Brexit was a defining moment in this country’s modern history. The Trade and Cooperation Agreement (TCA), the UK’s new free trade agreement negotiated with the EU, now governs the UK’s trading relationship with the European trading bloc and has radically reshaped the trading landscape.
With the first 100 days of the TCA under its belt, we look back to see how UK businesses have fared under the new trading regime.
According to the Office for National Statistics (ONS), UK goods exports to the EU tumbled by 40.7% in January while imports fell by 28.8%. These figures show the biggest decline since records began. In addition, recent data showed the UK economy shrank by 2.9% in January amid the third lockdown. In contrast, according to a recent study by KPMG, the UK’s trade with non-EU countries actually grew by 1.7% in January.
Before we allow ourselves to be consumed by a sense of despair, it is important to point out that a number of temporary factors have a part to play such as UK businesses stockpiling of goods at the end of last year and the effect of Covid lockdowns both here and across continental Europe. In addition, businesses have encountered considerable problems navigating the new customs arrangements put in place by the EU.
So, are these just teething problems? There is no doubt that these figures are distorted to some extent by the factors outlined above, but they cannot completely account for the precipitous drop in EU trade flows. It is too early to accurately assess the effect of Brexit until trade statistics covering a longer period have been and the effects of Covid recede.
Official statistics just published for February indicate a partial recovery with exports to the EU increasing by £3.7 billion. Imports from the EU also picked up slightly, increasing by £1.2 billion in February.
These figures show exports were still significantly lower than in February 2020 and indicate that the significant slump in UK exports of goods to the EU experienced in January compared to the level of non-EU trade is continuing albeit it to a certain extent. This does point rather ominously to the extent of the damage done to post-Brexit trade with the EU.
Business has undoubtedly been adversely affected by the new customs and regulatory regime put in place post-Brexit. Set out below are some illustrative examples of the issues we have seen UK exporters face.
The TCA delivered free trade with the EU with no tariffs or quotas for goods of UK origin. However, the narrow customs definition of ‘UK origin’ has resulted in many UK companies unwittingly finding themselves subject to double duty when supplying their EU based customers. UK businesses importing raw materials from non-EU countries must pay UK customs duties. When put into process if those goods exceed certain value of the finished product, they will not be classified as ‘UK origin’ and when imported into the EU will be subject to further customs duties and VAT. Affected businesses have found that their goods are now too expensive to retain their EU customers. In many cases, their preferred solution is to invest in a presence in mainland Europe to avoid double duty, taking investment and jobs away from the UK.
What the TCA did not deliver was barrier-free trade. Businesses have been badly affected by the new customs procedures comprising extra paperwork, the need for public health certificates for agricultural or food products, invasive inspections, and border delays. Now the UK is outside the EU Customs Union with its own regulatory system, it is treated as a third country. The EU now applies its regulatory system applicable to all third countries to the UK except and in so far as there are exceptions agreed as part of the TCA. This has resulted in some products, such as shellfish, which were previously allowed into the EU prior to Brexit being permanently banned. In other cases, UK exporters are being subject to extra delays and costs due to customs formalities and the need to obtain hygiene /plant health certificates for each shipment. This extra bureaucracy is hindering EU trade and driving up costs which may well need to be ultimately passed on to the consumer.
Post-Brexit there has been a very substantial reduction of market access for UK businesses to be able to provide services between the EU and UK. The UK can no longer take advantage of free movement of services or the right of establishment. It will be up to UK businesses to comply with national member states’ legislation on the provision of services on their territory subject to adherence to certain ‘national treatment’ provisions set out in the TCA. These prohibit EU member states introducing into their national laws any nationality or residence-based qualifications or discriminatory provisions against UK businesses. Whilst those limited protections are welcome, UK businesses providing services over many different EU countries will potentially be faced with a patchwork of different regulatory requirements.
The TCA provides for specific treatment for certain service sectors. One sector particularly badly affected is financial services. The TCA contains very limited provisions relating to financial services sector. After 1 January 2021, UK incorporated financial services providers lost their EU passporting rights. The UK financial services sector must now obtain unilateral equivalence decisions for different types of financial services from the EU Commission to allow them to trade in the EU. Many UK businesses have set up European based operations in advance of Brexit to circumnavigate these anticipated restrictions.