Elsa Leromain, economist at BSI, researcher at the Catholic University of Louvain and the Centre for Economic Performance, answers three questions on the state of trade relations between the European Union and the United Kingdom sinceBrexit.
BSI Economics – What is the nature of trade relations between the European Union and the United Kingdom now?
Elsa Leromain: On June 23, 2016, the United Kingdom voted in a referendum to leave the European Union. This was followed by a very long series of negotiations, which finally resulted in the signing of a trade and cooperation agreement on December 30, 2020. The United Kingdom is therefore no longer part of the single market and customs union. Since January1, 2021, the trade and cooperation agreement has governed trade relations between the United Kingdom and the European Union. Among other things, it establishes preferential arrangements for trade in goods and services, intellectual property, public procurement, aviation and transport, energy, and fisheries, and provides for the coordination of social security. Border controls have been reintroduced for goods and people, as neither can now move freely.
Is it as easy to trade goods as it was before?
It would be illusory to think that it is still as easy to trade goods between the United Kingdom and the European Union. While free trade agreements normally aim to facilitate the exchange of goods between countries, this agreement has increased trade barriers compared to the pre-Brexit situation. It leads to a much higher degree of integration than traditional free trade agreements, but significantly less than that implied by the single market and customs union.
Customs forms have been reintroduced and goods must be inspected at the border. However, trade in goods is not subject to customs duties and quotas as long as it complies with the rule of origin. In other words, companies must prove that the goods traded come from the domestic market. Defining the origin of a good is no easy task, especially if many components have been used in its manufacture.
There are several complex and varied rules for establishing the origin of a good. For a good to be considered locally produced, the following may be required: a minimum domestic value-added share of the total value of the good, a minimum weight of domestic components in the total weight of the good, a degree of local processing, or the use of a specific production process. Depending on the sector, one or more of these rules may apply.
Has this affected businesses?
As the rules of origin and the origin certification process are particularly costly, many businesses choose to pay customs duties even though they could potentially benefit from an exemption.
A report published by the UK Trade Policy Observatory gives an idea of the scale of the phenomenon from January to April 2021 for British businesses. They estimate that the value of UK exports to the European Union that are still subject to customs duties amounts to between €5.2 and €6.9 billion. Seventy percent of exports eligible for a customs duty exemption actually benefited from it, meaning that in 30% of cases, exporters who could have benefited from zero customs duties preferred to pay them rather than having to prove the origin of their goods or were unable to certify it. This share is significant, but it masks considerable heterogeneity between sectors. The aviation and clothing sectors seem to be particularly affected, while sectors such as fish, dairy products, and iron and steel seem to be much less so. For 1,657 products defined at the most detailed level of the Harmonized System nomenclature—representing one-third of the codes listed in the nomenclature—the preferential rate is used in less than 50% of cases. Companies are therefore still far from being exempt from paying customs duties.
