Partnership / Comprehensive Trade Agreement
Perhaps the most likely medium to long term outcome of Brexit is that there will be a Deep and Comprehensive Free Trade Agreement between the United Kingdom and the European Union. The agreement is likely to go much further than previous agreements entered by the European Union to provide for regulatory alignment in a wide range of areas, close customs cooperation and facilitation, and zero or close to zero tariffs on almost all non-agricultural products.
The position in relation to agricultural and food products remains highly uncertain. Many such products are subject to relatively high tariffs (30 to 50% or more) under the EU third-country rate regime. The eventual rates will be determined by the UK’s agricultural policy which may differ from the EU policy, which has some residual price support elements together with substantial direct payments and targeted support for agriculture the environment and agricultural communities.
The EU Canada Trade Agreement eliminated customs duties on 98.7% of all EU tariff lines on entry into force with progressive reductions to zero for most other products. The Agreement eliminated 90% of agricultural tariff lines with further liberalisation over 10 years. The remaining 10% are sensitive products on which there some zero rate quotas which are to increase,
Rule and Certification of Origin
Qualification for the reduced / zero customs duty in each of the EU and UK would require evidence of the UK and EU origin respectively of the particular goods. Goods which have been imported from a third country and which are moving freely in either the EU (or the UK) are not necessarily of EU (or UK) origin for this purpose. Therefore, there would be a requirement for certification of origin.
Certification of origin may be by one of a number of means and may be based on one of a number of tests. A common test is that of substantial transformation or a certain maximum value derived from the country of immediate export.
Proof of origin may require an application to and a certificate from a governmental or trade body for confirmation that the relevant test has been met. There may be simplifications in some or most cases, which allow or come close to allowing self-certification by the manufacturer, originator or importer, where the nature of goods is such as to make the issue low-risk.
Customs Procedures Remain
Regardless of whether there are close to zero or zero import/customs duties under a free-trade agreement, customs controls and procedures will still apply. Both import and export customs declarations will be required on each and every import and on each and every export. The free-trade agreement may allow some simplifications but is unlikely to avoid the necessity for declarations. Security notices on each import and export may also be required.
Customs procedures will constitute a significant challenge cost and friction in doing business, in particular for small to medium-sized businesses. Either the UK exporter through a permanent establishment or agent or their customer/supplier must also make the corresponding declaration in the EU jurisdiction. Businesses which deliver just in time will face particular challenges.
An electronic return with significant information about the transaction the code for the goods, proof of origin as well as information about the transport movement must be made. Most movements are likely to move freely but some degree of customs intervention by way of policing of origin and regulatory requirements is likely and is mandated on the EU side by existing EU law.
Agriculture and Food
In the area of agriculture and food, the default position requires very onerous veterinary or plant health checks at or near the border. The extent to which this will be simplified is not yet clear. There is likely to be some significant animal health plant health and food safety controls which may require verification at the border.
Even intra-EU controls apply on the movement of plants and animals but it is sufficiently coordinated to allow free movement at internal EU borders.
In the absence of a very high level of coordination, there is a distinct possibility of some interventions at or near borders. Customs control even by way of occasional policing or risk analysis based intervention are likely to be disruptive and costly. The risk of such controls will depend on the extent of divergences in food safety standards and controls.
The future direction of agricultural and food safety policy in the UK post-Brexit is not yet clear. The export and import declaration will be required in advance of each movement by way of prior clearance from HMRC and the revenue authority in the EU country of import or export.
Given the EU’s insistence that the four freedoms of movement under the EU Treaties, namely free movement of goods, free movement of people, free movement of services and free movement of capital are indivisible and given the UK’s opposition to being subject to the jurisdiction of the Court of Justice of European Union and EU law for the purpose of the rules of the single market, it appears likely that UK citizens and established business will not enjoy the freedoms to provide services, establish branches and subsidiaries and exercise professions with, in, or into other EU states.
Some degree of regulatory alignment may take place in respect of goods. However, even in this context in the absence of a single set of laws, self-executing courts and legal system, there is likely to be some regulatory barriers to trade in goods even with a comprehensive free trade agreement. Increased regulatory divergence may take place over time.
Single market rules and the jurisdiction of the European courts, including in particular the obligation of all domestic courts in the EU to apply EU law, are fundamental to ensuring a level playing field and fair competition within the EU. Almost all trade agreements provide only for state to state enforcement mechanisms which are not directly open to businesses and may lead to sanctions by way of countermeasures at the state level, rather than by way of direct orders invalidating the infringing action.
Regulatory divergence could become a significant barrier to trade post-Brexit. While an EU UK free-trade agreement may seek maximum regulatory conformity the effectiveness of the arrangements will be limited if as appears likely, the UK will not submit to a set of single market rules which potentially override domestic law in order to remove barriers to trade.
A mechanism to ensure regulatory alignment sufficient to maintain full single market access would require governance structures and dispute resolution mechanisms largely similar to those under the EU arrangements or the EFTA arrangements. Even if the EU was prepared to agree to such mechanisms, it appears unlikely that the UK government would wish to submit to them.
In the absence of a uniform approach to regulation, there is potential for unfair competition. There is a developed body of EU competition law as well as a wide range of harmonised standards across employment, occupational safety, equality, consumer protection, corporate law environmental regulation and many other areas.
Under the EU Canada free-trade agreement, in common with other advanced and developed free-trade agreement, there is limited removal only, of restrictions on the provision of services. As under the WTO Agreement on Services, concessions are ad hoc and very incomplete.
There may be wide-ranging visa-free travel for social and leisure visits and subject to conditions for most business activity. However, there is unlikely to be anything close to the present rights to establish a presence without discrimination and to provide services into the EU.
There is unlikely to be automatic recognition of licensing and authorisation of businesses which are regulated at present under a single EU framework. There is unlikely to be automatic recognition of qualifications, freedom to exercise trades and professions cross-border.
UK nationals and domiciled businesses will not be able to raise Treaty protections and other EU rights to cut through technical and effective barriers to trade in EU states. Under EU law there exists both core Treaty rights as well as detailed EU legislation which can be invoked before any court or by way of complaint to the EU Commission to counter rules and practices of member states which limit or prevent the free exercise of any business or service in another EU state. These protections will no longer be available to the UK established businesses after Brexit.
There are several key sectors which are subject to single EU based regulation, where it seems unlikely that any free-trade agreement would allow full membership and participation. This includes in particular common markets in the areas of financial services, transport, broadcasting, communications, energy and digital services.
In the circumstances, the only way in which a UK national or domiciled business can continue to have access to the EU single market will be by way of a corporate establishment in another EU state, such as Ireland.