U.K. Business Faces More Red Tape Under Brexit Customs Plans

  • Britain seeking relationship with customs union after Brexit
  • U.K. outlines two models for future trade links with EU

The U.K. Government will look to maintain a period of tariff-free trade with the European Union after Brexit as part of its plans for future relations with the EU. Bloomberg's Svenja O'Donnell reports on 'Bloomberg Surveillance.' (Source: Bloomberg)

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The U.K. outlined two potential visions for a post-Brexit customs arrangement with the European Union aimed at delivering "the freest and most frictionless" possible trade, albeit while imposing greater red tape on businesses.

A 14-page document released Tuesday by Brexit Secretary David Davis’s department envisioned how to span Britain’s departure from the EU in March 2019 to a day when a new trading relationship is ready to run.

During that time, according to the U.K.’s proposal, Britain would be free to negotiate and sign new trade deals with other countries, but crucially wouldn’t be able to implement them if they breach the terms of the interim arrangements with the EU. The bloc may challenge the vision, given it has long warned the U.K. against trying to cherry-pick and said Britain can’t enjoy as easy a trading relationship as it does now once outside the bloc.

“We’ve got to have some sort of a transition arrangement for a year or two,” Davis told BBC Television on Tuesday. The interim agreement “would be as close as we can to the current arrangements” while giving Britain the freedom to line up new trade deals, he said on BBC Radio 4.  

QuickTake Q&A: Britain’s Not-So-Sweet Options for an EU Trade Deal

The pitch underlined how complex the process of Britain unpicking and renegotiating ties with the world’s biggest trading bloc will be. While Brexit campaigners said the divorce would free British businesses from bureaucracy imposed by Brussels, the government’s two models of a future customs deal would both impose new requirements on companies.

Under the first plan, dubbed “a highly streamlined customs arrangement,” Britain would extend customs declaration requirements currently in place for other nations to EU exports and imports. While Britain would "simplify” processes, negotiate waivers and increase automation to prevent disruption at ports, “there will remain an increase in administration compared with being inside the customs union,” the department said.

The second proposal, called a “new customs partnership with the EU,” imagines no need for an EU-U.K. customs border, because the U.K, would mirror EU requirements for imports where the final destination of those goods is the EU. 

That would require a “robust enforcement mechanism” to ensure goods that don’t comply with EU trade policy stay in the U.K. The government put forward two mechanisms: a tracking process to track all goods and components, and a repayment mechanism -- whereby importers pay whichever is higher of the EU or U.K. tariffs and claim a refund should the end destination be the one with the lower tariffs.

‘Untested Approach’

“This is an innovative and untested approach that would take time to develop and implement,” the Brexit Department said, adding that it wants to “explore” the approach with businesses to understand the complexities involved.

Regardless of the EU talks, the U.K. will need to legislate for a new customs regime to be in place before March 2019, and make changes to sales tax and excise regimes. That’s because current rules governing customs are mainly in EU law, and current U.K. customs law is “insufficient,” the department said.

The government intends to put a customs bill through Parliament before Brexit that will also include provisions for standalone customs arrangements in case it fails to reach a deal with the EU. “It is only prudent that the government prepares for every eventuality,” it said. “This is not the government’s preferred outcome.”

Industry lobby groups have repeatedly warned against the potential for a “cliff edge” of duties, border controls and regulatory uncertainty on commerce with the U.K.’s biggest market the day after Brexit. They expressed relief before the full proposals were unveiled on Tuesday.

‘Single-Step Transition’

“Business wants to see as frictionless a customs system as possible,” Confederation of British Industry Deputy Director-General Josh Hardie said in a statement. “All efforts should be made to deliver a single-step transition, so that businesses don’t have to adapt twice.”

The road map, though, will be likely to run into opposition from the EU, given the U.K.’s suggestion it be allowed to line up trade accords with other countries during the interim period, something remaining fully inside the customs union would prevent.

A European Commission spokesman said the bloc welcomes the U.K.’s detailing of its position as a “positive step” and predicted it would allow the talks to progress. But he added that the EU would only turn to future relations once “we have made sufficient progress on the terms of the orderly withdrawal” and that any agreement “can only be finalized once the U.K. has become a third country.”

‘Fantastical and Contradictory’

Keir Starmer, the opposition Labour Party’s Brexit spokesman, called the proposals “fantastical and contradictory."

Failure to maintain something akin to the status quo could prove costly for the British. The current arrangement saves U.K. exporters from paying tariffs on goods sold to the EU. Countries outside the region and lacking a free-trade accord with it pay about 10 percent on shipments of cars alone.

A customs union-like relationship would help clear up the matter of how to police the border between Northern Ireland and the Republic of Ireland. Irish Prime Minister Leo Varadkar said earlier this month that a new customs union should be designed to avoid the need for controls on the 310-mile (500-kilometer) frontier which forms the EU’s only land link with the U.K.

The Irish issue will be detailed more fully by the British on Wednesday when they publish another paper that will express a commitment to keeping a “seamless and frictionless” border on the island.

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