As the clock on Brexit continues to wind down, negotiators from the United Kingdom (UK) and European Union (EU) keep insisting it is still possible to sign a free trade agreement (FTA) by the end of the year, even though deadline after deadline passes with little or no evidence that a deal can in fact be reached.
If no agreement materializes, after January 1, 2021, trade between the UK and countries in the EU will no longer be governed by the EU’s Single Market and Customs Union rules. Instead, World Trade Organization (WTO) rules will apply, imposing a new tariff regime, regulations, import/export protocols, quotas, and other trade restrictions on the exchange of goods and services in and out of the UK. WTO rules will also apply to trade between the UK and all other third world countries that the UK does not already have an FTA with.
Brexit implications and uncertainties for global supply chains
Businesses everywhere are trying to understand the implications of a no-deal Brexit, especially companies in the UK and EU whose supply chains and trade routes are intimately connected. Multinationals with manufacturing facilities in the UK are also concerned that parts sourced from the EU may suddenly be delayed, more expensive, or no longer available. Other complications could also arise from longer border checks and overwhelmed ports, as well as shortages of food, medicine, fuel, and other commodities.
Such uncertainties are anathema to today’s globally interconnected supply chains, and each affected company must decide for itself how best to weather the Brexit storm. No one currently knows how 2021 will play out; much depends on how negotiations go between now and the end of the year. However, there are several important changes introduced by Brexit that companies need to plan for, whether an FTA transpires or not.
Changes at the border: New customs procedures for imports and exports post-Brexit
While the UK was in the EU, trade between the two entities was governed by the EU’s Single Market and Customs Union rules, which allowed goods and services to travel between the UK and EU with no customs checks or other border formalities to slow the flow of commerce. After January 1, 2021, however, the EU will treat the UK like any other outside country and apply Customs Union rules to border activity between the two entities – rules that did not apply to the UK before. It’s worth noting too that EU Customs Rules will be enforced whether or not a free trade agreement is reached and will apply to all goods entering the EU from the UK or leaving the EU to go the UK.
Among the most important changes is that, as of January 1, 2021, EU businesses that want to import from or export to the UK will need an Economic Operators Registration and Identification (EORI) number to go through customs. UK businesses exporting goods to the EU will no longer be able to issue their own EORI numbers – they must obtain an EORI number issued by the EU. Other trade authorizations issued by the UK will also be invalid and must instead be obtained through EU administrative channels.
These sorts of changes in post-Brexit trade protocols are what prompt so much concern about backups and delays at the borders. In fact, the EU has warned all companies doing business with the UK to expect more administrative oversight and significant slowdowns as a result of procedural shifts at EU ports of entry and to anticipate that supply chains running through EU and UK ports could be severely disrupted.
Origin of goods documentation under a no-deal Brexit scenario
Prior to Brexit and during the transition, no tariffs or quotas were applied to goods traveling between the EU and UK, so there was no need to determine the “origin of goods” being traded because the UK was accorded “preferential treatment” status under EU Customs Union Rules.
After January 1, 2021, all goods traveling between the UK and EU in either direction will require origin of goods documentation, which means companies will have to track and record the origin of anything they wish to trade and must file the necessary paperwork with EU authorities. In essence, this means that all products originating from the UK will instantly be accorded “non-originating” status in the EU, completely altering the procedures and documentation necessary for compliance under the new regime. And like mandatory border checks, these origin of goods requirements will apply whether or not a UK-EU FTA is agreed upon by the end of year because approval will be necessary to receive preferential trading status within and between the EU.
Companies impacted by these new procedures can expect to shoulder a significant additional administrative burden, depending on the complexity and extensiveness of their supply chains. Indeed, trade impediments resulting from new origin of goods content requirements could be onerous enough for companies to consider changing suppliers or even relocating production facilities elsewhere.
The UK has its own content origin rules as well, such as the requirement that 55% of all parts used to manufacture automobiles in the UK must be sourced from the UK in order to qualify for zero tariffs. Prior to Brexit, auto parts originating from the EU were included in that calculation; after January 1, 2021, EU-originating parts will not be included, pushing many manufacturers out of compliance and, under a no-deal Brexit scenario, subjecting thousands of auto parts and automobiles to a 10% tariff under the U.K. Global Tariff (UKGT).
Preparing for post-Brexit global trade compliance
These and many other changes are the devil in the details of Brexit. And though much attention has been paid to how new taxes and tariffs will affect the cost and availability of goods and services post-Brexit, companies should be aware that the costliest part of doing business across borders is the time and effort it takes to go through border checks, comply with customs rules, and adhere to each country’s individual product standards and regulations.
As time goes by, it is possible that the UK and EU will eventually agree on some standard rules and regulations to ease the burden of cross-border commerce. But it is also just as likely that two completely different regulatory regimes will evolve, requiring significant additional administrative resources on both sides. Companies will also need to invest in the personnel and global trade management technology necessary to remain in compliance across these new regimes. Management will also need to continuously reassess supply chains to understand how the totality of Brexit rule changes are affecting the enterprise’s bottom line.
Qualifying for new or existing agreements with FTA management software
So far, the UK has settled independent FTAs with 19 individual countries outside the EU, with more in the negotiation phase. Under normal circumstances, FTAs usually take two to three years to negotiate. Even though the UK has successfully negotiated several FTAs at this point, companies should not assume that all of them will be negotiated just as easily. The current 19 agreements still do not compare to the 40+ agreements the EU has in place with 70+ countries worldwide.
The bottom line is that it could be years before UK trade relationships stabilize. Companies operating in and with the UK can and should look to available FTAs as a strategy for maximizing duty savings in their global supply chain design.
Qualifying for new or existing FTAs does not need to be overwhelming for supply chain or trade compliance professionals. Automation software, such as ONESOURCE Free Trade Agreement Management, can effectively eliminate the guesswork and labor attached to assessing and managing FTA qualification.
Powerful data analytics tools now allow companies to run compliance scenarios on current and future FTAs – and, if agreements overlap, identify which is more advantageous. Automated functions help companies comply with FTA-specific rules of origin, track suppliers, calculate duties, issue certificates, and provide real-time monitoring of the entire inventory lifecycle. Custom reports can also be run to record FTA-related savings, and documentation for audit support is automatic. Furthermore, a truly global solution not only tracks the implementation and evolution of FTAs around the world automatically, it also helps companies develop a comprehensive strategy for reducing overall duty spend by making the most of all available FTAs.
Despite the manifold benefits of a well-managed FTA program, the fact remains that FTAs are an under-utilized source of supply chain stability and efficiency for the majority of international companies. A comprehensive FTA management software solution can help organizations on the fence develop a systematic approach to FTA adoption.
No matter what happens with current FTA negotiations, life after Brexit will include numerous complications – some predictable, some unforeseen – for those involved in cross-border commerce between the UK and EU. The only questions now are how complicated things will eventually become and what the ultimate cost of Britain’s breakaway from the EU will be.
Visit our Brexit resource hub to learn more. You can also register for our free upcoming webinar with KPMG, “Practical Steps to Embrace Technology for Last-Minute Brexit Readiness.”