Hard Brexit: 19th Century thinking for a 21st Century world

Richard Asquith, VP Global Indirect Tax at Avalara, looks at the non-tariff barriers the UK will face when selling into the EU post-Brexit

As the increasingly febrile politics of Brexit pushes the UK towards a hard EU departure, businesses are beginning to take the implications for their international trade seriously. This includes concern over potential tariffs if the UK leaves the Single Market and EU Customs Union.

But fretting about tariffs is 19th Century thinking for a 21st Century world. The full-sized menace of a hard Brexit for businesses would be non-tariff barriers. Based on studies by the EU, this could cost the UK €4bn per annum.

Customs Union: Tariffs are so 19th Century

A hard Brexit will likely mean the UK leaving the EU Customs Union.  This represents a colossal risk to the efficiencies and profitability of companies that have based their manufacturing supply chains around the UK. The special assurance the UK government gave Nissan on its UK operations will be just the start of special pleading by global manufacturers with UK hubs.

The easy mistake is to view the Customs Union just as tariff-free zone. In reality, tariffs across the world’s major countries were a problem of the 19th Century, negotiated down to manageable levels in the post-World War world of General Agreement on Tariffs and Trade (GATT) or World Trade Organization (WTO). Average tariffs across the major world economies are lower than 4%.

The real threat of leaving the EU Customs Union is the potential imposition of the non-tariff barriers. These can be broadly divided between non-protectionist and protectionist – although governments are increasingly applying any pretext to shield their domestic businesses.

€4bn in non-tariff barriers

The following six non-tariff barriers are among those that the UK will face when selling into the EU.

1. Product standards obligations

The UK will have to decide whether it will continue to adopt the EU’s regimes on the testing, safety requirements and product classifications of the EU.  The challenge will be that the UK will no longer have a say in their development and enforcement.

2. Licensing and quotas restrictions

Probably the most popular non-tariff means of restricting imports that UK companies could face post-hard Brexit is licensing. These are granted, often with quota restrictions, to control the quantity or even costs of goods coming into countries. The UK may gain some protection from World Trade Organization standards, but the EU will become a tougher destination for trade.

3. Loss of passporting of financial services

Passporting is the services equivalent of product standard. Only once the exit negotiations are advanced will it become clear if the UK financial industry (banking, insurance, pensions etc.) will retain these rules, and the right to continue to sell into the EU. If not, then expect an exodus of foreign providers from the City of London and a hollowing out of UK providers.

4. Additional border controls and inspections

There will be additional documentation for UK importers and exporters to complete on a hard Brexit, such as Single Administrative Documents. Additionally, UK exporters will face complex “origin of supply” restrictions by the EU, which will require them to prove where the majority of their goods originated. This could be fatal for suppliers operating on a “just-in-time” supply basis, and their customers could well drop them for EU-based providers.

The burden to understand and comply with these new requirements will disproportionately hurt small and medium sized companies. In addition, the EU customs authorities are generally much tougher on issues around product valuations declared in import documentation – they have much more rigorous anti-dumping controls. This is the very reason many Chinese importers use the UK as an EU import hub are who are therefore likely to cut back on their presence there.

5. VAT obligations impacting cash flows

The UK’s exit from the EU will also signal its departure from the EU VAT regime that aims to harmonise and simplify indirect tax liabilities and reporting across the EU. It will mean that all goods entering the EU will immediately become liable to import VAT for the first time. Whilst this should be recoverable, it will likely mean cash flow delays.

6. Immigration controls and skills risks

The one certainty of a post-Brexit UK will be heavy restrictions on the supply of low-cost and skilled staff from the EU and beyond. This will undermines profit levels for construction through to agriculture that rely on inexpensive migrate employees. Some of the UK’s leading global sectors are also now raising concerns around graduate and doctorate-level hiring from abroad.

Richard Asquith is VP Global Indirect Tax at Avalara