. This can all be achieved with existing technical solutions, and in compliance with the EU’s Union Customs Code.
7. No long queues at Dover
- While queues at Dover are theoretically possible, it would require French customs to instigate unnecessary and excessive checks at Calais and elsewhere. But this is highly unlikely, for several reasons.
- WTO rules prohibit unnecessary checks undertaken for political reasons or for competitive advantage. The UK can maintain de facto alignment with EU for as long as it considers necessary, in order to avoid the need for checks.
- Even those who maintain that some additional checks would be required accept that these could be limited. There is no legal requirement to inspect more than a tiny fraction of vehicles.
- French officials have dismissed fears of a Calais ‘go-slow’ and suggested that as few as 1% of UK lorries would be subject to a physical check.
- Julian Jessop of the IEA has produced a rough calculation: for there to be an additional two-minute delay on average in crossing the frontier, it would require at least 10% of UK lorries to be subject to a new 20-minute check — i.e. ten times more than French officials have indicated will be checked.
- EU preparations for no-deal only say that checks may be conducted, not that they will be.
- New technology is already being installed at Calais to avoid delays, with automated checks and a turf war about where lorries might be inspected.
- A rail freight scanner has already been installed at Fréthun near Calais for unaccompanied rail freight (boosting Eurotunnel’s freight revenues considerably). This allows French customs to scan containers on 30 trains per day without the need for them to stop before they enter or leave the Channel Tunnel.
- Under the UK’s Transit Regulations (November 2018), the UK accedes to international transit conventions in its own right. These enable simplified customs transit procedures right across the world and cover all countries in the EU.
- Physical checks that are needed can be conducted away from the border, as they already are in many countries.
- HMRC is preparing for all scenarios post-Brexit, and has set up inland inspection facilities to divert traffic away from Channel ports for targeted checks. (see 10.7)
- Currently, ‘intelligence led’ inspections by the UK affect only 2% of non-EU goods shipments. The remainder are cleared immediately by computer-based procedures.
8. Impact of EU customs and regulatory checks not significant
8.1 WTO rules prohibit unnecessary checks, and it is highly unlikely that more than 1% of goods would be checked (see section 6).
8.2 Additional customs and regulatory checks could admittedly be disruptive for a minority of UK businesses. Namely, those connected with dairy products, meat and fresh foods, which cannot tolerate long delays.
8.3 But this works both ways. Unwarranted regulatory checks at Calais could lead to French importers suffering tit-for-tat delays at Dover.
8.4 To avoid this, the French have already installed scanning technology to speed up clearance at Calais (7.7, 7.8).
8.5 The AEO trusted trader scheme under the UCC should eliminate the need for physical customs checks at Calais, since goods can be pre-cleared for customs electronically.
8.6 Most engineering firms will be little affected (hence why heads of firms like Dyson, JCB and Northern Ireland’s Wrightbus support Brexit).
8.7 Car companies can withstand 10% tariffs on sales into the EU and 4.5% tariffs on components from the EU since they have benefited from a 15% depreciation in sterling.
9. Transportation and travel will not be disrupted
- The EU has already made a reciprocal offer to the UK in respect of air traffic rights and the validity of aviation safety certificates in the event of ‘no deal’.
- Several French regional airports derive close to 80% of their traffic from UK-owned airlines. Local tourism would be ruined by prohibitions on landing rights.
- France has passed legislation giving the President decree-making powers to ensure minimal disruption.
- Reciprocal visa-free travel for trips of up to 90 days has already been agreed between the UK and EU – even in the event of no-deal.
- In its no-deal preparedness notices on travel, the EU has announced that the mutual recognition of driving licences and road vehicles will continue under the rules of the Vienna Convention on Road Traffic 1968.
- In March 2018 the British government announced that it would be ratifying the Convention in its own right. This means taking one’s car abroad or hiring a vehicle on holiday should be no more complicated than it is now.
10. Annex: Solutions being implemented by HMRC to minimise trade frictions as part of no-deal Brexit customs planning
10.1 Replicating the rules and procedures in the EU’s Union Customs Code to operate domestically under the Taxation (Cross-border Trade) Act 2018, thus ensuring no unexpected changes for UK importers or for EU exporters to the UK. The first regulations under the Act, including the Import and Transit regulations, were made on 30 November 2018.
10.2 A new online Customs Declarations System to replace the 25 year-old CHIEF system. Expected to be able to handle up to 400 million declarations a year.
10.3 Importers will be able to declare import VAT on their VAT monthly return, rather than at the border – thus mitigating cashflow and procedural problems.
10.4 Trusted trader schemes are provided for in the new Import regulations (Part 9). This further minimises paperwork and the need for border controls.
10.5 Big manufacturers or food importers reliant on just-in-time deliveries from the EU27 should be registered as Authorised Economic Operators (AEOs). This means that freight is pre-cleared electronically (as is currently the case for most rest of the world imports) and not held up for checks at the border.
10.6 Major supermarkets who import produce from outside the EU will already be familiar with the AEO system. The no-deal UK system will replicate exactly what they are used to under the UCC, and so should enable them to handle produce imported from the EU27 in the same way as they do for produce imported from Africa or South America.
10.7 Inland inspection facilities to check the small number of consignments that will need to be physically checked have already been set up. Staff are currently being recruited. There is a large facility at Magna Park, Milton Keynes and another at Hayes. This means lorries can be directed away from ports for targeted checks, minimising delays.
10.8 The Import Regulations mandate electronic pre-clearance for customs as RoRo ports, to avoid delays at Dover.
10.9 There could be contingency plans to waive checks if required to avoid gridlock for security reasons. (The growth in unaccompanied rail freight scanned automatically would also reduce the number of lorries over time.)
10.10 HMRC has already published no-deal notices and guidance for importers and exporters on its website: https://www.gov.uk/guidance/exporting-and-importing-goods-if-the-uk-leaves-the-eu-with-no-deal
All of these plans are well advanced. If just-in-time importers get themselves set up and registered as AEOs, their EU imports should not be subject to any delays on entering the UK.