We start 2021 by watching trucks being refused at the border and perishable products being damaged at ports for lacking the proper documentation. Behind the simple description of the lack of the correct document lies a mountain of new obligations spread over a large number of regulations making the regulatory landscape rather confusing.
The new trading relation with the EU is not just touching an hideous complex area, technically, it is a regulatory change of gigantic proportions. The new UK/EU trade legal framework is made of multiple layers of complicated requirements. For some traders, the post-Brexit new trading environment is like an onion, the more they peel, the more they cry.
First, exporters and importers have to adapt to a new customs code. Customs legislation is among the oldest in the world and, over the last few decades, it has adapted to far-reaching developments in information and communication technology, containerisation, global supply chains or global retail. In customs law, the customs code can contribute to the complexity of the administration of imports and exports, or facilitate it. It is therefore central to the movement of goods. In the UK/EU saga, I personally lean toward complication.
Since January 1, the EU Customs Code no longer applies. Imports and exports are governed by the new UK customs code. Where the EU Customs Code had one Act and 2 implementing provisions; the UK Customs Code has one Act and, so far, 85 implementing regulations and amendments of the regulations.
Then, exporters and importers have to adapt to the new UK/EU trade agreement. Implementing the provisions of a trade agreement in a manufacturing plant is a complex process. For instance, businesses might need to develop a cost allocation system to track the value of each material used in production in order to determine the origin of a product. They will have to organise their inventory according to the country of origin of the goods with physical or accounting segregation.
All these obligations are not only piling up costs on traders but also risks. These requirements, if not met, will result in financial penalties in the form of duty being due. Customs can go back three years to collect unpaid duties. No wonder, businesses with products of low value and low duty rate prefer to pay duties instead of dealing under the terms of trade agreement. However for sectors subject to high duty rates such as food and drink, textile, automotive or with high value products such as the oil and gas or aerospace sectors, the trade agreement will provide substantial savings.
The governance of the agreement is adding another layer of complexity. The agreement establishes a partnership council, a trade partnership committee, 10 trade specialised committees, eight specialised committees and four working groups. This almost looks like a European Commission v2.0. All these bodies are co-chaired by the EU and the UK making decisions by mutual agreement. One can foresee a risk of blockage and delays.
Businesses already trading with non EU countries are quickly learning to work with the new rules to adapt their internal processes. Traders dealing only with the EU, have been, until January, sheltered from global trade obligations by the EU Single Market and Customs Union. They could pack a product in Glasgow and with just a dispatch note ship it to Aviemore or Avignon.
From January 1, they had to become exporters or importers overnight. This means, incurring all the additional costs, compliance obligations, documentation requirements, certifications linked with an international activity. For many SME’s their profit structure can’t sustain these costs. Abandoning European markets and focusing on domestic sales is not only the effective options but also the safest. Meanwhile, at the centre of this change, HMRC is also facing the complexity of the new trading environment with limited resources.
How will this situation develop? We expect, the first part of 2021 to be focused on movements of goods. The second semester will see the full customs declarations entering into force, not just for the EU but also Northern Ireland. We’ll then be focusing on resolving compliance problems.