In 1946, Churchill said an iron curtain had descended between the USSR and Europe. Seventy-five years later, on 1 January 2021, a red-tape curtain has descended between Britain and the EU.
The UK’s Brexit agreement has kept tariffs at zero but creates new barriers to UK-EU trade that affect goods and services. These are the barriers that cause truck queues at Dover, make exporting fish difficult and stop musicians touring the continent. In particular, there is no chapter on mutual recognition which would have greatly reduced the need for new safety testing and other checks.
The red-tape curtain is very expensive – costing an average 8-9% for both goods and services, and exports and imports. That’s around £25 billion a year on UK exports of just under £300 billion to the EU (2019 figures). This is a long-term trading cost and partly a teething problem.
For some businesses, lower sales and profitability will be manageable but for others the business model will fail. Most EU-UK trade will suffer because the Brexit bureaucracy creates difficulties for customers and suppliers. In January, there were over 40% fewer loaded lorries crossing the Dover Straits to France than before Brexit - out of every 100 lorries, only 41 were loaded compared to 70 pre-Brexit (according to government figures).
Let’s look at the far-reaching impacts of the new restrictions on goods and services exports (putting Covid-19 to one side).
Bad for goods
UK exporters to the EU now have to prove the origin of their goods (goods account for 58% of UK exports to the EU). Without proof, exports are subject to tariffs. Complex rules decide whether a product is sufficiently local to qualify as tariff-free. For a finished car this covers thousands of components coming from a global network of suppliers combined with the value added by UK manufacturers. For example, Nissan UK employs 6,000 directly and supports a further 70,000 in its supply chain. (Cars make up 13% of UK goods exports to the EU.)
Small businesses play an important role in supply chains but are often poorly equipped to handle the stringent demands of customs processes. There are over 140,000 smaller firms which export and employ over 2 million people (HM Revenue and Customs). They account for about 30% of goods exports with 70% by larger firms. A recent survey found that 20% of smaller firms have temporarily stopped exporting to the EU to avoid trade costs and paperwork. This is despite the benefit of 12-month relaxations to make ‘rules of origin’ easier to apply and that some traders are able to self-certify the origin of their goods. Both exports and imports need to go through CHIEF, the British customs system, which is complex, cumbersome and expensive to access for smaller businesses. HMRC is gradually replacing CHIEF with its new Customs Declaration Service.
Even tariff-free goods are subject to customs declarations and inspections. New customs declarations will cost about £15 billion a year on UK-EU trade, per HMRC estimates. The extra costs affect UK exporters and EU importers. The number of customs declarations could increase to 270 million compared with 55 million now. Part of the cost comes from employing tens of thousands of customs agents.
Another headache for UK exporters is inspection and testing. Goods must meet EU regulatory and technical standards before release to the single market. As an EU member, UK testing bodies could certify compliance, but, with little mutual recognition, no longer. Instead, an EU-accredited body must do the testing and do it in the EU. This means exporters have to use an EU subsidiary or find an EU-based agent willing to accept legal liability for conformity.
Businesses have to grapple with new labelling requirements. Goods exported to the EU and Northern Ireland continue with the CE mark but with other changes (especially for food products). Certain exports to NI now need the new UKNI label. For EU exports, the label must now show the name, address or identifier of a legal person established in the EU. This may require a new point of contact or a new entity. For goods placed on the GB market, the new UK Conformity Assessed (UKCA) mark replaces the CE mark from 1 January 2022 (and, for some products, sooner).
The deal allows simple products to be self-certified and other limited exceptions – for example: pharmaceutical manufacturing practices, some vehicle certificates, and some aspects of aerospace production. However, unlike other trade agreements, there are no chapters on mutual recognition of conformity assessment. Note that for exports of goods from Great Britain to Northern Ireland, the deal simplifies product certification for designated traders.
For chemicals (16% of UK goods exports to the EU), the UK government decided to create its own version of the EU’s regulatory framework. This doubles the admin for exporters (who must show they comply with both sets of rules). The Chemicals Industry Association estimates that the extra cost to the industry will be £1 billion a year. A future agreement on data sharing would reduce the figure.
Exports of food, plants, plant products and animals now require tests because, under the deal, the EU no longer recognises the UK’s standards or tests (and vice versa). This means the EU has the right to test all UK food and animal imports. Cross-border food supply chains are competitive and often time-sensitive, so extra costs and delays can cause serious problems. UK imports will also suffer because some EU exporters (for example of wine) will not want to bear the extra costs. Admittedly, the agreement encourages both parties to perform fewer risk-based tests, but there’s no provision to simplify the tests. Surprisingly, the rules are more onerous than the EU’s deal with far-away New Zealand, which requires checks on only 1% of food imports.
A disservice for services
Services are increasingly important in trade (services account for 42% of UK exports to the EU). When the UK was an EU member, it could supply services under UK rules to customers in the other member states. This freedom allowed the UK to export financial and other services to the EU27 from the UK.
A big change is that UK service suppliers now have to comply with many more rules, which are specific for each sector and member state. For financial services, it is possible that the EU may grant the UK regulatory equivalence in certain areas, but this can be revoked at short notice.
Services firms also have to deal with another barrier: the EU no longer recognises UK licences or professional qualifications. This makes it more difficult for Britons to cross borders to deliver services in the EU. There is a list of activities that they can perform without a work visa. It does not include musicians, performers nor artists.
For those that can work in the EU, the maximum visa-free time for short-term business visitors is 90-days in any six-month period. Plus, several member states require work permits in many sectors. However, British citizens have a right to work in Ireland (and vice versa) and the Common Travel Are still applies.
Due to the new restrictions, big slices of the UK’s services exports cake will shrink. Aviation, road haulage, the financial sector, and parts of professional and business services (65% of UK services exports to the EU) face hefty new barriers to trade. Travel (14% of exports) is likely to fare better because it exports by serving foreign visitors in the UK.
One option is to create a commercial presence in a member state to serve the EU market - as the government now recommends. Many banks, airlines and large professional services firms have already done so. Smaller firms find it more challenging. Fortunately, the investment rules under the deal are fairly liberal. The downside is that investment, jobs and tax revenues migrate to the EU.
Digital services are important to most sectors these days. So, it is good that the deal supports digital services and parts of e-commerce. This includes free data-flow obligations with safeguard provisions. However, the ability of UK businesses to transfer personal data from the EU will depend on a unilateral decision from the Commission to grant adequacy to the UK. The EU’s criteria for sharing personal data with a third country are stricter than for EU members.
Business has a few temporary reprieves. There are grace periods and the UK is not applying its full suite of import controls for six months (as they weren’t ready for 1 January). It is only when the reliefs end that the full effect of the new red tape will be felt.
Churchill’s speech was referring to the iron curtains that theatres used as a fire precaution, lowered at least once during a show. Ironically, government now says it’s looking for a bonfire of regulation. Sadly, the Brexit red-tape curtain looks as if it will be fireproof.
Thanks to the UK Trade Policy Observatory at the University of Sussex for two excellent blogs, and to Peter Ungphakorn and Gerard Fox for comments.
- Taking Stock of the UK-EU Trade and Cooperation Agreement: Trade in Goods, January 2021
- Taking Stock of the UK-EU Trade and Cooperation Agreement: Trade in Services and Digital Trade, January 2021
* This opinion has to been provided by Richard Barfield, author of Brexit FactBase, to the Conservative European Forum. The contributor is not a member of Conservative European Forum. The views and ideas expressed in this paper are not necessarily; the views and ideas of the Conservative European Forum nor should they be considered to represent its policy.