ExplodingthemythsofleavingtheCustomsUnion
AjointpublicationfromtheEuropeanResearchGroupandGlobalBritain
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Fact – NOT Friction ExplodingthemythsofleavingtheCustomsUnion
AjointpublicationfromtheEuropeanResearchGroupandGlobalBritain
CONTENTSForeword 3ExecutiveSummary 4Introduction 6MythssurroundingaUK-EUfreetradedeal 9Mythssurrounding‘NoDeal’–ortradingonWTOterms 20Aboutthepublishers 23
20thNovember2018
Coverpicture:ThePortofSouthampton,DiegoTorres
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FOREWORDBySimonBoydFinstD,ManagingDirectorofReidSteelItisoftensaidthatwhentheUKleavestheEUSingleMarketanditsCustomsUnionthatitwillbefarhardertotradewhetherit'simportorexport–thatfrictionlesstradewillbecomedifficultwithdelays,obstaclesandcosts.FrommyownexperienceIcansaythereverseistrue.InmyexperiencetradingwithourEuropeanfriendsisinfinitelymoredifficultthanitistotradewithothercountriesoutsidetheEU.Ithas,forinstance,beeneasierforustoexporttoMongoliathantoFrance,despitethefactwewerefoundedtherein1919.Thereasonsforthisareobvious,theEUisbureaucraticbyitsverynatureanditsCustomsUnionisafortressdesignedtoprotectproducersinsideitratherthanencourageopenfreetradewhereeveryonecanbenefit.Butwearenotandneverhavebeenprotectedbythisprotectionistregime.InsteadwehaveseenthesteadyebbofmanufacturingmovetootherareasoftheEU–andeventoareasbeyond–asaresultofourmembership.Addtothebureaucracyandprotectionism;theunevenplayingfield,demiseofourworldrenownBritishStandards(seenbymanyasthefinestintheworld)andtheconstantanti-competitivedietofbadEURegulationandDirectiveswhichourcivilservantsgoldplate,itisnowonderthatourproductivityandabilitytogrowhasbeenheldback.TheEUsystemsuitsonlythemultinationalswhohavethemeanstolobbyandunfairlyprofitattheexpenseofthevastmajorityofUKbusinesses.Thispaperisarevelationbecauseitexposesthetruththatwehavebeenonthereceivingendofacarefullyorchestratedblizzardoffalsefactsandpredictionsthatarenotbornoutbytheevidence.Indeedtheseventeenmythsthataretakendownherearetestimonytotheprevalenceoffear-mongeringthroughouttheBrexitdebatetomakeitappear"catastrophic"toliveandtradeoutsidetheEU.YetifweonlyaskourselveshowperfectlynormalandsuccessfulcountriessuchasChinaandAustraliaontheothersideoftheworld–andtheUSAontheothersideoftheAtlantic–havebeenabletotradesuccessfullywiththeEUandtheUKfromoutsideitscustomsUnionwehavetoadmitlifeandtradeinsuchacircumstanceisnotcatastrophicatall.IndeedlivingunderWTOrulesissuccessful,profitableandlife-enhancingfortheirsocieties.Tobefreetotradewiththegrowingworldwillreaphugerewardsforourcountryandourtradingpartners.Wewillthenseethereversalofthehugetradingdeficitofcirca£100BillionperyearingoodsourEUmembershiphasdelivered.Iaskmyfellowbusinesscolleaguestoreadthispamphletandtakeitslessonsonboard–wecanalladjusttotradingunderWTOrulesandworkingtowardsatradedealthatreducesanyfrictiontonearzero–butitshallnotbecatastrophic,itshouldnotevenbeuncomfortable,itshouldjustbeanotherbusinesschallengethatwillbeworthit.Wewillsucceedthroughourcountrytakingbackcontrolofourlaws,ourmoneyandourborders.
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EXECUTIVESUMMARYTheprovisioninthePM’sdraftWithdrawalAgreementthatcouldkeeptheUKindefinitelyintheEUcustomsunionisdrivennotjustbyconcernthatcustomsproceduresneededoutsideacustomsunionwouldrequireahardborderinIrelandbutbyfearsthattheywillimposecosts,causedelays,disruptsupplychainsandundermineeconomicgrowth.However,manyoftheproblemsascribedtoleavingtheEU’scustomsunionareimaginaryandmostoftherestareexaggerated.§ Referencesto“customspaperwork”havingtobe“checkedattheborder”afterBrexitconjure
upvisionsoflorrydriversfillinginformswhicharethenlaboriouslycheckedagainsttheirloads,causingdelaysandqueues.Infact,virtuallyallcustomsdeclarationsaremadeelectronicallyaheadofarrivalataport;mostconsignmentsareclearedwithinsecondsofarrival;atinypercentagearephysicallycheckedasaresultofriskassessmentbyHMRCcomputersorintelligenceinformation;andsuchchecksmaybecarriedoutawayfromtheborderatimporter’spremisesorwarehouses.
§ Mostchecksrelatetodutiablegoods,drugsorillegalimmigrantsandaremadeonthebasisofriskorintelligenceinformation.HMRCdonotexpectanyoftheseriskstoincreaseornewriskstoemergeasaresultofBrexitsotheywillnotrequiremorechecksthanatpresent.Thesameistrueforchecksoffood,plantsandanimals.Inanycasetheywill‘prioritiseflowovercompliance’topreventcongestion.
§ ItisoftenassumedthattherearenoborderproceduresorchecksontradewiththeEUatpresent.Yet,infact,companieshavetoreporttheirtransactionswithEUcountriesseparatelyintheirVATreturns;paydutyontobaccoandalcohol(whichyieldfarmorerevenuethantariffswouldintheeventof‘nodeal’);theymaybesearchedforillegaldrugsorimmigrants;driversmustshowtheirpassports;andcompaniesofanysizemustsubmitdetailsoftheirintra-EUtradetoIntrastat.Allbutthelatter(whichwillbereplacedbycustomsdeclarations)willcontinuepostBrexitandconstitutethemajorelementofbordercompliance.
§ TheclaimthatWTOrulesrequirecheckstobemadeattheborderisincorrect.Checksofcustomsdeclarationsarecarriedoutelectronicallyandphysicalchecksoftenmadeatimporter’sorexporter’spremises.EventheUnionCustomscode,whichrequiresagri-foodchecksatborderinspectionposts‘inthevicinityoftheborder’allowsthemtobeasfaras40kmsinland.ThisisparticularlyimportantforavoidinginfrastructureandchecksattheIrishborder.
§ Just-in-TimesupplychainsdonotoperateexclusivelywithintheEU.Indeed,afifthofcomponentsimportedbyUKmotormanufacturerscomefromoutsidetheEU,andtheirtimelyarrivalisjustasessentialtothereliableoperationofassemblylines.TheyaresubjecttocustomsproceduresthatdonotcausetheproblemssupposedtobelikelywhenappliedtofutureimportsfromtheEU.
§ Theassumptionthatfreetradeagreementsimposefarmoreburdensontradethandocustomsunionsisnotbornoutbyeconomicstudiesorintherealworld.Surveysoftheliteratureshowthatfreetradeareas–e.g.NAFTA-aremore‘tradecreating’thantheEUcustomsunion.BusinessesinSwitzerland,NorwayandotherEEAcountriesarenotcomplainingaboutcompletingcustomsdeclarationsletalonecallingtoconverttheirfreetradearrangementsintoacustomsunion.Thismaybebecausetheywelcomethefreetradeagreementstheircountrieshavebeenabletonegotiatewhichwouldnotbepossiblewithinacustomsunion.TheSwiss
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haveFTAswithcountrieswhosecombinedGDPisthreetimesthatoftheFTAsnegotiatedbytheEU.
§ AlthoughSwitzerlandandNorwayhavefewerchecksonproductcompliancebecausetheycomplywithEUsinglemarketrulesthecustomsdeclarationsrequiredattheirborderswiththeEUaresimilartothosethatwillberequiredattheUKborderandtheytoohavetocomplywithrulesoforigin.
§ Ofcourse,weshouldendeavourtominimisethecostofcompliancewithcustomsprocedures.ButastheChairoftheEuropeanlogisticsandcustomsassociationhassaid:“AlltheingredientstoensureasmoothexitprocessoftheUKfromtheEUandwhichallowalmostfrictionlesstradeaftertheexit,arealreadyavailable[intheUnionCustomsCode].”Sowedonotneedtonegotiatesimplifiedcustomsprocedures.
§ TheHMRCestimateofthecostofcompletingcustomsdeclarationsisanorderofmagnitudelargerthanactualcostsincurredbycompaniesandreportedbytheSwissauthorities.TheHMRCfigureisbasedonthechargesbycustomsagentsforlargeconsignmentsofcomplexproducts.ItignoresthefactthatovertwothirdsofbusinessescompletetheirowndeclarationsbecauseitischeaperandthatforthesmallrepeatconsignmentsthatcharacteriseUK/EUtradethecostofreplicatingdeclarationsisnegligiblecomparedwiththecostoftheinitialdeclaration.
§ Officialestimatesofthecostofcomplyingwithrulesoforiginareevenlessdefensible.TheyarebasedonoutdatedandirrelevantstudiesoftradebetweenunderdevelopedcountriesandtheUSAortheEU.AmorerecentauthoritativestudybytheWTOshowsthat,exceptforinfrequentconsignments,thecostsofcomplyingwithrulesoforiginare‘negligible’–theydonotevenwipeouta1%tariffpreference.Moreover,thenewREXsystem–whichtheEUhasagreedtoextendtotheUKpostBrexit–furthersimplifiestheprocedurefordeclaringorigin.
§ AparticularconcernhasbeenfearthatlengthydelaysatportsandconsequentcongestiononmotorwayswilldisruptplantsdependentonJust-in-Timesupplychains(JIT).Asexplained,HMRCdonotexpectmorechecksonimportsfromtheEUpost-Brexitandwillprioritiseflowovercompliance.Thefearis,however,thatdelays–eitherdeliberateorthroughlackofpreparation–onvehiclesarrivingatCalaisfromtheUKwillcauseaback-upofvehiclesextendingbackoverthechannelanduptheUKmotorwaysystem,interferingevenwithsuppliescomingintheoppositedirection.Deliberatedelayswouldbeabreachofthreetreatycommitments(theoriginalWTOtreaty,theTradeFacilitationAgreement(FCA)andtheLisbonTreatyrequiringtheEUtobehaveinaneighbourlyfashiontowardsadjacentstates).Ofcourse,legalredresswouldtaketimebutportsinBelgiumandHollandareeagertotaketradeawayfromCalais.
§ Moreover,queuesresultingfromproblemsatCalaisarenotunknown.OperationStackhashadtooperateon211dayssince1998anddidsofor23almostcontinuousdaysin2015withdelaysof35hours.YetJITplantsappeartohavemanagedsincenonewerereportedhaltingproduction.
§ ItisnaturalthatbusinessescontemplatetheworstpossibleconsequencesintheeventoftheUKleavingwithoutanagreement–duetolackofpreparationcombinedwithhostilenon-cooperationbytheEU.Sadlysomecommentatorspresentthesescenariosasiftheyrepresentwhatwouldbeapermanentsituationpost-Brexit.Butmostsuchproblemsarenotmerelyunlikelybut,iftheyhappenatall,essentiallytemporary.
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INTRODUCTIONOneofthemostcontentiousprovisionsofthePrimeMinister’sdraftWithdrawalAgreementisthecommitmenttokeeptheUnitedKingdominacustomsunionwiththeEUwhichwewillnotbeabletoleavewithoutEUapproval.ThatissupposedlynecessarytoavoidahardborderbetweenNorthernIrelandandtheIrishRepublic1andacustomsborderbetweenNorthernIrelandandGreatBritain.ButitalsoreflectsstrongpressurefromtheTreasuryandDepartmentforBusiness,EnergyandindustrialStrategy(BEIS)toavoidthecustomsprocedureswhichwillapplytoallourtradewiththeEUifweleavethecustomsunion–evenifwehaveaCanadastylefreetradeagreementoriftheUKleavestheEUonWTOterms.Theyclaimthatthesecustomsprocedureswillcauseunacceptable“friction”whichwillimposehugecosts,causedamagingdelays,disruptjust-in-timesupplychains,undermineeconomicgrowthandprovokemilitantresentmentontheIrishBorder.ThesefearsaredrivenbyaseriesofmythsabouthowtheythinkCustomsprocedureswork.Unfortunately,fewingovernmentorthemediaarefamiliarwiththem.Thispaperattemptstodispelthesemyths.Ofcourse,leavingthecustomsunionandreplacingitwithafreetradeagreementwiththeEUand/orothercountrieshasbothcostsandbenefits.Inafreetradearea,unlikeinacustomsunion,businesseshavetomakecustomsdeclarationsandcomplywithrulesoforiginwhentradingwithothermemberstates.Ontheotherhand,inafreetradeareastatesarefreetosettheirownexternaltariffsorabolishanyofthemeitherunilaterallyorinnegotiatingadditionalfreetradeagreementswithothercountries.Thispaperdemonstrateshowthepossiblecosts,delaysandcongestionofcustomsproceduresifwetradedwiththeEUonthebasisofafreetradeagreementoronWorldTradeOrganisationterms,havebeenexaggerated.Likewise,thebenefitsofwiderfreetradeagreementshavebeenunderstated.OnthebasisoftheirinevitablytheoreticalestimatesthegovernmentarguesthatthecostofleavingthecustomsunionwouldexceedthebenefitsoffreetradeagreementswiththeEUand/ortherestoftherestoftheworld.Yetcountriesthathavepracticalexperienceofbothcostsandbenefitsoffreetradeagreementshavereachedtheoppositeconclusion.MembersofEFTA,theEEA,NAFTAandtheAsianfreetradeareasarenotlobbyingtoconverttheirfreetradeagreementsintocustomsunions.Theirbusinessesdonotseemtofindcompletingcustomsdeclarationsandcomplyingwithrulesoforiginasignificantproblem.Andmemberstateshaveprofitedfromtheopportunitytonegotiateadditionalfreetraderelationshipswithaswatheofothernations.Inthelightofthis,itisstrangehowmuchnegotiatingandlobbyingefforthasbeenexpendedonkeepingtheUKwithinacustomsunioninwhichtheUKhashistoricallybeentheloser.WhentheUKjoinedtheCommonMarketin1973itwasoneofthefastestgrowingmarketsintheworld.Wehopedthatgettingwithinitsthenhighexternaltariffwouldenableustosharethatgrowth.YetonlyfouryearslaterBritainwasbustandhadtobebailedoutinthebiggesteverIMFrescue.Themain
1SeeTheBorderbetweenNorthernIrelandandtheRepublicofIrelandpost-BrexitEuropeanResearchGroup12thSeptember2018whichshowsthattheEUcouldavoidinfrastructureorchecksattheborderwhilecomplyingwithitsownrules.HMRChassaidthattheUK“doesnotrequireanyinfrastructureattheborderbetweenNorthernIrelandandIrelandunderanycircumstances”
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causesweredomesticbuttheywereaggravatedbythehugetradedeficitopeningupasimportsfromthecontinentfaroutstrippedBritishexportstothecontinent.FortyyearslaterthatdeficitintradewiththeEUisapproaching£100billion.Ontheotherhandourtradewiththerestoftheworldisgrowingmorerapidlywithagrowingsurplus.Meanwhile,theEUisnowtheslowestgrowingcontinentaleconomyapartfromAntarctica.TheEUitselfexpects90%offuturetradegrowthtobeoutsideEurope.AndtheEUexternaltariffnowaveragesonly4%makingitmuchlessimportanttobeinsideit.ThedecisiontoleavetheEUisapoliticalone,notaneconomicone.Itwasaboutrestoringnationalself-governmentsothatwecouldholdthepeoplewhomakeourlawsdemocraticallyaccountable.Notthatprosperityanddemocracyarealternatives.Inthelongruntheygohandinhand,becauseifademocraticgovernmentfailstodeliverprosperitytheelectoratecanthrowitout.Furthermore,anationalgovernmentcantailorlawstothenation’sneedsratherthanhavingtoacceptone-size-fits-allrulesacrossacontinent.Itisdomesticpolicythatoverwhelminglydetermineswhetheranationiscompetitiveornot.SotakingbacknationalcontroloverourdomesticlawandeconomicpolicywillstrengthentheUK’sflexibility,agilityandfreedomtocompete.MembershipofthecustomsunioninpracticeentailsremainingsubjecttothebulkofEUsinglemarketlawincludingallfuturelaws–withnosayoverthem.Theparadoxofthedebateaboutremaininginthecustomsunionisthatthosewhoareentirelyhappytoforegotherighttolightentheburdenofover10,000EUlawsandregulations2somehowbaulkattherequirementtocompleteacustomsformanddeclarationoforigin.IsitreallycrediblethatcustomsproceduresalonearemoredamagingthanalltheREACH,MiFiDandcountlessotherdirectivesandregulations,imposedonindustryovertheyears?Furthermore,newindustrieslikeBioTech,FinTech,AI,GMandGeneEditinginwhichtheUKisstrong,facetheriskofbeingregulatedbyotherEUcountrieswhichhavenointerestintheirprosperity.ApologistsforEUlegislationarerighttosaythatregulationisanecessaryevilinacomplexmoderneconomy.Therewillbelittlescopeforabonfireofregulations.Buttherewillbeconsiderablescope,andcumulativelyenormousbenefit,frombeingabletostreamlinetherulesweinheritfromtheEU,tominimisecompliancecostsandabovealltoreducethebarrierstoentry.Weshouldofcourseseektodothesamethingforcustomsprocedures.Indeed,oneofthemythsthatwedebunkisthatthereisnoscopeforsimplificationwithinthecurrentEUcustomscode.ThereisanditshouldbeaprioritytoencourageandfacilitateBritishbusinessestotakeadvantageofthesesimplificationswhentradingwiththeEU.So,itmakesnosensetotrytopreservethetradestatusquowiththeEU.ThereisfarmoreopportunityfortheUKbygainingfreedomtosimplifyregulatorystandardsongoods,tosetourowntariffsandquotasandtradepolicy,andtousetheseleverstoachievebettertradingrelationshipswiththerestoftheworld,whichisgrowingsomuchfasterthantheEU.ThisiswhyitissooddthattheUKgovernmentshouldhavebecomesopreoccupiedwithdefendingadeficittradingrelationshipwiththeEUattheexpenseofthegrowingsurpluswegeneratefromtradewiththerestoftheworld.
2“Attheendof2008,therulesoftheTreatyweresupplementedbysome8,200regulationsandjustunder1,900directivesinforcethroughoutthe27MemberStates”EuropeanCommission’s26thAnnualReportonMonitoringtheApplicationofCommunityLaw(2008)
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Onlyafterweleave,andretakecontrolofourowntradepolicy,willwehaveregainedtheflexibilitytoadaptourselvestoachangingworld,andbuildastrongfoundationforourfutureprosperity.So,theUKshouldwelcometheprospectofaCanada+++tradedealwiththeEU,aswasofferedbyPresidentTuskbackinMarch2018.CombinedwiththeERGproposalsforcustomsfrontierswithoutnewinfrastructure,whichremovestheneedfortheso-called“back-stop”ora“hardborder”betweenNorthernIrelandandtheRepublic,aCanada+++advancedFreeTradeAgreementoffersthebestandonlydeliverableFutureEconomicPartnershipwiththeEU.
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MYTHSSURROUNDINGAUK-EUFREETRADEDEAL(butmayalsounderliediscussionsof‘nodeal’)
MYTH1
• Customsdeclarationsarepiecesofpaperthatareexaminedandcomparedwithloadsattheborder.
“trucksfromnon-EUcountries…havetoparkandfillinaformatthefreightclearanceoffice.AcomputerisedsystemknownastheCustomsHandlingofImportandExportFreight(CHIEF)logsdetailsautomatically,indicatingwhatthegoodsareandwhattheimportdutymightbe,butithastobechecked.”TheEconomist6April2017
Thereality:
• Virtually100%ofcustomsdeclarationsforgoodsarrivingintheUKaremadeelectronicallyaheadofarrivalattheport.Theyaresentto,andcheckedelectronicallyby,theCustomsHandlingofImportandExportFreightcomputersystem(CHIEF)3.
• CHIEFcarriesoutcomputerisedriskassessmentprocessestoidentifyconsignments,orgoodswithinaconsignment,thatneedtobephysicallyexaminedortheirdocumentationexamined.Checksarenormallycarriedoutonlyifariskofnon-complianceisidentified.
• Fewerthan1%ofimportsarephysicallycheckedasaresultofCHIEF.• Around94%ofimportsareclearedin5secondsand96%oftheremaining6%arecleared
within2hours4.• Fewerthan3%ofnon-EUimportsaresubjecttodocumentchecksand96%ofthoseare
clearedwithin2-3hours.• Most“border”processes–likecustomsdeclarations–arenotcarriedoutattheborderbut
electronicallyorattheexporter’sorimporter’spremises,inlandwarehousesetc.• PostBrexit,inthevastmajorityofcases,theonlynewcustomscheckneededunderafree
tradeagreementwouldbeconfirmationofthecustomsdeclarationsimilartothecheckonthedrivers’passports(whichalreadytakeplace)wherethereareborderpostsasatDover,oratthedestinationpremises.
MYTH2
• CustomsdeclarationsatChannelportswillrequirechecksanddelaysattheborder.Thereality:
• ThereneedbenomorechecksongoodsenteringtheUKthanatpresentasaresultofBrexit.JonThompson,CEOofCustomsandRevenue,inevidencetotheSelectCommitteeexplainedthatthereneedbenoextraCustomschecksbecausechecksarerelatedtorisk(mostofwhichrelatetogoodsliabletoexcisedutiesandillegaldrugs)andimportsfromtheEUwillbenoriskierpostBrexitthanbefore.5
3CHIEFwillsoonbeupgradedtothenewCustomsDeclarationService(CDS)furtherfacilitatingtrade.4HMRCbriefingtoMPsOctober2018.5EvidencetoDEXEUSelectCommittee29thJan2017.Q220MrRees-Mogg:IfIhaveunderstoodyourevidencecorrectlytoday,customsandexcisecan…minimiseanydelaysatthebordertoensuretheyarenoworsethantheycurrentlyareonourside?…JonThompson:Inrelationtoimports,yes.
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MYTH3
• TherewillneedtobefarmorechecksonfoodandanimalimportsenteringtheUK.“Oursystemforimportingandexportingfoodimplodesalmostinstantly…Wedon'thaveenoughinspectionposts,wedon'thavethestafftomanthem,wedon'thavethemeanstodivertproducttothemandwedon'thavethecoldstoragecapacitytohandleproductgoinginandout.Manyportsdon'thavespacetoinstallmorefacilities.”IanDunt,Editor,Politics.co.ukJuly2018Thereality:
• ThereneedbenoextraSanitaryandPhyto-SanitarychecksonfoodandanimalsenteringtheUKpostBrexit–unlessinfutureEUgoodsrepresentagreaterhealthriskthannow,whichseemsunlikely.JohnBourne,PolicydirectorofAnimalandPlantHealthforDEFRA,confirmedthat,becausephysicalinspections(likecustomschecks)areriskrelatedtheyseenoreasontoincreasetheirfrequency6.
• FreshfruitetcisflowninfromIsraelandothernon-EUcountrieswithnegligibledelaysatUKairportCustoms/SPScontrols.AslongasfreshfoodclearancepointsaregeareduptooperateatDoverinthesamewayasatfreightairports,thereneedbenodelays.
• Indeed,EUrulesrequiringarbitraryhighpercentagechecksonimportsregardlessofriskneednolongerapplyintheUK.
• TheEUmayimposeadditionalchecksonfood,plantsandanimalsenteringtheEUfromtheUK.TheUK’sSPSmeasureswill,however,initiallybenotjustequivalent,butidentical,totheEU’s.TheWTOSPSagreementappearstodisallowadditionalEUchecksinsuchcircumstancessinceitrequiresthat:“MembersshallacceptthesanitaryorphytosanitarymeasuresofotherMembersasequivalent,evenifthesemeasuresdifferfromtheirownorfromthoseusedbyotherMemberstradinginthesameproduct,iftheexportingMemberobjectivelydemonstratestotheimportingMemberthatitsmeasuresachievetheimportingMember’sappropriatelevelofsanitaryorphytosanitaryprotection.”However,theEUmayimposecheckstoensurethatequivalentrulesinnon-membercountriesincludingtheUKarebeingadheredto.
MYTH4
• WTOrulesrequirememberstatestooperatebordercontrols“thelegalrequirementwewillhave…tooperatetheWTO-compliantborder,whichdoesrequirechecksattheborder.That’swhattheWTOrulesrequire.”PhilipHammond7Thereality:
Q237JonThompson:Thefundamentalquestionhereiswhetherwhatiscurrentlyintra-EUtrafficwillbeanymoreriskypostleavingtheEuropeanUnionthanitisnow?Whatweinterveneonnowisriskandintelligence-based.Thatisasystemwewillcontinuetoapplyinthefuture.Wemaynotinterveneanymorethanwedonow,6IbidQ237JohnBourne:Fromourpointofview,weabsolutelyagreewithyou:wedonotthinktherearesignificantreasonstoalterourriskassessmentsondayone.Wehavebeendoingthisforalongtimeandnothinghasreallychanged;hopefully,wehavegotrelativelyappropriateriskmanagementprocessesinplacenow.7https://www.politico.eu/article/philip-hammond-brexit-ireland-uk-will-enforce-hard-border-in-ireland-if-there-is-no-brexit-deal/
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• Despiterepeatedrequests,thegovernmenthasbeenunabletoprovideuswiththetextoftheWTOrulesthatallegedlyrequirechecksattheborder.
• WTOrulesaredesignedtofacilitatetrade–nottohinderit.Theyprohibitdiscriminationbetweengoodsonthebasisoftheircountryoforigin.
• Mostdeclarationsaremadeelectronically,notattheborder;checkscanbe,andoftenare,madeawayfromtheborderatcompanypremises,warehousesetc.
• EvenBorderInspectionPoststhattheUnionCustomsCode(whichinanycasetheUKwillbeabletoamend)requirestobe‘inthevicinityoftheborder’andareoftensited20kmsormoreaway.
• WTO/GATTrulesrequiregoodstobetreatedinsimilarwaysregardlessoforiginanddestination.8However,itisnormalforprocedurestodifferbetweenports(forexample,notallwillhavefull-timecustomsposts)andbetweenlandandseaborders.So,aslongastheUKdoesnotdiscriminatebetweengoodsataparticularlocationonthebasisoforiginordestinationitisnotobligedtoperformitschecksattheborder.
• TheWTOalsoallowswaivers–albeittemporarybutrenewable–evenfromnon-discriminationrulesontheverysecuritygroundsthatunderlietheconcernabouttheproceduresapplyingtotradeacrosstheUK/Irishborder.
MYTH5
• TherearecurrentlynochecksorproceduresrequiredforimportingintotheUKfromtheEU
“Currently,goodsmovingbetweentheEUandUKdon’tneedtobecheckedatborders”JonStone,Independent,23July2018Thereality:
• TherearecurrentlyseveralborderprocessesandchecksontradecrossingtheUK/EUborderwhichwillremaintheprincipalprocedureswhenitbecomesacustomsborder.Currentchecksinvolve:
o CompanieshavetoreporttheirtransactionswithEUcountriesintheirVATreturnsbecauseexportstotheEUarezeroratedwhereastransactionswithintheUKincur20%VAT.(Thiswillcontinueandrequiresmuchoftheinformationthatwillbenecessaryforcustomsdeclarations.)
o Excisetaxesonimportsoftobacco,alcoholetcareseveraltimesthevalueofimporttariffs9.(ThatwillremainthecasepostBrexitwhetherwetradewiththeEUonFTA,WTOorFCAterms.)
o IllegalDrugs–involveasignificantproportionofchecks(whichwillnotchangepostBrexit).
8“withrespecttoallrulesandformalitiesinconnectionwithimportationandexportation,andwithrespecttoallmattersreferredtoinparagraphs2and4ofArticleIII,anyadvantage,favour,privilegeorimmunitygrantedbyanycontractingpartytoanyproductoriginatinginordestinedforanyothercountryshallbeaccordedimmediatelyandunconditionallytothelikeproductoriginatinginordestinedfortheterritoriesofallothercontractingparties.”GATTArticle19IbidQ217…JohnThompson:themajorriskfromanHMRCperspectiveisactuallyexcise.PerhapsIcangiveyouanillustration.Apacketof20cigarettes,whichretailsinthiscountryfor,say,£9,youcanbuyinEasternEuropefor£1.IfyouarepreparedtotrytoimportitfromsomewhereintheMiddleEastacrossaneasternEuropeanboundary,youcanalmostcertainlygetitfor10p.Now,giventhat£7billionofexciserevenueisraisedattheborder,thereisasignificantchallengeinrelationtotobaccoandalcoholattheborder.Thatisthemajorriskhere,notreallythe£3billionofcustoms.Attheminute,wepass80%ofthatontotheEuropeanUnion.ThatistheareawhereHMRCisparticularlyexercisedaboutriskovertime.
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o Illegalmigrants–are,likewise,acauseofchecksatpresent(whichwillnotchange).o Statisticalreturns.Allbutsmallercompanieshavetosubmitdetailsoftheirintra-EU
tradecomprisingmuchoftheinformationwhichwillberequiredbycustomsdeclarations,thoughonamonthlybasisratherthanwitheachconsignment.Nextplcsaytheyexpectlittleextraworkasaresult10.(Customsdeclarationswillreplacethis,notbeadditional.)
o Drivers(andpassengers)mustshowtheirpassportssincetheUKisoutsideSchengen.(Thiswillnotchange.)
• Intheeventofanoutbreakofdisease,epidemiologicalcontrolsmaybeintroducedattheborder.
MYTH6
• Just-in-Timesupplychainscannotoperateacrosscustomsfrontiers
“Idon’tthinkit’sfeasibleforthecarmakerstocarryonrunningtheJITsupplychainsif…UKleavestheEUcustomsunion.”TimLawrence,PAConsultingFinancialTimesJune2018Thereality:
• Just-in-TimeandJust-in-SequencesupplychainscananddooperateacrosscustomsfrontiersintheUKandworldwide.
• 21%ofautomanufacturers’bought-insupplychaincomesfromoutsidetheEUagainst36%fromtheEUand43%fromwithintheUK11.Thereliableoperationofproductionlinesisasdependentonthesenon-EUimportedJIT/JISsupplychainsasthosefromtheEU.CustomsproceduresatUKportshaveneverbeencitedasaproblemforthesesupplychains.
• FordandGeneralMotorsdependonsupplychainsthatoperateacrosstheCanadian/US/Mexicoborderswhere,becauseNAFTAisafreetradeareanotacustomsunion,thereisacustomsborder.12
• Freshcutflowers(whichareverytimesensitive)traveldailyfromtheNetherlandsacrossthecustomsbordertoSwitzerland.(BecausesinglemarketrulesapplybothsidesoftheSwissborder,flowersdonotfaceSPScheckstherebuttheexampleillustratesthatordinarycustomsdeclarations,whichapplytoflowersastoallgoods,donotresultindelays.)
• Althoughdelaysindeliveriesareundesirable,UKmotormanufacturersalreadyhavetocopewiththesometimesprolongeddelaysatChannelports(resultinginOperationStack–seeMyth13),delaysonmotorwayssuchastheM25andacrossEuropebetweenEUsuppliersandUKplants,causedbybadweatherandotherincidents.
10BrexitPreparationandImpactAnalysis,NextCEO’sReportforHalfYearendedJuly2018.“AlthoughthereisnocustomsborderbetweentheEUandUK,anycompanyimportingmorethan£1.5morexportingmorethan£250kpaisrequiredtosubmitIntrastatdeclarationsforallgoodsflowingintotheUKfromtheEUandviceversa.Intrastatdeclarationscontainalmostentirelythesamedatathatisrequiredtomakeacustomsdeclaration.Therefore,wedonotanticipateanyadditionaldatawillbeneededinordertoimportgoodsfromtheEUpost-Brexitandsothereislittleadditionalworkinrespectofdatacollection.”11TradePostBrexitBostonConsultingGroup,HerbertSmithFreehillsandGlobalCounsel12ThiswashighlightedbytherecentagreementonrevisionstotheNorthAmericanFreeTradeAgreement.https://www.cnbc.com/2018/10/01/ford-general-motors-rally.html
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MYTH7
• CustomsUnionsarefarmorebeneficialthanFreeTradeAgreements.“[ACanada-styleFreeTradeAgreement]wouldbeabadBrexitoutcomefortheUK…acustomsunionshouldserveasapractical,real-worldanswer”CarolynFairbairn,DirectorGeneraloftheCBI13Thereality:
• NorwayandSwitzerlandarenotcallingforcreationofacustomsunionwiththeEU.NorisCanadacallingtoconvertNAFTAintoacustomsunion.Theydonotfindthesecustomsprocedurescauseonerous‘friction’.
• ComprehensivereviewsofstudiesoftheimpactoftradeagreementsprovidenoevidencethatacustomsunionwouldbemorebeneficialforUK-EUtradethanastandardfreetradeagreement(FTA).OnefoundnoevidencethatcustomsunionsoutperformFTAsintradecreation14.ThemorerecentstudyfoundmembershipoftheEUcustomsunionhadmodesttrade-boostingimpacts(15-20%)butthatthesewereonalltheirmeasuressmallerthanthetrade-creatingeffectsofFTAssuchasNAFTA15.
• TurkeyhasacustomsunionwiththeEUbutdelaysattheEU/Turkishborderarelegendarynotleastbecauseofchecksforillegalimmigrants(whichareandwouldremainafeatureofUK/EUtradesinceweareoutsideSchengen).WhentheEUdoestradedealswiththirdparties,thesethirdcountriesgaintariff-freeaccesstoTurkishmarketsbutTurkishexportersdonotgainautomaticreciprocalaccesstothesethirdcountriesandTurkeyhastotrytonegotiateparallelarrangements(notalwayssuccessfully).Notably,TurkeycameclosetocancellingitscustomsunionwiththeEUwhentheEUwasnegotiatingtheTTIPtradedealwiththeUS.BritaininacustomsunionwouldbeinthesamepositionasTurkey.16
• AcustomsunionwouldruleoutUKnegotiatingourowntradedeals.• Switzerlandhasnegotiatedtradedeals(someinconjunctionwithEFTA)withcountries
whoseGDP(excludingtheEU)is3times17thatofthecountrieswithwhichtheEUhastradedeals.However,Swisstradedealscanbeone-sidedbecauseadherencetosinglemarketrulesmeanstheycanoffernoregulatoryflexibilityintheirtradenegotiations.
• Nonetheless,athirdofSwissFTAshaveasignificantservicescomponentwhereas90%ofEUFTAshavealmostnoservicecomponent18.YetoverhalfoftheUK’sexportsbyvalueaddedisinservices,givingusadifferentinterestfromtherestoftheEU.
13(http://www.cbi.org.uk/insight-and-analysis/a-business-plan-for-a-good-brexit/)14“Lookingatthemostwidelystudiedagreements–EU,EFTAandNAFTA–,thelargestimpactisforNAFTA(131%),whiletheEuropeanagreementsregistermuchlower,butpossiblymorerealisticvalues:27%inthecaseofEFTA,41%fortheEU.Itisalsoworthnotingthatcustomunions–EU,CARICOM,MERCOSUR,CACM,CISCU–donotseemtoconsistentlyoutperformthefreetradeareasintermsoftradeimpact.Indeed,inthemeta-analysisregressionthecoefficientoftheCUvariablewasneversignificant.”Reciprocaltradeagreementsingravitymodels:ameta-analysisMariaCipollinaandLucaSalvatici(UniversityofMolise)15Table6GravityEquations:Workhorse,Toolkit,andCookbookHeadandMayer(2013)1614ReasonsWhyaUK-EUCustomsUnionRemainsaTerribleIdea.ByGudginandWeston,BriefingsforBrexit17MythandParadoxoftheSingleMarket:HowthetradebenefitsofEUmembershiphavebeenmis-soldMichaelBurrageCivitasJan2016.SwitzerlandhastradedealswithcountieswhosecollectiveGDPis$39.8trillionofwhich$16.7trillioniswiththeEUwhichhasFTAswithcountrieswhosetotalGDPisonly$7.7trillion.18Ibid
14
MYTH8
• CustomscompliancebetweentheEUandEEAcountriesorSwitzerlandisverylightonlybecausetheyhavetocomplywithEUrules.
Switzerland,Norway,IcelandandLiechtensteinarenotpartofaCustomsUnionwiththeEU.Sotheyhavenegotiatedtheirownfreetradeagreementswiththerestoftheworldandlevytariffsonimportsfromnon-EUcountriesatratesthatdifferfromtheEUexternaltariffs.Thereality:
• ThesamecustomsproceduresapplytotradeacrossthebordersbetweentheEUandSwitzerlandandNorwayaswilloperateatUK/EUborderspostBrexitundera‘CanadastyleFTA’.However,theiralignmentwithSingleMarketrulesreducestheextentofnon-customschecksbelowthosetheUKwouldfaceinaCanadastyleFTA.
• AllgoodscrossingthebordersbetweenEUandEFTAcountrieshavetocompletecustomsdeclarations,declaretheiroriginandeitherdeclaretheirconformitywithEUrulesoforiginorpayfullEUdutyonimportswheretheEEAcountryhasapreferentiallowtariff.
• TherequirementforthesecustomsandorigindeclarationsisnotremovedorreducedbecauseEEAcountriesadopt(orinSwitzerland’scase,closelyalignwith)Singlemarketrules.(AdherencetoSingleMarketrulesdoesremovetheneedforcertificationofcompliancewiththoserules)
• AgriculturalproductsandanimalsfaceadditionalchecksatEUborderswithNorwayandSwitzerland.
• UKmembershipoftheEEAwouldnotremovetheneedforcustomsdeclarationsforgoodscrossingtheIrishbordernoraddresstheEUdemandforabackstopincorporatingNIortheUKinacustomsunion.
• Despitethesupposedlydamaging‘friction’causedbycustomsborders,Switzerland,Norway,LiechtensteinandIcelandhavehigherGDPpercapitathananycountrywithintheEUcustomsunion.
MYTH9
• CustomsprocedurescannotbesimplifiedwithoutEUagreement.ItiswidelyassumedthattheUKwouldhavetonegotiatewiththeEUtosimplifyprocedurestominimisefrictionforourexportersandimporterspostBrexit.Thereality:
• “AlltheingredientstoensureasmoothexitprocessoftheUKfromtheEUandwhichallowalmostfrictionlesstradeaftertheexit,arealreadyavailable.”Paper19byCLECATrepresenting19,000EUcustomsagentshandling80%ofEUclearances.
19PositionPaper:ThefutureeconomicpartnershipbetweentheEUandUKCLECAT–EuropeanAssociationforForwarding,Transport,LogisticsandCustomsServices–October2018
15
• ThereisarangeofsimplificationsalreadyavailableintheUnionCustomsCodethatcanbeimplementedbyWTOmemberstatesimmediately.
• CLECATlists60simplificationsalreadyavailableintheUnionCustomsCodethatcanbeusedbyUKcustoms,Britishimportersandexportersandcustomsagents.
MYTH10
• CustomsandRulesofOrigindeclarationscouldcost£17-20billion.“Takentogether,[RulesofOriginandCustomsDeclarations]indicateaburdenonUK-EUtradeingoodsofaround£17-20bnayear.”–LetterfromJonThompson,CEOofHMRCtotheTreasurySelectCommitteeTheseHMRCestimatesincludethecostsofdeclarationsbothintheUKandtheEUonbothexportsandimports(£6.5billionfordeclarationsineachdirectionplus£3-5billionforRulesofOrigin–seeMyth13).SohalfwouldbebornebyEUbusinessesandconsumers.Thereality:
• Measuresofactualbordercoststurnouttobeafractionofthesetheoreticalestimates.• Switzerlandcalculatedthecostofbordercomplianceatlessthan0.1%ofthevalueoftrade.
BecauseSwitzerlandadoptsEUsinglemarketrulesitstotalbordercompliancecostswouldbeexpectedtobelowerthanthosetheUKwouldexperienceinCanada-styleFTA.ButthatdoesnotexplainwhyHMRC’sestimatejustofthecostofmakingcustomsdeclarationsandcomplyingwithrulesoforiginisover50timeshigherthantotalSwisscosts!
Regulatorycosts/millionCHF
Dutiestoact Imports Exports TotalPresentationandregistration 230 105.9 335.9Controlsandinspection 2.9 0.4 3.3Paymentofimportduties 19.6 0 19.6Archivingandbacking-upofdata 12.9 7.5 20.4Foreigntradestatistics 39.4 16.1 55.5Proofoforigin 16.7 27.4 44.1Total 321.5 157.3 478.8
Valueoftrade 277,000 293,000 570,000Percentagecostofcustoms 0.116 0.054 0.084 Thepapernotes:“Theestimatedcustomsclearancecostsinthisstudyarelessthan0.1%ofthevalueofimportedandexportedgoods.Thecostspercasearehigherforimportsthanexports.”20
• AstudyfortheDutchgovernmentbyKPMG,21whichwentintomuchmoredetailthantheHMRC,putthecostofcustomsdeclarations(excludingcompliancewithRulesofOrigin)if
20BerichtüberdieRegulierungskosten:SchätzungderKostenvonRegulierungensowieIdentifizierungvonPotenzialenfürdieVereinfachungundKostenreduktion.Dec201321Impactofnon-tariffbarriersasaresultofBrexitKPMGforMinistryofEconomicAffairsandClimatePolicyandMinistryofAgriculture,NatureandFoodQualityJanuary2018
16
theUKtradesonWTOtermsat1%ofUK/Netherlandstrade–onequarteroftheHMRCfigure(andKPMG,likeHMRC,didnotallowforthemuchreducedcostofreplicatingmultiplesimilardeclarations).
• NEXTplc,whichhaspublishedadetailedimpactassessmentof‘NoDeal’22,estimatestheadditionalcostsofcustomscomplianceonthe£170mstocktheyimportfromtheEU/Turkeywillbe£100k–i.e.lessthan0.1%.
• Tate&Lylereportsthatforallitsimportsviaitsownterminalitemploysjusttwopeople(whoalsoundertakeothertasks)tohandletheircustomsdeclarationsatacostoflessthan0.02%ofthevalueofimports.EvenforconsignmentsofspecialistcanearrivingatotherportsforwhichTate&Lyleemployscustomsagents,thecostofcustomsproceduresaddslessthan0.06%tothecostoftheconsignment.23
• TheHMRCestimateassumesthattheverylargenumberofsmallconsignmentswhichcompriseUK/EUtrade,manyofthemregularrepeatdeliveriesforindustrieslikethecarindustry,willhavecostssimilartotheone-offcostsofagentshandlingthefarlarger,lessregular,consignmentswhichcomprisetradefromoutsidetheEU.
• Makingthefirstofmanydeclarationscanbetimeconsumingandcostly–itinvolvesassemblingdataaboutname,numberandlocationofexporter,transporter,importeretc.andthecommoditycodeandvalueoftheconsignmentandinsertingitinthedatafieldsoftheCHIEFform.Butrepeatingtheprocessforsubsequentconsignmentscanbedigitalisedifonlyafewelementschange,reducingthemarginalcostofmakingsubsequentdeclarationstonegligibleamounts.
• TheHMRCestimatewasbasedonthreestudies–o astudy(Grainger)24involvingjust3importersofchilledandfrozenmeatand2
freightforwarders(agents)specialisinginthemeattrade–ahighlycomplexanduntypicaltrade.Thestudyquotedagent’scostsofhandlingcustomsdeclarationsof£20to£40.
o astudy(Ipsos-MORI)25coveringcompliancecostsofalltaxes.Theaveragecostofacustomsdeclarationhandledbyagentswas£41but68%ofcompaniesdothisthemselves,presumablybecauseitismuchcheaper.
o thestudy(KPMG)referredtoabovefortheDutchgovernmentestimatingthecostofcustomsdeclarationsintheeventofnodeal,whichcameupwithacostfordeclarationsof1%ofthevalueoftrade.
• ThereasontheHMRCestimateissooutoflinewithcompanies’experienceappearstobe:o Theybasetheirestimateonthechargesofcustomsagents
§ Theseoftencoverotherservicesincludingcalculatingdutyduewhichwouldbeirrelevantinafreetradearrangement.
§ Customsagentsareoftenusedformorecomplexconsignmentslikefrozenmeat,whichinvolvemorethancompletingthedeclaration,orforirregularconsignmentsthatdonotbenefitfromrepetition.
§ 68%offirms26completetheirowndeclarationspresumablybecauseitismuchcheaper.Ofthosewhousedagentsmostdidsoforcalculatingdutypayableorforgoodsrequiringinspections.
22CEOReport:BrexitPreparationandImpactAnalysis,NextplcResultsforHalfYearendingJuly201823Brexit,MovementofGoodsandtheSupplyChainbyShankerA.SinghamandVictoriaHewson,LegatumInstituteFeb201724TradeandCustomsProcedures:TheComplianceCostsofMeatImportsDrAndrewGraingerNottinghamUniversityBusinessSchool3rdSeptember201325UnderstandingtaxadministrationforbusinessesIpsosMORIHMRevenueandCustomsResearchReport375July201526UnderstandingtaxadministrationforbusinessesIpsosMORIHMRevenueandCustomsResearchReport375July2015p33
17
o HMRCalsobaseditsestimatesoncostsincurredonimportsfromoutsidetheEUwhereastradewiththeEUtypicallyinvolvesconsignmentsthatarefarsmallerandmorefrequent.Thecostofreplicatingmultiple,similarrepeatdeclarationswilltendtofalltonearzerooncedigitalised.27
MYTH11
• Motormanufacturerswillfacehighcostsofcompletingcustomsdeclarations.“Hondaexpectsitwouldneedtohandle60,000additionalcustomsdeclarations,requiringanewITsystemandadditionalstaff.HMRevenue&CustomssaysthiswouldcostHonda£2.1mayearinform-fillingalone.”FinancialTimesJune2018Thereality:
• Honda’sestimate(whichassumestheHMRCestimatedcostof£35perconsignmenteventhoughanITsystemwouldreducetheunitcosttoafractionofthisfigure)nonethelessimpliesthecostofdeclarationswouldaddjust0.2%tothecostofcomponentsandlessthan0.1%tothecostoftheaveragecar.
• Moreover,itimpliestheywillemploysome50to60stafffull-timeoncompletingcustomsdeclarationsmeaningeachcompletesonly4or5perday.Thisisasurprisinglylowthroughput.
MYTH12
• CompliancewithRulesofOriginissocomplicatedthatitwilloutweighthebenefitsoffreetradeagreements.
“costly‘rulesoforigin’thatcouldrenderatariff-freedealmeaninglessformanycompaniesinthesesectors.”CustomisingBrexit,InstituteofDirectors2018ACanada-stylefreetradeagreementwiththeEU(unlikeaCustomsUnion)wouldallowtheUKtoenterintofreetradeagreementswiththirdcountriesaswell.However,wheresuchFTAsreduceUKtariffsbelowthosechargedbytheEU,theEUwouldwanttostopgoodsavoidingtheirexternaltariffbyenteringtheUKonaloworzerotariffthenbeingre-exportedtotheEU(eitherunchangedorascomponentsoffinishedgoods).Consequently,allgoodsmovingfromtheUKtotheEUwillhavetodeclaretheirorigin;andthosedeemedundertheEU’sRulesofOrigintocomefromoutsidetheUK/EUfreetradeareawillhavetopaytheEU’sexternaltariffonexporttotheEU.Thereality;
• RulesofOriginapplytoexportsfromSwitzerlandandNorwaytotheEU.ItisscarcelyanissueformostoftheirtradersthoughSwitzerland’sstrongengineeringand
27HMRCestimatefromVATreturnsthat217,000firmswillmakeanextra205millioncustomsdeclarationspostBrexit.Thatmeansonaverageeachfirmwillmakenearly1,000shipmentspaaveragingjust£2,000each.Bycontrast,the150,000UKfirmstradingwiththirdcountriesmake55milliondeclarations–onaverageroughly370paperfirm,nearly£7,000pershipment.Itisprobablethattheunitcostofmultiple/repeatdeclarationsontradewiththeEUwillbefarlowerthanonhighvalue,lessfrequentshipments.
18
pharmaceuticalsindustries,inparticular,involvesupplychainswithboththeEUandtherestoftheworld.
• ThenewRegisteredExportersystem(REX)intheUnionCustomsCodeallowsself-reportingoftheoriginofgoodsexportedtotheEU28.Itisnolongernecessarytohavethiscertifiedbythenationalauthorities.
• TheEUhasagreedthatREXwillbeapplicabletoUKfirmsunderapostBrexitFTA,asitisforothercountriestradingwiththeEUonpreferentialterms.
• Thiswillsignificantlysimplifytheprocessofcomplyingwithrulesoforigin:o REXonlyrequiresfirmstoregisterwiththeirhomecountryauthority.o Firmsthensimplyself-declaretheoriginwhenmakingacustomsdeclaration.o Theymustalsokeeprecordsoftheoriginofrawmaterialsandtracebacktheorigin
ofcomponentssothattheycanprove,ifrequired,thatthedeclaredoriginoftheirexportscomplieswithEURulesofOrigin.
• Companiesproducinggoodsusingnon-UK/EUcomponentsandmaterialswillstillneedtoshow,ifrequired,acalculationthatestablisheswhetherthelocalvalueaddedmeetstheRulesofOrigin.Thisisusuallyaone-offcalculationforeachmodelofcar/derivative.Thecalculationdoesnotneedtoberepeatedforeachunit,sothecostperunitisusuallytrivial,beingspreadoverallthefirm’sexportstotheEU(thoughforfoodproducts,forexample,wheneversourcingofrawmaterialschanges,thenthecalculationmayneedtoberepeated).
• MostUKexportswillqualifyasofUKorigin29–acrosstheNI/Irishborderitisvirtually100%.• Theadministrativecostofdemonstratingcompliancetorulesoforiginisexaggerated,the
substanceofthoseruleswillbeveryimportantforindustrieslikemotormanufacturing.Inparticular,thelevelof‘localcontent’willbeimportantaswilltheabilitytoincludeas‘local’componentsfromcountriesthatalsohavemutualfreetradeagreements.
MYTH13
• ThecostofcompliancewithRulesofOriginexceedstariffpreferencesthatwillbenegotiatedinUKfreetradedealswiththirdcountries.
HMRChasputthecostofcompliancewithrulesoforiginat£3-5bn.ABISReviewofCompetencesquotedcostsnegatingtariffpreferencesashighas15%ofthevalueoftrade.TheCBIquotescostsupto8%oftrade.Thereality:
• Theseestimatesarenotcredible.o AmorerecentWTOstudy30concludedthatthecostofcomplyingwithrulesof
originis‘negligible’–insufficienteventocancelouta1%tariffpreference31.o TheyignorethesimplificationintroducedbyREX.o TheyignoretheactualcostsincurredcomplyingwithRulesofOriginbetweenEEA
countriesandtheEUthataretoolowtocauseanyconcern.28https://ec.europa.eu/taxation_customs/sites/taxation/files/rex_registered-exporter-system_en.pdf29AssumingtheEUappliesthePan-EuroMedsystem,whichitnowappliestoallotherregionalpreferentialagreements.30NewevidenceonpreferenceutilizationAlexanderKeckandAndreasLendleWorldTradeOrganizationEconomicResearchandStatisticsDivision31“Byvalue,atleast80%ofpreference-eligibleimportsinboththeEUandUSwithmarginsoflessthan1%enterunderpreferentialregimes.IntheUS,manylow-valueimportswithlowmarginsstillenterunderapreference,evenwhensaveddutiesarelessthanUSD10.Thisstronglysuggeststhatutilizationcostsareoftennegligible.”NewevidenceonpreferenceutilizationAlexanderKeckandAndreasLendleWorldTradeOrganizationEconomicResearchandStatisticsDivision
19
o Theyarebasedondiscredited32,outdatedandirrelevantstudiesoftradebetweendevelopingcountriesandtheEUorUSAthatignorethevolumeoftrade.
• TheWTOstudysuggeststheonlysignificantcostistheone-offcostofassemblingtheinformationtodemonstratecompliancewithrulesoforigin.Theycalculatethisrangesbetween$15and$1,500butspreadoverallofafirm’sconsignmentsthisisusuallynegligible.
• Ifthecostofcomplianceexceedsthetariffpreference,acompanycansimplypaythetariffinstead.Thatisonlylikelytobethecaseifthetariffisextremelylowandthegoodsareexportedinverysmallquantities.GiventhattheaverageEUexternaltariffonindustrialgoodsisabout2.5%theaveragecostofcompliancecouldnotexceedthatamount–waybelowfiguresquotedbytheCBI.
32TheBISReviewofCompetencesclaimedthatstudiesshowedthecostofcomplyingwithRoOswasbetween4%and15%ofthevalueofimports.Nearlyallthestudiesanalysedrelatedtotradewithdevelopingcountries,whichmayfinditdifficulttoprovecompliancewithRoOs.Incalculatingthelikelyrangeofcostsitexcludedwithoutexplanationthemostrelevantstudy–ofRoOsbetweenEEAandEU–whichshowedcompliancecostsbelowthelowerendofthequotedrange.Theupperendoftherangecamefromdoublecountingelementsofastudythatactuallyshowedmaximumcostsofhalfthatlevel.
20
MYTHSSURROUNDING‘NODEAL’–ORTRADINGONWTOTERMS(butmayalsounderliecriticismsofaUK/EUfreetradedeal)MYTH14
• TherewillbelengthydelaysonclearingimportsenteringthroughDoverifweleavewithoutadeal(orevenwithaconventionalfreetradedeal).
“TherisksofaNoDealBrexit–delaystolorriesatDover”HilaryBennMPThereality:
• HMRChassaiditwill“prioritiseflowovercompliance”.33So,evenifinitiallysomehauliershavenotcorrectlymadetheircustomsdeclarations,theywillbewavedthroughtopreventdelays,andfolloweduplater.
• TheideathattheUKwillitselfholdupflowsofgoodsenteringtheEUpostBrexit(whetherornotthereisaDeal)wouldbeabsurdandisnotthegovernment’spolicygiventheircommitmenttoprioritiseflowandavoidnewchecks.
• ItisequallyinconceivablethattheFrenchorotherEUauthoritieswilldeliberatelypreventordelaytheirexportsthroughCalaistotheUKasthelocalFrenchauthoritieshavemadeclear.34(SeeMyth15belowforUKexportsthroughCalais).
MYTH15
• DelaysinclearingUKexportsthroughCalaisarelikelytocauseabacklogoflorriesontheM20ifweleavewithoutadeal(orevenwithaconventionalfreetradedeal).
“Wealsoneedtopreparefortheworst-casescenariowheretheauthoritiesatCalaisaredeliberatelydirectingago-slowapproach”.DominicRaab,October2018Thereality:
• Adeliberatego-slowatCalaiswouldbeabreachofthreetreatyobligationso TheoriginalWTOTreatyforbidsdiscriminationagainstgoodsfromanycountryso
proceduresatCalaiswouldhavetoapplytoIrishgoodsthathavecrossedtheUKaswellasBritishgoods.
o TheTradeFacilitationAgreement,whichcameintoforceinFebruary2017,requiressignatories(includingallEUmemberstates)tofacilitate–nothinder–trade.
o TheEU’sownConstitution(Article8)35requiresthemtoco-operatewithneighbouringcountriestoestablishanareaofgoodneighbourliness.
• Otherchannelports–especiallyZeebruggeandRotterdam–areeagertowintradeawayfromCalais.Itisestimatedthatotherroll-off-roll-onportscouldhandle40%ofDover/Calaistrade.
33HMGBorderDeliveryGrouppresentationtoACITAconference18thOct201834https://www.bbc.com/news/uk-politics-4599024335Article8.1.TheUnionshalldevelopaspecialrelationshipwithneighbouringcountries,aimingtoestablishanareaofprosperityandgoodneighbourliness,foundedonthevaluesoftheUnionandcharacterisedbycloseandpeacefulrelationsbasedoncooperation.
21
• AthirdoflorriesgoingfromDover/FolkestonetoCalaisarereturningempty36(reflectingthehugeEUsurplusontradewithus)soCalaisauthoritieswillhaveathirdfewerdeclarationstoclear.
• ThenewheadoftheFrenchequivalentoftheUKBorderDeliveryGroupistalkingabouta“risk-basedapproach”tochecks37.
• TheHautesdeFranceauthoritieshavemadeclearthatfarfromhinderingtrade–anideatheydescribeas“economicsuicide”38–theyaremakingpreparationstoensuresmoothflowpostBrexit.
MYTH16
• JITsupplychainswillbeinterruptedbyunprecedentedlorryqueuesbackinguptheM20–forwhichweareunprepared.
“JustminordelaysattheChannelTunnelandDoverwouldforcehundredsofitstruckstowaitfortheequivalentof90hoursaday…itisverydifficulttoseehowcross-borderJustInTimesystemscansurviveintheircurrentform.”UKinaChangingEuropeApril2018Thereality:
• TherehavebeenfrequentandprolongeddelayscausingblockageoftheM20yetwithnoreportsofproductionbeinginterruptedatmotormanufacturersorotherJITplants.
• OperationStack39hasbeenactivatedon211daysbetween1998and2015asaresultof:o BlockadesofCalaisbyfishingboatso Industrialdisputesonferrieso Immigrantsbesiegingsecurityfenceso FiresandbreakdownsintheChannelTunnelo SevereweatherintheEnglishChannelo SnowblockingroadsexitingCalais
• Insummer2015OperationStackwasinforcealmostcontinuouslyformorethanthreeweeksbetween23Juneand1August2015.
• Atthepeak,7,000HeavyGoodsVehicles(HGVs)werequeuedontheM20,taking36hourstoworktheirwaythrough.
• ThereisnorecordofanyJITmanufacturingplantshavingtohaltproductionintheUKasaresultofthesedelays.
• OperationBrock,withenhancedcapacityandimprovedtrafficrouting,willreplaceOperationStackaheadofBrexitthoughpermanentlorryparksmayalsobeneededinfuture,regardlessofBrexit,tocopewitharecurrenceofpastproblems.
36RichardEveritt,ChairmanDoverPort:“Iwouldliketothinktheycouldgothroughrelativelyeasily...Onethirdoflorriesareemptygoingback.”DEXEUSelectCommittee29/11/1737UKBorderDeliveryGrouppresentationtoCLECATconference18thOctober201838BBC:“FrenchofficialsdismissUKfearsofCalais'go-slow'”https://www.bbc.com/news/uk-politics-4599024339OperationStackHouseofCommonsTransportCommittee23rdMay2016
22
MYTH17
• Shorttermproblemsfollowing‘nodeal’willbepermanentProjectFearMark2postulatesshorttermdisruptionintheeventofnodeal–eitherasaresultofdeliberatenon-cooperationorlackofpreparationbygovernmentsandbusinesses–andthenportrayswhatisintrinsicallytemporaryasifitwillbethepermanentstate.Thereality:
• ConceivablysomefirmswillinitiallybeunfamiliarwithcustomsprocedureswhichmightcauseorexcusedelaysinCalais(thoughnotinDoverwhereflowwillbeprioritisedovercompliance),butbusinesseswillsoonlearntheproceduresashavefirmstradingwithnon-EUcountries.
• Itistheoreticallypossible,thoughextremelyunlikely,thattheFrenchorEUauthoritieswilldeliberatelyprovokeaperiodofdisruption‘pourdécouragerlesautres’,butinconceivablethatitwillbepermanent–bothbecauseitwouldbeabreachoftreaties(seeMyth15)andbecauseitwouldinflictgreatharmonFrenchandEuropeanbusinesses.Legalremedies(possiblytakenbydisadvantagedEUbusinessesortheirgovernments)taketimebutwouldensurethattreatybreacheswouldnotbepermanent.
• ItisimportantthatCustomsandallgovernmentagenciesprepareforexitingtheEUwithnotradedeal.Thatmeansnotonlyensuringthatstaffaretrained,equippedandinformedoftheneedtogiveprioritytoflow,butalsoensuringbusinesseswhichtradesolelywithintheEUaremadefamiliarinadvancewithordinarycustomsprocedures.
23
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Fact – NOT Friction ExplodingthemythsofleavingtheCustomsUnion
AjointpublicationfromtheEuropeanResearchGroupandGlobalBritain
20November2018
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