The third round of negotiations on the UK-EU future relationship is due to take place between 11 and 15 May 2020. On the agenda are discussions on trade in goods and also trade in services and investments and other issues.
Trading under FTA terms, even a so-called “best in class” FTA, will be of a very different nature compared to the free movement of goods enabled by the EU’s Customs Union and Single Market. In an FTA context, rules of origin and customs formalities will apply; all imports will need to comply with the rules of the importing party and will be subject to regulatory checks and controls for safety, health and other public policy purposes. The ambition is to agree a comprehensive FTA so that there are no tariffs and no quotas across all goods.
Without an FTA in place by the end of the transition period (31/12/2020), tariffs and quotas will apply to all trade in goods between the EU and the UK. In this scenario, the EU is likely to apply what is known as “MFN tariffs” to the UK. Indeed, under the WTO Most Favoured Nation (MFN) principle, benefits given to one trading partner need to be extended to all other WTO members, unless a preferential trade arrangement, such as an FTA, allows this. Therefore, without an FTA in place as of 1 January 2021, economic operators and consumers should not expect privileged treatment when dealing with the UK.
Without a “level playing field” in terms of avoiding market distortion in terms of unfair competition or subsidisation of certain sectors, the EU is not minded to offer a comprehensive FTA to the UK. In his press statement on 24 April 2020 Michel Barnier, the chief EU negotiator, in giving an update on the negotiations, expressed his “disappointment” that that the UK’s efforts towards achieving such “a level playing field” were seriously lacking.
However, Mr Barnier was hopeful progress would be made in the remaining two rounds commencing on 11 May and 1 June, with 30 June remaining the deadline by which both sides must decide whether to extend the transition period or not.
Even if an FTA is agreed, businesses will be required to submit customs declarations and to prove origin. This places an additional administrative burden on them in terms of completing declarations in-house or using agents. The Customs Freight Simplified Procedures (CFSP) may be used to simplify the clearance at the border. An easier form of the CFSP – the TSP – was introduced as part of “no-deal” planning but it is not clear whether the TSP will be applied at the end of the transition period. The UK government website recommends businesses apply for a EORI number or to contact a freight agent as part of preparations for the post-transition period. Traders with significant shipping volumes should consider applying for AEO status. This has the advantages of avoiding delays at borders, reducing the levels of financial guarantees and reducing audit checks. However, it takes time to achieve AEO status as the trader’s IT, reporting systems and processes need to reach a high level of compliance and control.
After the end of the transition period and without a trade deal, goods entering the UK from the EU will become “imports” as goods from third countries currently are. This means “import VAT” will need to be paid creating a cash flow cost. It is expected the UK will introduce postponed import VAT accounting but again this depends on the outcome of the trade negotiations with the EU. UK traders will not be able to benefit from EU VAT simplications such as distance sales, triangulation and call-off stocks. This will require additional EU registration and reporting obligations for UK traders and consequent cost.
The international trade landscape post 1 January 2021
The UK could offer various fiscal and other incentives to attract inward investment into the UK. However, the EU is expected to strongly resist any such moves it perceives as not staying on a “level playing field” or which distort competition and potentially puts EU firms at a competitive disadvantage. It will be interesting to observe how the trade negotiations pan out during the remaining part of 2020 especially in the economic aftermath of COVID-19.