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03/2017

Nothing to declare
A plan for UK-EU trade outside the Customs Union
About the Authors
Stephen Booth
Director of Policy and Research
Stephen leads Open Europes policy and Open Europe is a non-partisan and independent policy
research projects and has directed Open think tank. Our mission is to conduct rigorous analysis
Europes research projects on EU regulation, free and produce recommendations on which to base the
movement and immigration, justice and home UKs new relationship with the EU and its trading
affairs and the UKs trade relationship with the relationships with the rest of the world. We aim to
EU. Stephen is a regular contributor to print and ensure that Government policy and public debate is
broadcast media. rational and well informed.
Aarti Shankar In the wake of the UKs vote to leave the EU, our
Policy Analyst programme of research and consultation will focus
Aarti joined Open Europe in 2016 after working particularly on:
as a researcher in public affairs. Her areas of
expertise include French politics, free movement The UKs new relationship with the EU, including
and immigration, EU trade policy, and EU trade, security and political cooperation.
institutions and crisis management. The most important opportunities for new trading
relationships with nations outside the EU.
Vincenzo Scarpetta Productive international cooperation across areas
Senior Policy Analyst such as immigration, research and development,
cross-border investment and inancial services.
Vincenzo joined Open Europe at the end of 2009,
irst in Brussels and then in London. His areas Our starting point is the promotion of democratically
of expertise include the politics and economics grounded economic, trade and investment policies which
of southern Europe, EU law and institutions, foster growth, employment and freedom under the rule
EU inancial services regulation, and EU trade of law.
policy. He is a regular commentator in print and
broadcast media across Europe. Guided by these free market and liberal principles, we
are committed to an open Europe and an open Britain.
Edited by Henry Newman, Director
Copyright Open Europe 2017 ISBN: 978-1-907668-50-0
This report is released as part of the Prosperity
UK 2017 Conference, for which Open Europe is
an adviser.

Ofices
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Nothing to declare: A plan for UK-EU trade outside the Customs Union | Open Europe

CONTENTS
Executive Summary a dozen key points on customs................................................................................... 2
Glossary ....................................................................................................................................................................... 6
Introduction ................................................................................................................................................................ 8
1. The EUs Customs Union and the issues that arise from UK withdrawal ..................................... 13
1.1. The status quo .................................................................................................................................................... 13
1.2. What issues could arise from withdrawal from EUCU? ....................................................................... 14
1.3. Sector-specific considerations: some sectors face significant issues, others do not ................ 21
1.4. Could currency be a factor? ........................................................................................................................... 25
1.5. Three broad areas to focus on ...................................................................................................................... 25
2. Potential options for UK-EU customs cooperation ............................................................................ 26
2.1. Half-in, half-out ................................................................................................................................................ 26
2.2. Out of customs union but with a trade and customs cooperation agreement with the EU .... 29
2.3. Brexit without a trade and customs cooperation agreement with the EU (aka WTO option)30
2.4. A bilateral FTA and customs cooperation agreement is the best option ...................................... 31
3. Trade agreements and Rules of Origin ................................................................................................... 32
3.1. FTAs with the EU and non-EU trade partners .................................................................................. 32
3.2. Rules of Origin (RoOs) ............................................................................................................................... 33
4. Conformity with product standards........................................................................................................ 37
4.1. Mutual Recognition Agreement (MRA) to cover product standards in harmonised and non-
harmonised sectors ................................................................................................................................................... 37
4.2. EU MRAs with other trading partners ....................................................................................................... 38
4.3. European standardisation governance bodies ....................................................................................... 38
5. Processes and systems to minimise friction at the border ............................................................... 40
5.1. Do more before the border .......................................................................................................................... 40
5.2. Streamlining customs processes at the border ..................................................................................... 45
6. The UK-Irish Border ..................................................................................................................................... 47
6.1. Context The cost of an Irish border......................................................................................................... 47
6.2. Displace the inland border? ........................................................................................................................... 48
6.3. Towards a virtual inland border ................................................................................................................. 48
Conclusions .............................................................................................................................................................. 51
Annex I: Case studies ............................................................................................................................................ 53
Annex II: Systems of cumulation and rules of origin ................................................................................ 59
Annex III: The Union Customs Code................................................................................................................. 61
Annex IV: EU and international agreements facilitating the movement of goods............................. 62

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Executive Summary a dozen key points on customs

1. The UK should leave the EUs Customs Union (EUCU). The UK Government has stated its
intention to leave key parts of EUCU (the Common External Tariff and the Common
Commercial Policy). Open Europes assessment is that leaving these and EUCU overall is
correct. Brexit means the UK must be able to shape its own trade policy. It can only do so
outside of EUCU.

2. The UK should not seek a half-in, half-out arrangement, which would be the worst of all
worlds. It should leave EUCU entirely to maximise opportunities. Prime Minister Theresa
May has suggested that she is open to being an associate member of EUCU or remaining a
signatory to elements of it. Open Europe believes that, while it is sensible to keep an open
mind, no half-in option is better than being fully out. Nonetheless, the UK should consider
retaining membership of some relevant conventions.

3. It is in both the UKs and EUs interest quickly to secure full cooperation on the practicalities
and administration of customs as part of a comprehensive Free Trade Agreement (FTA).
Such an agreement could be a chapter in a UK-EU FTA or an accompanying, discrete customs
facilitation agreement. The EU already has agreements on customs facilitation with non-
members, including Switzerland and Canada. A comprehensive UK-EU FTA will ensure the
continuation of tariff-free UK-EU trade and minimise customs delays.

4. There will inevitably be a degree of cost to the UK economy associated with leaving EUCU.
Some costs will be one-off adaptation costs (e.g. technology investment which may have
benefited the UK anyway); other costs will be ongoing frictional costs to UK-EU trade. These
costs can be minimised and may be offset by trade liberalisation with non-EU partners.

5. The UK must take action now to minimise costs and seize new opportunities. Some steps are
unilateral, domestic reforms; others are bilateral with specific EU members (above all Ireland);
other negotiations need to happen at EU level, or indeed more broadly.

6. There will also be costs to the EU economy and these costs will be much greater if full
customs cooperation with the UK is not secured. The costs to the EU economy will be
greatest in those countries and industries which export the most to the UK. If comprehensive
customs cooperation and an FTA are secured, these costs will be minimised.

7. There are challenges and opportunities from leaving EUCU but these vary from sector to
sector, and even between companies in the same industry. Individual companies will need to
look carefully at their supply chains and consider making adjustments where appropriate.

8. Free trade does not require a customs union and over half of UK trade happens without it.
Most UK trade (51.5% in 2015) is not with the EU. Non-EU trade takes place without a
customs union and is growing faster than trade with the EU. In 2015, the US was the largest
recipient of UK goods exports (16.6%). There is no EU-US FTA, let alone a customs union.

9. Companies with complex supply chains can trade without a customs union. For example,
automotive supply chains cross the US-Canada border. Both countries are North American
Free Trade Agreement (NAFTA) members, but are not in a customs union. Nonetheless,
leaving EUCU will challenge companies with complex supply chains. To address challenges, the
UK and EU need an FTA to eliminate tariffs, to agree liberal cumulation so more products
transformed in either the UK or EU can be considered as originating anywhere else in the UK
or EU, and to cooperate and use technology to minimise bureaucratic delays and costs.

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10. The UK should grandfather i.e. replicate the FTAs that the EU has concluded with third
countries. The UK, as an EU member, is currently party to over 30 FTAs with over 60 non-EU
countries. The Canada-EU FTA, CETA, is one example. Discussions on how to grandfather
these agreements should be underway bilaterally between the UK and third countries but also
need to engage the EU. Protecting these agreements will secure the freest possible trade,
safeguarding existing global supply chains, and supporting growth in global trade.

11. There is an extremely strong economic case for full UK-EU customs cooperation; the
question of whether it is achieved or not is primarily political as much as practical. Reaching
a comprehensive UK-EU customs agreement will be technically easier than other trade
agreements. As an EU member, the UKs customs systems are already fully recognised by EU
members and the UK already applies EU product standards. Businesses across the EU are used
to tariff-free trade so there will be less pressure to defend specific industries.

12. The UK and EU should consider a transition period to extend the UKs EUCU membership for
one or even two years. Theresa May has suggested phased implementation for new
arrangements on customs systems. The two-year Article 50 timetable is a challenging limit for
negotiations. A transitional period would increase chances of a favourable deal for both sides,
and minimise potential disruption to UK and EU business. It would also give governments and
business time to adapt, including by upgrading customs procedures and IT. Agreement on a
transition period is most useful early in the Brexit negotiations to reduce the risk of companies
making rushed decisions on changes.

Full UK-EU customs cooperation is preferable to being half-in, half-out of EUCU

None of the alternatives to the status quo guarantee frictionless UK-EU movement of goods.
There are various options available for UK-EU customs cooperation. The core trade-off is
integration versus control. The more integrated the UK remains with the EU, the less control it
will have over its trade policy. The best solution is for the UK to leave EUCU and conclude a
comprehensive UK-EU FTA with full customs cooperation. This is in line with the direction of
global trade negotiations, which now focus largely on Non-Tariff Barriers including customs.

The UK should reject the Turkish model or a sectoral customs union. One half-in, half-out
model is Turkey, which itself has a customs union with the EU. This agreement covers industrial
but not agricultural goods. The Turkish model suited a country on a path to EU membership;
the UK is heading the other way. Another option is a bespoke sectoral customs union,
whereby only industries with integrated EU supply chains (e.g. automotive, aerospace,
chemicals) would be in a customs union. This would be complex, legally difficult, and probably
unnegotiable. These options would minimise UK-EU trade disruption at the expense of
obstructing non-EU trade.

A parallel tariffs model is too clever by half. A suggestion circulating in Whitehall is that the
UK leaves EUCU but levies parallel tariffs identical to EUCUs Common External Tariff. By
agreement, goods imported by the UK but destined for the EU would be considered customs
pre-cleared by the EU with the probable proviso that duties collected by the UK would be
largely sent to Brussels. UK companies could reclaim duties for goods for UK use if they were
imported from countries with which the UK had signed FTAs. Such a system will be hard to
negotiate, overly bureaucratic for both business and government, and politically very difficult.

The most radical option sees the UK leave EUCU without any successor deal. The so-called
WTO option would grant the UK maximum freedom for trade policy but with maximum UK-
EU trade disruption. Open Europe will consider the no deal option in a forthcoming paper.

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What would intensive UK-EU customs cooperation look like?

Various issues could arise from the UK leaving EUCU and will need to be addressed when
negotiating UK-EU trading and customs arrangements. These issues will depend on whether
an FTA is concluded or not. If there is no FTA, customs duties will need to be applied according
to WTO commitments. If there is an FTA, compliance with Rules of Origin (RoO) is key.

A priority for UK-EU agreement should be minimising compliance burdens for Rules of
Origin. If the burden of compliance is too high, business may choose not to use the lower tariffs
available under an FTA, preferring to avoid paperwork by simply paying WTO tariffs.
Minimising Rules of Origin burdens will save business money and time, particularly for those
companies with complex supply chains which could need proof of origin for numerous
components. The Canada-EU FTA, CETA, provides a framework but the UK and EU can go
further.

The UK and EU could agree to scrap all Rules of Origin requirements for certain low tariff
goods. Various goods are subject to low WTO tariffs. These goods may have lower, or zero,
tariffs under a UK-EU FTA, but the compliance burden for business may put them off using the
FTA even if it is available. The UK and EU could agree to waive origin requirements on all
products below a threshold determined by the cost of transporting goods between them.

The UK and EU should conclude a Mutual Recognition Agreement (MRA) on product


standards and conformity assessments. The EU has sectoral MRAs with the US, Canada,
Switzerland and Japan. These countries do not apply EU law but for particular sectors their
standards are considered sufficient by the EU. The UK may diverge with EU standards over
time and the question of standards harmonisation will be considered by Open Europe in a
forthcoming paper.

The UK should consider retaining membership of a number of EU conventions to facilitate


further the movement of goods. The Convention on a Common Transit Procedure ensures
non-EU goods are exempt from duty payments and multiple customs checks. The Community
Road Haulage Licences means UK hauliers only need one permit to move goods within the EU.
As part of UK-EU customs cooperation, the UK could also maintain access to the EUs Customs
Information System (CIS) to allow the exchange of data in customs investigations.

Delays at customs borders are a major political and economic risk, and avoiding these must
be a priority for the UK and EU. Business relies on the certainty that their goods will not be
arbitrarily or unexpectedly delayed at borders. Delays at border points (e.g. lorries queuing in
Kent to access Dover) could not only be politically difficult for the UK Government, but could
also disrupt EU companies exporting to the UK. Cutting the volume of information needed at
entry/exit points will be crucial in avoiding longer waiting times at the border.

Technology can help minimise friction at the customs border. Physical inspections of non-EU
shipments are currently extremely rare. Almost all customs declarations are received
electronically and can be lodged before goods arrive in the UK. The same approach should be
extended to shipments from the EU. This would help reduce the potential for delays.

The UK already runs one of the worlds most efficient customs systems. Last year, the World
Bank ranked the UK fifth in the world on customs performance. But there is room for
improvement and there are measures the UK can adopt unilaterally to become top of the class.

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Intensive bilateral cooperation will be required with key EU trading partners. In 2015, France
and Spain were the second- and eighth-largest trade routes for major UK ports. However, they
ranked 17th and 24th respectively on customs performance according to the World Bank. The
UK should work intensively to support key trading partners to upgrade their customs systems.

The UK needs to accelerate upgrading its computer systems for electronic customs
declarations. The timetable for computer upgrades should be accelerated, with close
ministerial scrutiny, to allow for proper testing before Brexit. The UK should largely replicate
the Union Customs Code (UCC) in domestic legislation after Brexit, to facilitate UK-EU
computer system interoperability and streamline customs clearance. The UK should also
unilaterally implement a Single Window system a one-stop shop where traders can lodge all
customs documentation to replace the separate platforms for customs, excise, and VAT.

The UK and the EU should enable self-assessment for Authorised Economic Operator (AEO)
traders. Government and business groups need to encourage more UK importers and
exporters to obtain AEO status. AEO traders are pre-approved by relevant authorities as
trusted operators. Already 60% of UK imports and 74% of UK exports are by UK companies
with AEO status. Encouraging AEO status should be a priority for Government which should
also consider specific support for smaller businesses. Self-assessment could allow trusted
importers to pay customs duties in arrears, rather than shipment-by-shipment. Payment of
VAT, which brings in significantly greater revenue, already works on this basis for EU imports.

Businesses in the UK and EU will need to prepare for the transition. Businesses may need to
make sure employees are appropriately trained to deal, among other things, with the new IT
systems. The UK government should prioritise providing information and assistance to SMEs.

The UK-Irish border is the UKs only land border

The UK-Irish border is particularly sensitive, but there is strong political will to find a
solution. A customs border will be required but the border can be almost invisible. A number
of measures can be adopted to reduce its visibility notably drawing on the experience of
EUCU border between Sweden and Norway.

The free movement of people rather than goods need not be affected by a customs
border. Movement of people between Ireland, Northern Ireland and Great Britain is provided
for by the Common Travel Area which pre-dates the EU. This should be maintained.

The UK and Ireland should use technology to pre-clear almost all goods so trucks can cross
without needing to stop. Inspections when exceptionally required should take place at
dedicated zones away from the border, with UK checks recognised by Ireland and vice versa.
This would remove the need for checkpoints or the presence of customs officials at the border.

We do not support creating a customs border around the whole of the British Isles, or around
the external border of the island of Ireland. Both such options would entail significant political
(and other) complications and would almost certainly be unnegotiable.

Management of the UK-Irish border will require long term political cooperation and
investment. A specific UK-Ireland Border Working Group should be established alongside
existing high-level cooperation as a forum to plan, supervise and evaluate progress. This
should bring together the UK and Irish governments and the Northern Irish executive. Mindful
of the political sensitivities and significance surrounding the UK-Irish border, the EU should be
especially flexible regarding allowing closer UK-Irish bilateral customs cooperation.

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Glossary

ACE US Automated Commercial Environment


AEO Authorised Economic Operator
AES US Automatic Export System
ATT Australian Trusted Trader system
BSI British Standards Institution
CBP US Customs and Border Protection
CET Common External Tariff
CCP Common Commercial Policy
CDS Customs Declaration Service
CEN European Committee for Standardisation
CENELEC European Committee for Electrotechnical Standardisation
CETA Canada-EU Comprehensive Economic and Trade Agreement
CHIEF UK Customs Handling of Import and Export Freight system
CIS EU Customs Information System
CTA UK-Ireland Common Travel Area
DIS US Document Image System
EBA Everything But Arms trade agreements
EDL Enhanced Drivers Licences
EEA European Economic Area
EFTA European Free Trade Area
EMA European Medicines Agency
EORI European Operators Registration and Identification
EU European Union
EUCU European Union Customs Union
FTA Free Trade Agreement
GATT General Agreement on Tariffs and Trade
GM Genetically modified
GSP General Scheme of Preferences
HMRC Her Majestys Revenue and Customs
IEC International Electrotechnical Commission
IIP Canadian Integrated Import Declaration
IPR Inward Processing Relief
ISO International Organisation for Standardisation
LPI Logistics Performance Index
MFN Most Favoured Nation
MIL Minimum Indicative Level
MRA Mutual Recognition Agreement
NAFTA North-Atlantic Free Trade Agreement
NCTS EU New Computerised Transit System
NLF 2008 EU New Legislative Framework
NSB National Standardisation Body
NTB Non-Tariff Barrier
PEM Convention Regional Convention on Pan-Euro-Mediterranean preferential Rules of Origin
PGA Participating Government Agency
PTA Preferential Trade Agreement
RFID Radio-Frequency Identification
RoI Republic of Ireland
RoO Rules of Origin
SES New Zealand Secure Export Scheme
SIVA UK Simplified Import VAT Accounting scheme
SMMT UK Society of Motor Manufacturers and Traders
STL Secure Trade Lane

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TEU Treaty on European Union


TFEU Treaty on the Functioning of the European Union
TFA 2017 WTO Trade Facilitation Agreement
TSW Trade Single Window
TTIP US-EU Transatlantic Trade and Investment Partnership
UCC 2016 EU Union Customs Code
VAT Value-Added Taxation
VCA UK Vehicle Certification Agency
VUCE Ventanilla nica de Comercio Exterior (Mexicos Trade Single Window)
WTO World Trade Organisation

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Introduction
A beginners guide to international trade and customs unions
At its root, international trade is the exchange of goods and services between countries. It can be
more or less free. Country A can choose to raise revenue or to protect its domestic industries by
imposing a tax (commonly known as import tariff or import duty) on goods produced in countries B
and C. This would often result in countries B and C imposing a similar tax on goods produced in
country A.

Once import duties are in place, country A needs to make sure it monitors the flow of goods from
countries B and C so that it can actually levy those duties and vice versa. This explains why
countries A, B and C all set up Customs, specific authorities in charge of checking goods that cross
borders as well as collecting duties on imports. Customs authorities operate through a number of
border checkpoints as goods produced abroad can arrive via air, land and sea.

Let us now assume that countries A and B choose to lower import duties, or scrap duties altogether,
on each others goods. They can do so by means of a Preferential Trade Agreement (PTA),
generally also known as a Free Trade Agreement (FTA). This type of agreement makes it cheaper
for businesses and consumers in both countries to buy goods produced in the other country.
Country A and country B could also agree to apply lower (or zero) duties for imports of certain
goods but only up to a fixed quantity with higher tariffs kicking in once that quantity is exceeded.
These are called tariff quotas.

Goods produced in country C are not covered by the FTA between country A and country B, so
customs authorities in country A will now need to check the origin of a product to make sure that it
actually comes from country B and can skip import duties and vice versa. Assuming that a product
is exported from country A to B, the buyer in country B would normally submit proof of origin to
the customs authorities in their country after obtaining relevant documentation from the seller in
country A.

Rules of Origin (RoO) are used to establish the level of local content in products by detailing in
which country goods are produced or manufactured and therefore whether they qualify for
preferential treatment under the relevant trade agreement.1 For some products the origin is more
obvious than for others. There would be little doubt about a potato grown by a farmer in country A
and then sold in country B. But what if a company in country A buys the potato from the farmer,
slices it and fries it using sunflower oil produced by country C, then packs it frozen, and tries to sell
it into country B? Could those fries still be considered as originating in country A and therefore
sold in country B without having to pay import duty? To answer these and similar questions,
countries A and B agree Rules of Origin.

But country A and country B could go one step further and form a customs union. This would have
a number of implications. First, they would scrap all import tariffs on each others goods. Second,
they would also abolish customs checks between them. Goods coming from country A would enter
country B without being stopped at the border for customs inspections and vice versa. Third, both
countries would impose the same tariffs on goods produced in country C. We could call it a
Common External Tariff (CET). Fourth, country A and country B would agree on the mutual
recognition of customs procedures. In practice, this means country As customs authority would
check goods coming from country C and the customs authority of country B would recognise
those checks as valid. As a result, those goods could move from country A to B without further
customs controls they would be in free circulation between country A and B. Customs unions
only cover goods. Trade in services does not face tariffs.

1
It is generally exporters responsibility to check that the rules of preferential origin have been followed and
provide the necessary documentation to their customers, who would then present the paperwork to their local
customs authority so that they can pay reduced or zero duties.
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The actual practice of trade


In reality, there are more countries but the principles are the same. Countries trade with each other
within different frameworks and under different rules. The baseline is provided by the rules of the
World Trade Organisation (WTO), established in 1995. Trade under WTO rules is underpinned by
the Most Favoured Nation (MFN) principle. This means that if a country grants one WTO member
a lower import duty for a product, it has to extend the same treatment to all other WTO members,
of which there are now 164. The maximum tariffs on individual types of goods are laid out as part of
each members WTO schedule of commitments.

The MFN principle is not based on strict reciprocity. Countries can benefit from the more
favourable MFN duties offered by a fellow WTO member without having to lower their own import
tariffs. There are, however, exceptions to the general MFN principle. WTO members are allowed
unilaterally to grant developing countries preferential access to their markets.

Free Trade Agreements (FTAs) are another major exception to the MFN rule. Two or more
countries can agree lower or zero tariffs only among themselves. This means goods originating or
sufficiently processed in countries that are party to the FTA qualify for preferential or zero duties.
As a result, customs checks are needed to verify the origin of the products that are being shipped.

New-generation FTAs focus not only on tariff reduction, but also on lowering so-called Non-Tariff
Barriers (NTBs) to facilitate market access. These notably include product standards a number of
requirements on the classification, labelling, and testing that goods need to satisfy before they can
be sold. For example, labelling on cosmetic products sold within the EU must indicate the period
after opening for which it is safe to use them.

As explained above, trading partners can also establish a customs union among themselves. Unlike
FTAs, customs unions tend to include countries that share borders. Customs unions are also less
numerous than FTAs, although they tend to have larger memberships and cover broader
geographic areas. Examples of customs unions include the EU Customs Union (EUCU), the
Southern African Customs Union (SACU), and the Latin American trade bloc Mercosur.

Customs controls are only one of several types of checks that can take place at a border. They are
primarily aimed at collecting tariffs, excise and Value-Added Tax (VAT) on imports. Other types of
border checks include: immigration controls; veterinary, phytosanitary (for plants), and quarantine
checks; security checks of vehicles to prevent smuggling, terrorism and human trafficking.
Different agencies and bodies can be responsible for different controls. In the UK, customs officers
can either be employed by Her Majesty Revenue & Customs (HMRC), a non-ministerial
department under the responsibility of Her Majestys Treasury, or by the UK Border Force, a law
enforcement agency within the Home Office.

The European Union (EU) is more than a free trade area. It is a customs union and has established a
single market within which not only goods, but also services, capital and workers, can circulate
freely. The EU has gone a long way in removing obstacles to trade among its member states
(although the EU single market in services is far from completed). Greater barriers remain when it
comes to trade with non-EU countries in the form of tariffs (especially high on agricultural
products), but also strict product standards and Rules of Origin requirements.

The EU has over 30 FTAs in force with over 60 non-EU countries, and the UK is currently a party to
all by virtue of its EU membership. These FTAs have been concluded as part of the EUs Common
Commercial Policy (CCP), which is among the exclusive competences of the EU. This means
individual EU member states cannot negotiate FTAs independently. The European Commission
conducts trade talks on behalf of the whole bloc. Crucially, however, the EU has so far failed to
strike trade deals with the worlds biggest economies including the US, China, Japan, India,
Australia, and the Latin American Mercosur bloc.

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A snapshot of UK trade
The UK is an island. Its only land border is between Northern Ireland and the Republic of Ireland
discussed at length later.2 The overwhelming majority of goods move to and from the UK by sea. In
2015, a total 389 million tonnes of freight handled by UK ports was international traffic. 254
million tonnes was imported from and 135 million tonnes exported to international ports.3 Trade
with the EU accounted for over half of international traffic (by weight) via UK ports, with a total
203 million tonnes of freight.4

In the same year, 4.7 million tonnes of goods were transported by road between the UK and the
Republic of Ireland and 2.3 million tonnes were transported to and from the UK by air of which
less than 0.5 million tonnes was intra-EU trade.5

2
Different arrangements are in place for UK overseas territories. Gibraltar, for instance, is not in the EUCU and is
not subject to EU rules on VAT and excise. The Isle of Man is treated as UK territory for customs, VAT and excise
purposes. The Channel Islands are in the EUCU, but are not subject to EU rules on VAT and excise. See European
Commission, Taxation and Customs Union Territorial status of EU countries and certain territories:
https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/territorial-status-eu-countries-certain-
territories_en
3
The figure includes road goods vehicles and unaccompanied trailers that travel to and from international
destinations on ferries, as well as freight travelling via the Channel Tunnel.
4
Over 56 million tonnes of freight passed to or from the Netherlands. In part, this is due to cargo travelling first to
the Netherlands from ports of origin across the world and then trans-shipped to the UK and vice versa. For
further details, see Department for Transport, UK port freight statistics 2015, 21 September 2016:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/555338/port-freight-statistics-
2015.pdf
5
Air transport statistics are from Eurostat and include both freight and mail on board. For the UK-Irish statistics,
see Irish Central Statistics Office, Road Freight Transport Survey 2015, 29 July 2016:
http://www.cso.ie/en/releasesandpublications/ep/p-rfts/roadfreighttransportsurvey2015/
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Customs unions are not a prerequisite to trade


Customs unions have a long history. A famous early example is the Zollverein established among
several German states in 1834. However, while customs unions once used to be more prevalent
than FTAs, now they are the exception. At the end of 2009, customs unions accounted for fewer
than 10% of regional trade integration agreements notified to the WTO although it is also true
that customs unions tend to cover larger geographic areas than FTAs.6

Customs unions are not a prerequisite to trade. Jyrki Katainen, one of the European Commissions
vice-presidents, noted in a recent speech that China and the EU trade over 1.4 billion in goods
alone every day.7 Yet, the EU has no preferential trade agreement in place with China let alone a
customs union. In 2014, the total trade in goods and services between the EU and the US was over
908 billion.8 Again, this was possible without a preferential trade agreement or a customs union
between them.

Australia and New Zealand have a closely integrated trading relationship. In the year to June 2016,
Australia was New Zealands top export destination and second largest source of imports.9 The two
countries do have a number of bilateral customs cooperation arrangements in place, but are not in
a customs union.

In 2015, the US accounted for nearly 65% and over 55% of Canadas total trade in goods and
services respectively. The two countries are members of the North American Free Trade
Agreement (NAFTA), but are not in a customs union.10 In the UKs case, the largest single country of
destination for UK exports of goods is the US (16.6% of the total in 2015), and this relationship is
not currently governed by a preferential trade deal or indeed a customs union.11

6
Soamiely Andriamananjara, Customs Unions, in Chauffour and Maur (editors), Preferential trade agreement
policies for development A handbook, World Bank, June 2011:
https://openknowledge.worldbank.org/bitstream/handle/10986/2329/634040PUB0Pref00Box0361517B0PUBLI
C0.pdf?sequence=4
7
Jyrki Katainen, China meets Europe, speech delivered at the Hamburg Summit, 25 November 2016:
https://ec.europa.eu/commission/2014-2019/katainen/announcements/china-meets-europe-remarks-vice-
president-katainen-hamburg-summit_en
8
European Commission, Trade United States, data retrieved on 30 January 2017:
http://ec.europa.eu/trade/policy/countries-and-regions/countries/united-states/index_en.htm
9
Statistics New Zealand, Good and services trade by country Year ended June 2016, data retrieved on 30 January
2017:
http://www.stats.govt.nz/browse_for_stats/industry_sectors/imports_and_exports/GoodsServicesTradeCountry_H
OTPYeJun16.aspx
10
Government of Canada, Annual merchandise trade, data retrieved on 30 January 2017:
http://www.international.gc.ca/economist-economiste/statistics-statistiques/annual_merchandise_trade-
commerce_des_marchandises_annuel.aspx?lang=eng. See also Government of Canada, International transactions in
services, by selected countries, data retrieved on 30 January 2017: http://www.international.gc.ca/economist-
economiste/statistics-statistiques/bip-bdp.aspx?lang=eng
11
The UK exported over 47bn worth of goods to the US in 2015 out of a total of nearly 285bn, see ONS, UK
balance of payments The Pink Book 2016, p95.
11
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Brexit means Brexit means the UK leaving the EUs Customs Union
The Prime Ministers Lancaster House speech made clear that the UK will leave the key aspects of
the European Unions Customs Union (EUCU) and the single market in goods, services, capital and
people. Instead, the UK will seek a new preferential trade deal and a bespoke customs arrangement
with the EU as part of a new Global Britain strategy, under which the UK should be:
The best friend and neighbour to our European partners, but a country that reaches beyond the
borders of Europe too a country that goes out into the world to build relationships with old
friends and new allies alike. 12
The Governments position, reiterated in the White Paper on EU exit, can be summarised as
follows:
a) The UK will no longer apply the EUs Common External Tariff (CET), whereby all member
states must levy the same duties on imports from outside the EU. 80% of duties collected by
member states are paid into the EU budget, while national governments keep 20% to cover
costs of collection.13 Outside EUCU, the UK could set its own customs duties via an
independent schedule of commitments at the World Trade Organisation (WTO). It could lower
or scrap relatively high pan-EU tariffs in areas where it has fewer or no strategic economic
interests to protect. Agriculture is the most obvious area where the UK could consider applying
lower customs duties than the EU. To mention a few examples, the EU levies general third-
country duties of 20% on apricots, 14.4% on peeled tomatoes, and 13.6% on carrots.14
b) The UK will no longer be part of the EUs Common Commercial Policy (CCP), under which
individual member states are not allowed to conclude their own trade deals. The most obvious
advantage of leaving EUCU for the UK is the freedom to enter free trade talks with all the
major economies with which the EU has so far failed to establish FTAs. This is a significant
economic opportunity, given that the US alone already accounts for over 15% of the UKs
global trade in goods and services.15
c) As a result, the UK will seek a bespoke agreement on customs with the EU short of full
customs union membership with the aim that trade of goods with the EU should be as
frictionless as possible.16 This might take the form of a customs and trade facilitation chapter
within a UK-EU FTA, or a standalone agreement.
In addition, the Governments White Paper says the UK will seek a phased process of
implementation for new arrangements between the UK and the EU following formal withdrawal.
In her Lancaster House speech, the Prime Minister specifically mentioned customs systems as an
area where phased implementation might apply. The UK may therefore not drop out of EUCU
immediately after March 2019.

12
The full text of the speech, delivered on 17 January 2017, is available here:
https://www.gov.uk/government/speeches/the-governments-negotiating-objectives-for-exiting-the-eu-pm-
speech
13
Following the entry into force of Council Decision 2014/335/EU of 26 May 2014 on the system of own resources
of the European Union: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014D0335&from=EN
14
These rates apply to any third country with which the EU does not have any preferential arrangements in place.
The latter include not only fully-fledged bilateral trade agreements, but also the so-called Generalised Scheme of
Preferences (GSP) under which the EU applies lower import tariffs to a number of developing countries. India, for
instance, does not have a bilateral trade deal with the EU but is a beneficiary from the GSP.
15
19.6% of UK exports and 11.1% of UK imports, see ONS, UK balance of payments The Pink Book 2016, pp95-
96.
16
HM Government, The United Kingdoms exit from and new partnership with the European Union, February 2017:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/589191/The_United_Kingdoms_e
xit_from_and_partnership_with_the_EU_Web.pdf
12
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1. The EUs Customs Union and the issues that arise from UK withdrawal
1.1. The status quo
As a EUCU member, the UK currently benefits from tariff-free and border-free trade with the EU.
Once a good has been imported from outside the EU and relevant tariffs have been paid, it can
move around the EU as if it had originated in the EU technically speaking, that good is in free
circulation within the EU.

To move goods within EUCU, traders need only register as authorised consignors with one member
states customs authority, even if they perform transactions elsewhere. This means British
businesses registered with HMRC are authorised to trade with any EU member state without
registration in the destination country. In addition, they are not required to raise customs
declarations or documentation, and are subject to no customs checks at EU borders.17 Traders
must, however, obtain an Economic Operator Registration and Identification (EORI) number from
their customs authority to allow them to interact with other EU customs administrations, for
example with regard to the raising of VAT or excise duties.18

VAT and excise

Customs duties are not the only charges levied on trade in goods. Most goods are also subject to
Value-Added Tax (VAT) and certain products attract excise duties.

The EUs VAT system - As an EU member, the UK operates under the EUs VAT Directive and the
coordinated VAT collection system.19 The common VAT model allows VAT-registered operators in
one member state recognition across the EU. Businesses operating under the following conditions
are required to register for VAT with HMRC:20

VAT turnover is greater than 83,000 in a twelve-month period;


The business expected to exceed this threshold within a 30-day period.

A zero rate is applied on goods dispatched between EU VAT-registered businesses.21 VAT is


instead due in the destination country upon receipt of goods. This is chargeable at the importers
domestic rate of VAT, under the destination principle of taxation. Importantly, under the EUs
coordinated VAT system, taxes are not levied at the point of entry. Instead, importers can account
for VAT due on EU goods together with other domestic VAT payments as part of a periodic VAT
return.22

The EU VAT Directive sets a minimum standard VAT rate of 15%, with no maximum.23 For goods or
services eligible for a reduced VAT rate, the EU minimum floor is set at 5%.24

17
Customs authorities are not the only government agencies that operate at borders. There may also be border
force, immigration officials, and quarantine enforcement. While cross-border trade within the EUCU may not be
subject to customs controls, they may have to submit to other security checks by other authorities at the border.
18
EORI.eu, Economic Operators Registration and Identification, retrieved on 8 March 2017:
http://www.eori.eu/eori-general-information/
19
Council Directive 2006/112/EC on the common system of value added tax, 28 November 2006: http://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=celex:32006L0112
20
For further details, see the UK governments guidelines on VAT registration: https://www.gov.uk/vat-
registration/when-to-register
21
If exporting to non VAT-registered customers, exporters charge their domestic rate of VAT.
22
In the UK, businesses submit VAT returns to the HMRC every three months.
23
European Commission, Taxation and Customs Union VAT rates:
https://ec.europa.eu/taxation_customs/business/vat/eu-vat-rules-topic/vat-rates_en
24
Ibid.
13
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Excise duty - Excise duty is a tax that applies to the following products:
Alcoholic drinks;
Cigarettes and tobacco products;
Hydrocarbon oils (e.g. petrol and diesel).

There is currently an unlimited duty-free allowance for individuals on such products brought into
the UK from the EU. In order to qualify, however, goods must be transported by the individual, they
must be intended for personal consumption, and relevant duty and tax must have been paid in the
country of purchase.25 In practice, the UK sets Minimum Indicative Levels (MILs) on tobacco and
alcohol products. Individuals transporting such products in volumes greater than these MILs are
likely to be questioned on suspicion of commercial importation. For example, the UK sets MILs of
800 cigarettes, 110 litres of beer, and 90 litres of wine for products brought in from the EU.26 UK
MILs are significantly lower for products brought in from outside the EU, and are currently set at
200 cigarettes, 16 litres of beer and four litres of wine.27 These levels could be re-examined outside
of the EU.

For businesses, HMRC charges excise duty on these products if they are acquired, imported, or
produced in the UK. However, UK businesses can use certain measures to delay or waive the
payment of excise duty on goods bound for trade in other parts of the EU.28 For instance, goods
that are cleared for free circulation in the EU (i.e. EU-originating goods, or non-EU goods for which
duty has been paid) can be moved across the EU in duty-suspension by transporting goods to and
from national authorised excise premises.29 Payment of excise duty is then suspended until goods
are released to market. Excise duty can also be claimed back on goods transiting through a member
state, not intended for consumption in that country.

Once these formalities are completed, it theoretically makes no difference for a Liverpool-based
company to ship products to a customer in Bournemouth or Athens. Similarly, a truck can drive
through the UK, make various stops to pick up different consignments, and then get a ferry in
Dover to France without customs controls.
The UK is also a party to the EUs harmonised customs administrations, which ensure the
recognition of customs procedures across all national authorities. This means UK businesses face
no additional administrative customs requirements to trade with other member states. The only
systematic documentation UK traders are currently required to produce when dispatching goods
to the EU are VAT invoices. These document the VAT registration numbers of both parties, to
ensure accurate tax declarations and obtain proof of shipping.30
1.2. What issues could arise from withdrawal from EUCU?
This section outlines the issues UK-based companies could face following EUCU withdrawal to
illustrate potential pinch points. EU companies trading with the UK could indeed face similar issues.
The practical nature of any changes to the status quo will depend on the new arrangements that
exist between the UK and the EU, which we will discuss in the following sections.
Chart 1 (pre-Brexit) and Chart 2 (post-Brexit) illustrate the potential change to a simple transaction
a finished good being exported from the UK to the EU (the reverse process applies to a good
being imported from the EU to the UK). Chart 3 (post-Brexit) illustrates a process whereby a
product or component is imported into the UK from a non-EU or EU country and then exported to
the EU.
25
HM Government, Bringing goods into the UK: Arrivals from EU countries: https://www.gov.uk/duty-free-
goods/arrivals-from-eu-countries
26
Ibid.
27
HM Government, Bringing goods into the UK: Arrivals from outside the EU: https://www.gov.uk/duty-free-
goods/arrivals-from-outside-the-eu
28
HM Revenue & Customs, Dispatching your goods within the EU: https://www.gov.uk/guidance/dispatching-your-
goods-within-the-eu
29
In the UK, these are premises approved as an excise warehouse by the HMRC.
30
HM Revenue & Customs, Dispatching your goods within the EU.
14
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16
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17
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As shown in Chart 2, the UK will become a third country, once it leaves the EU. Hence, in principle,
even products wholly obtained in the UK would be subject to EU customs controls. For complex
supply chain industries, products assembled in the UK can contain parts from various EU and/or
non-EU countries, which are then processed or assembled before re-export to the EU.
Alternatively, parts from the UK may be exported to the EU to be processed and exported to a non-
EU country. Chart 3 illustrates how processes can get more complicated when products or
components cross more than one border.

Depending on the new UK-EU agreement reached, trade could/would face the issues outlined
below.

1.2.1 Customs duties and/or rules of origin


Overall, global tariffs have declined in recent decades. The EUs average tariff on products is now
only 1.6%.31 Yet, Open Europe research has noted previously that just over 35% of UK goods
exports to the EU are in sectors cars, chemicals, clothing and food, beverages and tobacco
where the EU imposes significant tariffs.32 In other words, the low average masks higher tariffs in
certain sectors and for specific products. While the EU operates internally as a free-trade bloc, with
a developed single market in goods, it continues to impose external protectionist measures,
particularly for trade in highly-regulated industries and agriculture.

If there is no FTA to establish duty-free UK-EU trade, then UK exports to the EU would become
subject to tariffs and vice versa. These would need to be collected by each side. This collection
would not only impose a fiscal cost on trade, but also an increased administrative cost for exporters
having to classify goods for customs purposes. There are currently around 15,000 classifications
subject to 135 different duty rates.33 Correctly classifying goods is essential to ensuring that the
product attracts the appropriate level of duty.

Unless the UK also agrees FTAs with the over 60 countries with which the EU itself holds FTAs,
some firms could face the possibility of paying duty twice (see Chart 3). This could be levied, for
instance, on imported components that are processed, or on goods that come from, for example,
Mexico, and are exported on to the EU. Such increases in trade costs would damage
competitiveness and, in certain cases, businesses may move operations to the EU to secure a duty-
free trade environment.

If there is a UK-EU FTA, exporters will need to comply with EU Rules of Origin (RoOs) to benefit
from preferential FTA rates. These ensure that non-EU goods do not enter the UK at lower or zero
duty via the backdoor of the EU, and vice versa.

31
World Bank staff estimates on weighted mean applied tariffs on all products, 2015:
http://data.worldbank.org/indicator/TM.TAX.MRCH.WM.AR.ZS?locations=EU. There are broadly two types of
tariffs. The most common are so-called ad valorem tariffs, which mean duties are calculated as a percentage of the
value of the imported goods. There are also specific tariffs calculated on the quantity of the imported goods (i.e. per
unit weight, volume or number of pieces). In some cases, EU tariffs are expressed as a combination of ad valorem and
specific tariffs.
32
Open Europe, What If? The consequences, challenges and opportunities facing Britain outside the EU, March
2015, p27-28: http://2ihmoy1d3v7630ar9h2rsglp.wpengine.netdna-cdn.com/wp-
content/uploads/2015/03/150507-Open-Europe-What-If-Report-Final-Digital-Copy.pdf
33
KPMG, How Theresa May can navigate the customs conundrum, January 2017;
https://home.kpmg.com/content/dam/kpmg/uk/pdf/2017/01/brexit-trade-theresa-may-can-navigate-customs-
conundrum.pdf

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1.2.2 Conformity with product standards


A wide range of goods, from toys to electrical products and medical devices, can only be sold in the
EU if they respect EU safety standards.34 A conformity assessment procedure which involves
testing, inspection, and certification is needed before a product can be placed on the EU market.
In many sectors, product conformity can be self-certified: manufacturers affix the CE marking to
their product, attesting to the necessary checks, and certifying the good as compliant with EU
legislation.

High-regulation sectors, such as automotive and chemical sectors, need accredited certification.
This is when an authorised conformity assessment body (known as a Notified Body) undertakes the
relevant inspections and issues certification of technical compliance. UK-based companies who
intend to keep exporting to the EU after Brexit will need to continue complying with these
standards and satisfy the EU that is the case.

If requirements for inspection of certification of conformity with EU standards became more


onerous, this would result in extra bureaucratic burdens for exporters from cost and potential time
lost clearing customs. Equally, if UK standards diverge from EU standards this could introduce
additional burdens for EU businesses.

1.2.3 Increased friction and administration cost at the border


Outside EUCU, shipments to and from the EU would need customs declarations. Customs
declarations are currently only needed for goods coming from or going to non-EU countries. There
is concern that HMRCs computer systems might fail to cope due to the increase in customs
declarations needed outside EUCU. HMRC believe the upgrades currently being made will ensure
systems can cope (see Section 5 for a broader discussion).

Shipments might be subject to inspection at the border, primarily for safety purposes. This can
range from ensuring product compliance with relevant EU technical standards, to verifying export
declarations, certificates of origin, insurance certificates and transport permits. Given that the EU
accounts for nearly half of the UKs volume of trade, this could pose significant operational
challenges in terms of increased waiting time at points of entry/exit. Not only would these delays be
particularly disruptive for complex and time-sensitive supply chains, but the possibility of queues
approaching, for example, the Dover and Calais sea ports would be politically sensitive.

UK sea ports and airports might need to expand infrastructure such as temporary storage facilities.
These are dedicated areas within (or outside of, but linked to) sea ports and airports. They are
currently used to store goods imported from outside the EU before they receive customs clearance
or are transferred to another point within EUCU meaning that the customs clearance formalities
are transferred to the customs office of destination.35

34
For further details, see Department for Business, Energy & Industrial Strategy, Product safety for manufacturers, last
updated on 30 October 2015: https://www.gov.uk/guidance/product-safety-for-manufacturers
35
See European Commission, EU import procedures:
http://www.exporthelp.europa.eu/thdapp/display.htm?page=rt/rt_EUImportProcedures.html&docType=main&lan
guageId=EN. Importers also use temporary storage areas as a way to defer the full customs declaration and
payment of duties. Goods can currently remain in temporary storage for a maximum of 90 days, see HM Revenue &
Customs, Temporary storage for imports, last updated on 29 February 2016:
https://www.gov.uk/guidance/temporary-storage

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The greatest challenge in terms of border friction and infrastructure at UK and EU ports is likely to
be the handling of roll-on/roll-off traffic whereby wheeled cargo (e.g. cars or trucks) is driven
straight on and off vessels rather than being offloaded by cranes. Once trade in commodities (e.g.
oil, coal, gas and ores) is stripped out, roll-on/roll-off freight accounted for 21.5% of total goods
freight at major UK ports in 2015 in terms of tonnage.

Transporting goods via containers offers exporters and importers more time to deal with
paperwork in transit and the infrastructure at container ports is already more suited to dealing with
customs clearance. Roll-on/roll-off ports such as Dover and Calais have been used to dealing almost
exclusively with UK-EU trade, and therefore have not had to facilitate customs clearance of goods.
Upgrades might need to be considered.

However, physical inspections of shipments coming into the UK from outside the EU are extremely
rare. According to HMRC, about 99% of all customs declarations are currently received
electronically and can be lodged before goods arrive in the UK. 96% of customs declarations are
then also cleared electronically within seconds. Most of the remaining 4% is subject to only
documentary checks at the border. Just a tiny fraction of non-EU shipments are physically
inspected at the moment.36 Nothing would prevent the UK from extending the same approach to
EU imports after Brexit. In fact, given that UK customs are already trusted by the EU, this would
seem particularly logical.

The UKs customs system is efficient, meaning that the country is starting from a strong position. In
the World Banks 2016 Logistics Performance Index, the UK ranked fifth out of 160 countries for
customs performance. Among EU member states, only Germany, the Netherlands, and Finland
fared better than the UK.37

36
Data cited by Jim Harra, Director General of Customer Strategy and Tax Design at HMRC, in evidence to the
House of Commons Treasury Select Committee, 7 February 2017:
http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/the-
uks-future-economic-relationship-with-the-european-union/oral/46819.pdf
37
World Bank, Connecting to compete Trade logistics in the global economy, Logistic Performance Index 2016:
https://wb-lpi-media.s3.amazonaws.com/LPI_Report_2016.pdf

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1.3. Sector-specific considerations: some sectors face significant issues, others do not
Earlier in this section, we outlined three stylised scenarios to illustrate what might change as a
result of the UK leaving EUCU. The reality is, however, that different industries will be affected to a
different extent.

1.3.1 Automotive
The car industry has been vocal on the negative consequences of leaving the single market and
EUCU. Mike Hawes, Chief Executive of the Society of Motor Manufacturers and Traders (SMMT),
the car industrys lobby group, said in response to Theresa Mays Lancaster House speech,

We need government to deliver a deal which includes participation in the customs union to help
safeguard EU trade, trade that is tariff-free and avoids the non-tariff and regulatory barriers that
would jeopardise investment, growth and consumer choice. Achieving this will not be easy and we
must, at all costs, avoid a cliff-edge and reversion to WTO tariffs, which would threaten the
viability of the industry.38

These concerns stem from factors linked to the car industrys business model. The industry
operates complex and time-sensitive supply chains. The average car is made of about 1,800 parts.
However, this figure counts some large components (e.g. the engine) as single units although they
contain thousands of smaller parts. An average car includes up to 30,000 parts if one counts every
single screw, nut and bolt. 65% of components used to build cars in the UK are currently imported,
and roughly half of cars manufactured in the UK are then exported.39 Some parts can cross borders
several times in the process.

38
SMMT, Statement in response to the Prime Ministers speech on Brexit, 17 January 2017:
https://www.smmt.co.uk/2017/01/smmt-statement-in-response-to-the-prime-ministers-speech-on-brexit/
39
According to Bain & Company, Is your supply chain ready for Brexit?, February 2017, p4:
http://www.bain.com/Images/BAIN_BRIEF_Is_Your_Supply_Chain_Ready_for_Brexit.pdf

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One obvious disruption could come from duties, because carmakers operate in a comparatively
high-tariff environment. The EU currently applies a 10% import duty on finished cars and an
average 3.8% import duty on components.40 The UK and the EU could strike a trade deal that would
lower or scrap tariffs on cars and car components altogether something we believe is likely to
happen, not least because EU countries such as Germany and Spain see the UK as a key market for
their cars. The European Automobile Manufacturers Association (ACEA) estimates Germany
exported 26.73 billion of motor vehicles and automotive parts to the UK in 2015. For Spain, the
figure was 6.08 billion.41

However, while a trade deal with the EU would eliminate tariff costs, it would not solve the
administrative burden for UK-based carmakers. They would need to provide proof of origin in order
to benefit from reduced or zero tariff treatment. This can be costly and time-consuming given that,
as we noted above, a finished car contains several thousands of parts the majority of which are
sourced outside the UK. Outside EUCU, the car industry could therefore either be hit by tariffs or
be forced to comply with greater paperwork to satisfy Rules of Origin requirements. This would
affect carmakers in the UK and on the continent.

The biggest potential problem would be customs delays, especially given that carmakers tend to
operate just-in-time supply chains. This means a company organises its supply system so that it
only receives components when they are needed. By doing so, the company cuts its inventory costs.
Jaguar Land Rover and Nissan, the UKs two largest carmakers, hold only two hours of stock of
some parts at their plants.42 To avoid operational disruptions to their supply chains, carmakers
might need larger stockpiles, pushing their inventory costs up.

Cars built in the UK will still need to meet EU product standards before they can be placed on the
EU market. This might lead to a duplication of testing unless the UK and the EU are able to reach an
agreement on mutual recognition of standards and conformity assessments after Brexit (see
Section 4 for further details).

Generally speaking, the issues outlined above will have a greater impact on volume manufacturers
in the UK such as Honda, Nissan, Toyota, and Vauxhall which are oriented to the EU market.
This explains why, in September 2016, Japans Ministry of Foreign Affairs voiced the concerns of
Japanese companies in a letter calling on the UK and the EU to maintain tariff-free trade and
prevent any additional burden from customs clearance procedures after Brexit.43 Smaller,
premium manufacturers such as BMW Group and Jaguar Land Rover are less reliant on the EU for
sales and would be less affected by change.

40
See Copenhagen Economics, The impact of trade liberalisation on the EU automotive industry: trends and
prospects, study commissioned by the European Commissions Directorate-General for Trade, 11 July 2014:
http://trade.ec.europa.eu/doclib/docs/2016/march/tradoc_154340.pdf
41
ACEA, Motor vehicle trade between the UK and its main EU partners, 28 September 2016:
http://www.acea.be/statistics/article/motor-vehicle-trade-between-the-uk-and-main-eu-partners
42
Financial Times, UK car industry fears effect of Brexit tariffs on supply chain, 16 October 2016:
https://www.ft.com/content/c397f174-9205-11e6-a72e-b428cb934b78
43
Japanese Ministry of Foreign Affairs, Japans message to the UK and the EU, September 2016:
http://www.mofa.go.jp/files/000185466.pdf

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1.3.2 Aerospace
The aerospace sector also operates complex supply chains. For example, the Airbus plant in
Broughton, Wales, assembles the wings of all Airbus civil aircraft. The wings contain many parts,
some sourced from outside the UK. They are then in turn shipped to other Airbus plants abroad
where aircraft final assembly takes place for instance in Toulouse, France.44

The situation looks similar to the car industry, particularly with regard to possible supply chain
disruptions caused by delays at the customs border. There is, however, one fundamental difference.
The aerospace sector is generally subject to low or zero tariffs at WTO level. The EU itself levies no
import duties on civil aircraft. Therefore, with regard to tariffs, from the aerospace industrys
standpoint it would make little or no difference whether the UK and the EU managed to agree a
trade deal post-Brexit or not. Even if the UK and the EU concluded a trade deal, businesses in the
aerospace sector would likely not make use of the preferential access. This would require the
additional burden of producing proof of origin for access to the same existing zero-tariff rate.45

1.3.3 Clothing and textiles


The automotive and aerospace industries are examples of complex supply chains involving
numerous components, some of which need to cross border several times during the assembly
process. Other business sectors operate more straightforward supply chains. Clothing retailers at
present import a finished product from a non-EU country and then sell it in the UK or export it to
the EU.

These firms and retailers more generally often make use of bonded warehouses. These are
HMRC-authorised facilities where UK-based companies can store imported goods. Companies only
pay duty when goods are removed from the warehouse to be sold in the UK. This mechanism helps
importers cash flow, because they do not need to pay when goods enter the UK.

Perhaps more importantly, a company importing finished products that it does not intend to sell in
the UK but rather re-export can use bonded warehousing to avoid paying customs duties in the UK
altogether. Therefore, once the UK is out of EUCU, and even assuming that it fails to strike a trade
deal with the EU, the continued use of bonded warehouses by clothing retailers would make sure
their goods are not subject to customs duties twice when the product enters the UK and when it is
placed on the EU market.

1.3.4 Food and beverages


The food and beverage sector is subject to comparatively high tariffs. EU out-of-quota duties on
dairy products, for instance, can be between 50% and 150% and as high as 250% in some cases.46
The food and beverage sector offers a useful illustration of how the impact of leaving EUCU can
vary even within the same industry.

44
For further details, see the Airbus website, Airbus in the UK, retrieved on 10 February 2017:
http://www.airbus.com/company/worldwide-presence/airbus-in-uk/
45
Provision of basic data on origin would still be required for the operation of instruments of commercial policy such
as anti-dumping measures, as well as for trade statistics and labelling requirements. See World Trade Organisation,
Technical information on Rules of Origin: https://www.wto.org/english/tratop_e/roi_e/roi_info_e.htm
46
See FarmEurope, EU-US Trade and Investment Partnership: Outline of a possible negotiation strategy for EU
agriculture, 2015: http://www.farm-europe.eu/wp-content/uploads/2015/10/TTIP-final.pdf

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Tate & Lyle Sugars, one of Europes largest sugar manufacturers, backed the campaign to leave the
EU and is in favour of leaving EUCU because it believes the move would benefit its business. Gerald
Mason, Senior Vice-President of Tate & Lyle Sugars, wrote last October:
Exiting the EU Customs Union actually gives the UK Government the choice over setting import
tariffs, and ends the requirement for them to apply prohibitively high EU tariffs [] UK food
manufacturers like us are forced to buy our imports from this limited list of countries because we
cannot buy from anybody else without paying the massive EU tariff around 100% in the case of
raw cane sugar. And even when we do buy from these tariff-free suppliers, they jack up their prices
safe in the knowledge our only other choice is to buy from suppliers who face tariffs.47

In a letter to staff ahead of the referendum, Mason also stressed:


Last year, EU restrictions and tariffs pushed our raw material costs up by nearly 40 million alone
turning what should have been a good profit that we would all share into a 25 million loss. We
pay as much as 3.5 million of import tariffs to the EU on some of the boats of cane sugar that
unload at our refinery, only for the EU to then send that money to subsidise our beet sugar
producing competitors in Europe.48

Tate & Lyle Sugars is currently forced to choose between sourcing its imports of raw cane sugar
from higher-cost suppliers that have been granted preferential access to the EU market, or pay the
high EU tariff on raw cane sugar imports from cheaper suppliers such as Brazil or Thailand.49 This
essentially made its UK operations unprofitable in 2015. The company hopes to lobby the UK
government to cut import tariffs on raw cane sugar after Brexit but, to do so, the UK needs to
leave the EUCUs Common External Tariff (CET).
Conversely, Associate British Foods potentially stands to lose from the UK leaving EUCU.50 The
company produces more than two million tonnes of sugar every year from sugar beet factories in
the UK and Spain. It would therefore be hit by customs duties should the UK and the EU fail to
strike a deal after Brexit.51

47
Op-ed for The Grocer, Nick Clegg is right to shine a light on food prices, but his Brexit analysis is flawed, 21
October 2016: http://www.thegrocer.co.uk/finance/brexit/nick-clegg-is-right-to-shine-a-light-on-food-prices-but-
his-brexit-analysis-is-flawed/543865.article
48
BBC News, Tate & Lyle Sugars joins campaign to leave EU, 22 June 2016: http://www.bbc.co.uk/news/business-
36593528
49
Reuters, Refiner Tate & Lyle Sugars says best served by Britain leaving EU, 24 March 2016:
http://uk.reuters.com/article/uk-britain-eu-tateandlylesugars-idUKKCN0WQ24R
50
Bain & Company, Is your supply chain ready for Brexit?, February 2017, p3.
51
Bain & Company, Is your supply chain ready for Brexit?, p3.

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1.4. Could currency be a factor?


In this paper, we have not conducted an in-depth analysis of the impact of currency fluctuation
which would indeed cut across sectors. There is an argument that, if the UK failed to conclude a
post-Brexit trade deal with the EU, a devaluation of the pound would at least partly offset the cost
of newly-imposed customs duties on its exports. A weaker pound would make UK goods relatively
cheaper for importers on the continent thus mitigating the impact of customs duties.

However, this would be only one of several effects. The reality is the impact of currency devaluation
in this context would not be clear-cut, and a number of problems could arise. A weaker pound
would mean cheaper UK exports but also costlier UK imports. This would hurt those UK-based
manufacturers who rely on intermediate goods sourced from outside the country.

UK consumers could be penalised in two ways. Firstly, it would become relatively more expensive
for them to buy foreign goods. Secondly, currency devaluation would create inflationary pressures
over time. If, in the longer term, prices began to grow faster than wages, this would ultimately erode
peoples purchasing power.

Bain & Company pointed out in a recent report that, under a hard Brexit scenario, net exporters in
industries facing low or zero WTO tariffs might benefit from the weaker pound and lower UK tax
rates. According to the report, aerospace companies could see their profits increase by 4% to 8%
and pharmaceuticals companies by 2% to 3%.52

Overall, the value of the pound will continue to rise or fall in future due to a host of factors and
events some of them domestic, some other international. Other currencies are likely to be subject
to similar fluctuations. As such, it would not be advisable for the UK government to make policy
decisions on the basis of expected future relative currency movements.

1.5. Three broad areas to focus on


Leaving EUCU will not have a uniform effect on all sectors of the economy. Some industries are
likely to face tougher challenges, while others may find the move beneficial. There are broadly
three categories of issues that need to be addressed:
Customs duties and Rules of Origin requirements: As discussed, changes relating to customs
duties and Rules of Origin will prove particularly significant for the automotive industry, while
sectors with straightforward supply chains or zero rate tariffs will face less disruption.
Mutual recognition of product standards between the UK and the EU: Similarly, achieving
mutual recognition of product standards may prove procedurally easier for goods that
manufacturers can self-certify as regulation compliant. However, for industries where
technical compliance must be attested by a conformity assessment body, the simplified
process of assumed compliance would not be sufficient. They would rely on national bodies
being established and accreditation approval procedures being considered equivalent and
mutually recognised.
Processes and systems to achieve a frictionless border between the UK and the EU:
Increased friction at the border is likely to have a material effect on all goods exported to the
EU and imported from the EU. Ensuring efficient cross-border movement must be a key priority
for the UK government. Of all the issues that could arise from the UK leaving EUCU, delays at
the customs border are the one that cuts across industries and sectors of the economy as
everyone would be negatively affected by longer waiting times.
The following sections will examine each of these three issues in turn. With the help of case studies,
we will look at what the UK and EU should aim to do unilaterally and multilaterally to minimise
friction and maximise trade with the EU and the rest of the world after Brexit.

52
Bain & Company, Is your supply chain ready for Brexit?, February 2017, p3.

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2. Potential options for UK-EU customs cooperation


The Government has said that it does not view the future of UK-EU customs cooperation as binary
and is considering options including a completely new agreement, or for the UK to remain a
signatory to some of the elements of the existing arrangements.53 In December 2016, Secretary of
State for Exiting the EU David Davis described a spectrum of potential customs arrangements
with the EU, which range from being:
Inside the EU customs union;
A partially-inside Turkish model;
Outside, but with a free trade agreement and a customs arrangement;
Completely outside.
The fundamental trade-off is that greater integration is likely to mean less disruption to UK-EU
trade but could limit the UKs freedom for manoeuvre to conduct an independent trade policy. As
noted above, the Prime Minister has ruled out remaining a full member of the customs union in her
Lancaster House speech. Indeed, it is almost impossible to envisage how the UK could remain in
EUCU in the medium term. However, it is possible that the UK could temporarily remain inside
EUCU, after the planned date of EU withdrawal in March 2019, as part of a transition until a new
arrangement is implemented.
So, what are the various approaches to customs cooperation that are open to the UK and EU
beyond full membership of EUCU?

2.1. Half-in, half-out


There are a range of possibilities that could be described as retaining elements of the existing
arrangements or a half-in, half-out model.
2.1.1 The Turkish model: a bespoke customs union with the EU
The UK could withdraw from EUCU but seek a new customs union with the EU, following what is
commonly dubbed the Turkish model.54 This option would allow for relatively seamless movement
of goods between the UK and the EU, as well as less onerous administrative requirements for trade
operators than under a standard UK-EU trade deal. Presumably, it would also be possible to
negotiate with the EU as it would essentially replicate an off-the-shelf model. However, it would
restrain the UKs ability to conclude FTAs with the rest of the world.
In 1995, Turkey and the EU established a customs union between them covering industrial and
processed agricultural goods, with exemptions in place for non-processed agricultural produce.
However, one fundamental difference with the UKs current situation is that the customs union
with the EU was envisaged as a step towards Turkeys full membership of the bloc. The UK is clearly
moving in the opposite direction as it is departing the EU.
Turkeys customs union provides for tariff-free trade in goods with the EU, as well as common
customs procedures to facilitate trade and reduce bureaucracy.55 This does not mean Turkey-EU
trade is completely free of paperwork. For example, goods covered by the Turkey-EU customs
agreement that are in free circulation i.e. goods originating in Turkey/EU or imported into
Turkey/EU from third countries and with all relevant duties already paid need to be accompanied
by a specific certificate when shipped between Turkey and the EU.

53
HM Government, The United Kingdoms exit from and new partnership with the European Union, p49.
54
Andorra and San Marino have similar arrangements in place since 1990 and 1991 respectively.
55
The Turkish customs union agreement with the EU does not cover services, the free movement of people, the
Common Agriculture Policy, the Common Fisheries Policy and Structural Funds. Nor is Turkey required to
contribute to the EU budget.

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Furthermore, proof of origin is still required even for some goods in free circulation.56 Overall, this
process is less burdensome than it would be under a standard FTA but still more onerous in
comparison to EUCU membership.

More importantly from the UKs standpoint, this degree of integration under a customs union with
the EU places significant obligations and restrictions on Turkey that curtail its ability to conduct a
meaningfully independent trade policy. Under Article 13 of its customs agreement with the EU,
Turkey is required to align itself to the CET, which means adjusting its own tariffs whenever
necessary in line with changes by the EU.57 This means Turkey has to pursue a substantially
similar commercial policy to the EUs trade regime.58 It is also required to adopt and enforce EU
customs provisions on the origin of goods, customs declarations, the release of goods into free
circulation, and the movement of goods.59 This effectively mandates Turkey to mirror the EUs
existing preferential trade agreements with third countries. Yet, Turkey enjoys no formal
representation or influence through the EU. It has no decision-making power over what countries
the EU strikes deals with, nor can it formally represent its interests within EU institutions.

Of the approximately 20 operational FTAs Turkey has implemented, all but one (an FTA with
Malaysia) are in partnership with non-EU countries holding preferential arrangements with the
EU.60 In fact, given the EU has so far put in place a network of over 30 preferential trade deals with
third countries, Turkeys ability efficiently to replicate agreements with EU partners appears in
doubt. This may be in part due to trade deflection: the EUs international trade partners may be
reluctant to sign a deal with Turkey given they already enjoy indirect tariff-free access to Turkish
markets, via the EU-Turkey customs union, without having to reciprocate by providing preferential
access to their own markets for Turkish traders.61 The EU has recently attempted to correct for this
by pushing a Turkey clause during negotiations with third countries, calling on international
partners to pursue a similar agreement with Turkey.62 However, this remains non-binding, with
Turkey reliant on the EU to enforce it.

Finally, Turkeys theoretical ability to pursue independent preferential trade agreements in


agricultural produce and services, which are outside the scope of the customs union with the EU,
appears hollow. Theoretical freedom in these areas has not so far presented a genuine independent
offer to third countries, and it would be technically challenging to achieve given these sectors are
increasingly integrated with other industries.

56
For a broader discussion, see BKP Development Research & Consulting, Study of the EU-Turkey bilateral
preferential trade framework, including the customs union, and an assessment of its possible enhancement,
commissioned by the European Commission and prepared in consortium with Panteia and AESA, 26 October 2016:
http://trade.ec.europa.eu/doclib/docs/2017/january/tradoc_155240.pdf
57
Decision No 1/95 of the EC-Turkey Association Council on implementing the final phase of the Customs Union, 22
December 1995: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A21996D0213(01)
58
Ibid., Article 12.
59
Ibid., Article 28.
60
The FTA between Turkey and Malaysia entered into force on 1 August 2015. Negotiations for an EU-Malaysia
FTA, which began in 2010, were put on hold in April 2012 at Malaysias request.
61
Mehmet Sait Akman, The European Unions trade strategy and its reflections on Turkey: an evaluation from the
perspective of free trade agreements, April 2010, p26.
62
Ibid.

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2.1.2 A sectoral customs union with the EU


One reason why the Turkey-EU agreement has attracted so much attention in the UK debate is that
it can be seen as a potential template for a sectoral customs union. Nearly all industrial products
are included but agriculture is exempt. This is why it has been suggested that the Turkey-EU
customs unions selective coverage could allow those UK industries with the most integrated EU
supply chains, such as the automotive, aerospace, and chemical sectors, to be in a customs union
with the EU with all other sectors exempt.
In other words, this sectoral option can be seen as a bespoke variation on the Turkish model. As
such, it broadly comes with similar advantages and drawbacks although it would likely be harder
to negotiate for the UK, given the consensus among the EU-27 that the UK be prohibited from
cherry-picking when negotiating its post-Brexit relationship with the bloc.
Sectoral membership of a customs union also poses legal, technical and political challenges. Firstly,
the WTOs General Agreement on Tariffs and Trade (GATT) requires that a customs union
eliminate barriers to trade with respect to substantially all trade between the constituent
territories.63 While this definition does not necessarily undermine the legitimacy of the Turkey-EU
customs union (although this has never been contested), it is possible that a customs union confined
to a few selected industries would raise concerns among other WTO members and face legal
challenge. Potentially alienating non-EU partners in this way would be a risk for the UK to take,
since it is simultaneously seeking to cement its own schedule of commitments at the WTO (which
would be complicated if other members have legitimate grounds for dissent) and be approaching
non-EU partners for bilateral FTAs.
Secondly, a sectoral customs union design would prove technically challenging to implement. It can
be quite difficult to draw a clear line between one industry and another. For example, how would it
be possible to distinguish between trade in nuts and bolts used as components in the car sector
(which might be covered by a sectoral custom union) and a sector which is not. Meanwhile, a
sectoral customs union would mean that the UK would have to deliver carve-outs in all future FTAs
with international partners on the sectors integrated into a UK-EU customs union. Overall, it is
unclear whether this is a long-term opportunity cost the UK should bear.
2.1.3 The option of parallel tariffs
Another possible half-in, half-out scenario could see the UK leave EUCU but reach a UK-EU
agreement whereby the UK applied a parallel tariff on imports. This would mean levying the EUs
Common External Tariff (CET) on goods that are imported into the UK and destined for the EU
market. It would, however, allow the UK to refund tariffs on goods destined for purely the domestic
UK market when these goods come from countries with which the UK has (independently from the
EU) concluded an FTA. The objective would be to allow tariff-free circulation of UK-EU trade under
almost identical arrangements to the status quo, while enabling the UK to deviate from the EUs
tariffs in the FTAs it strikes with non-EU countries after Brexit. Compared to the Turkish and
sectoral models above, this would theoretically provide the UK with greater trade independence at
the same time as ensuring minimal friction for UK-EU trade.
This would, however, be a complex arrangement that would be difficult to administer and negotiate
with the EU. The UKs hope would be that by voluntarily mirroring the EUs tariff and customs
procedures for goods entering the UK in the first instance, the EU would be satisfied that the UK
was not operating as a backdoor to its market (since the same tariff would apply to UK and EU
imports) and that these goods could therefore move in free circulation with the EU without
additional checks or documentation for standards or rules of origin. In the meantime, the UK would
have full control of its trade policy and could conclude new FTAs with non-EU countries.UK
importers wishing to take advantage of these lower tariffs for the UK market would need to apply
for a refund on the difference between the tariff levied by the UK on all imports on the border (the
EUs CET) and the lower tariff on goods for only the UK market.

63
WTO, General Agreement on Tariffs and Trade, Article XXIV 8(a).

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There are several drawbacks to such a solution. Firstly, it would likely require a huge amount of
political capital to negotiate. It would be very difficult to keep track of secondary movements of
goods which could be shipped on to the EU after being cleared for use in the UK domestic market
and therefore face lower tariffs. This is likely to make the EU particularly reluctant to negotiate this
kind of arrangement. The UK would likely have to offer a sweetener by promising that revenues
collected from duties on goods destined for the EU market would largely continue to be sent to
Brussels. This would be politically controversial in the UK and deny the Exchequer of significant
revenue.

Secondly, this option would be exposed to potential legal challenges at the WTO for being
discriminatory. For example, if a non-EU country has an FTA in place with the EU but not with the
UK, it could sell goods via the EU into the UK at reduced tariff rates. This would put another non-EU
country, which has no FTA in place with either the EU or the UK, at a disadvantage hence the
potential for challenges at the WTO.

Finally, and most importantly, the price of attempting to maintain the status quo for UK-EU trade
would pose obstacles to realising the UKs global trade ambitions. Operating a system of refunds on
imports of non-EU goods for the UK market would present additional paperwork (and potentially
cash flow problems) for importers of non-EU goods. It would risk creating a powerful force for
inertia in the UKs global trade policy, since every time that the UK deviated from the EUs common
tariff, the system for UK importers and administrators would become more complicated as the
number of potential refunds on offer would increase. Such complexity would hit SMEs
disproportionately, as they are more likely than big companies to focus on the UK market, and send
a strong signal to non-EU trade partners that they were less important to the UK than the EU.

2.2. Out of customs union but with a trade and customs cooperation agreement with the EU
The most straightforward form of customs cooperation would be to conclude a bilateral UK-EU
customs cooperation agreement, either as part of a broader UK-EU FTA or as a standalone UK-EU
agreement. This would mean that the UK would have full control over its trade policy for non-EU
trade. It would be free to enter FTAs with non-EU countries or unilaterally lower its WTO tariffs.
The UKs Ambassador to the WTO, Julian Braithwaite, wrote in January 2017 that replicating our
current EU trade regime will help ensure that our transition in the WTO is as simple, technical and
uncontroversial as possible.64 In practice, this means the UK may opt to replicate the EUs tariff
regime the day after Brexit, but this option would enable the UK to shape its own tariffs in the
future.

As we outlined in Section 1, withdrawal from EUCU gives rise to several potential challenges,
including the need for customs declarations; compliance with Rules of Origin requirements to
benefit from preferential access to each others markets; compliance with product standards;
potential delays at the customs border; and so forth.

The objective of a UK-EU FTA and customs cooperation agreement would be to address and
mitigate these issues, providing tariff-free trade that is as frictionless as possible. Indeed, the EU
often incorporates provisions on customs cooperation and trade facilitation in its FTAs. The
Comprehensive and Economic Trade Agreement (CETA) between Canada and the EU contains a
dedicated chapter on customs cooperation that includes provisions for a Joint Customs
Cooperation Committee to examine and ensure the sound functioning of the agreement.

64
Julian Braithwaite, Ensuring a smooth transition in the WTO as we leave the EU, Foreign & Commonwealth
Office blog, 23 January 2017: https://blogs.fco.gov.uk/julianbraithwaite/2017/01/23/ensuring-a-smooth-
transition-in-the-wto-as-we-leave-the-eu/

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A UK-EU customs agreement could seek to harness the latest best-practice and technological
developments to create a new light-touch and efficient border. Importantly, this would run with the
grain of developments in global trade. As import tariffs have been consistently decreasing across
the world, efforts at the WTO level are now focusing on Non-Tariff Barriers (NTBs) notably
including the facilitation of customs procedures. In fact, the WTOs brand-new Trade Facilitation
Agreement (TFA), which entered into force on 22 February 2017, addresses precisely how to speed
up the movement, release and clearance of goods. The full implementation of the TFA is estimated
to reduce global trade costs by an average of 14.3%, while also potentially reducing the average
time needed to import and export by 47% and 91% respectively. It is claimed that TFA will boost
world GDP growth by 0.5% a year between 2015 and 2030.65
The UK and the EU are unique in the sense that they start from a standpoint of intense integration,
with the UK already implementing EU customs procedures and regulations. While exit from the
customs union and the creation of a new customs border is likely to lead to some inevitable
increases in frictional trade costs, this is also presents a unique opportunity to create the most
efficient customs border in the world.

2.3. Brexit without a trade and customs cooperation agreement with the EU (aka WTO option)
While this is not our central assumption in this paper, the UK and the EU could fail to strike a
comprehensive trade deal and therefore trade on WTO-only terms. Open Europe will discuss this
scenario at length in a separate paper. For the time being, it is worth stressing that there would be a
number of things the UK could do unilaterally to mitigate the impact of shifting to the new
environment. Press briefings have also confirmed that the Cabinet has been tasked with preparing
for a no deal scenario.
As UK Chancellor Philip Hammond put it,
We could be forced to change our economic model, and we will have to change our model to
regain competitiveness. And you can be sure we will do whatever we have to do.66

These changes might include, but not be limited to:

Duty drawback schemes: Many countries in the world have adopted this kind of schemes to
encourage the development of a competitive export sector whereby intermediate goods
imported for further manufacturing and later export are not subject to the normal customs
duties envisaged for goods imported for domestic consumption. The EU itself has
established an Inward Processing Relief (IPR) scheme. These schemes would be of
particular help for carmakers and other industries operating complex supply chains and
subject to comparatively high tariffs.
Free trade zones/Export processing zones: Another option the UK might want to consider
would be to establish free trade/export processing zones. By some estimates, there are
approximately 3,000 such zones across the world.67 One example in Europe is the Shannon
Free Zone in the Republic of Ireland.68 These areas are usually considered as outside the
customs territory of a country that is, they are subject to a different tariff and tax regime
and offer broader tax advantages than just duty relief.

65
World Trade Organisation, Trade facilitation Cutting red tape at the border, retrieved on 6 March 2017:
https://www.wto.org/english/tratop_e/tradfa_e/tradfa_introduction_e.htm
66
The Guardian, Hammond threatens EU with aggressive tax changes after Brexit, 15 January 2017:
https://www.theguardian.com/politics/2017/jan/15/philip-hammond-suggests-uk-outside-single-market-could-
become-tax-haven
67
See, for instance, World Bank, International Trade Department, Duty and tax relief and suspension schemes A
learning toolkit, 2009:
http://siteresources.worldbank.org/INTEXPCOMNET/Resources/duty_and_tax_toolkit_pub_screen_2009.pdf
68
Shannon Chamber, The Shannon Free Zone at a glance, retrieved on 27 February 2017:
http://www.shannonchamber.ie/about/about-shannon/shannon-for-business/shannon-free-zone/

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Unilateral free trade: A more radical option would be for the UK unilaterally to scrap all
import tariffs, thereby making it cheaper to sell goods into the UK. This would translate into
lower costs for UK consumers but also lower costs of production for UK firms, as they
would have to pay less to buy intermediate goods and services from abroad. Therefore, UK
exports could eventually also become cheaper and more competitive. In previous research,
we analysed this scenario in detail and found that unilateral free trade could potentially
deliver a permanent boost of 0.75% to the UKs GDP.69

Deregulation: The UK could also look to reduce the burden on businesses and boost its
attractiveness as an investment destination by means of deregulation. In previous research,
we estimated that a politically feasible deregulation drive would deliver a saving of around
12.8 billion per year after Brexit.70 However, the UK government has so far ruled out
intervening on social and employment regulations, which by our own estimates accounted
for 5.6 billion of potential savings.

Taxation: The UK government is already planning to cut the corporate tax rate to 17% by
2020. Under this scenario, it could intensify work towards creating a low-tax environment
and increase its attractiveness for businesses.

2.4. A bilateral FTA and customs cooperation agreement is the best option
None of the alternative options to membership of EUCU guarantees an equally seamless movement
of goods between the UK and the EU as under the status quo. Therefore, the upcoming negotiations
will be all about striking the most effective balance between safeguarding barrier-free UK-EU trade
and ensuring that the UK is in a position to conduct a genuinely independent trade policy after
Brexit.

All of the half-in, half-out options would be highly complex in their application, which makes them
difficult to negotiate with the EU. They seek to minimise disruption to UK-EU trade at the expense
of creating obstacles for the UK to trade with non-EU partners. It is therefore difficult to reconcile
any of these options with the aspiration of establishing a truly Global Britain. Meanwhile, the
absence of a customs agreement would mean maximum disruption to UK-EU trade and require that
the UK adapt to a significantly altered trading environment.

The optimal solution that balances the UKs ability to trade globally and with the EU would be to
conclude a UK-EU FTA and customs cooperation agreement. From the EUs point of view, customs
cooperation goes with the grain of existing agreements and avoids the need for unnecessary new
barriers to trade. This agreement should address tariffs, recognition of standards and introduce the
most up-to-date mechanisms to minimise border costs. The land border between the Republic of
Ireland and Northern Ireland also warrants special attention. The following sections of this paper
will discuss those issues in turn.

69
For further details, see Open Europe, Where next? A liberal, free-market guide to Brexit, April 2016, p20-21:
http://2ihmoy1d3v7630ar9h2rsglp.wpengine.netdna-cdn.com/wp-content/uploads/2016/04/Open-Europe-A-
liberal-free-market-guide-to-Brexit-FINAL.pdf
70
Open Europe, What if? The consequences, challenges and opportunities facing Britain outside the EU, March
2015, p88.

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3. Trade agreements and Rules of Origin


3.1. FTAs with the EU and non-EU trade partners
As we illustrated in the previous section, withdrawal from EUCU without FTAs in place with the EU
and non-EU trade partners (third countries with which the EU currently has FTAs) would result in
duties being levied on UK trade with these countries. Even if the UK were unilaterally to lower or
scrap its own tariffs, UK exporters would still face tariffs when selling into EU or non-EU markets.

3.1.1 The EU
The UK government aims to secure duty-free EU trade via an ambitious and comprehensive
FTA.71 The optimal outcome would be to establish a deep agreement covering goods and services,
which would not only avoid tariffs on trade in goods but also provide bilateral cooperation on
customs procedures and trade facilitation (these will be addressed in greater detail in Section 5). If
this cannot be achieved within the two-year negotiating timeframe under Article 50 of the Treaty
on the European Union (TEU), the UK and the EU should agree not to impose new tariffs or duties
on each others goods for a limited period. This could be part of a transitional
agreement/implementation phase with a view to finalising the FTA. It is legally compatible with the
requirement of Article 50 to take into account the framework for its future relationship with the
Union.

3.1.2 Non-EU partners


Securing a tariff-free FTA with the EU alone would not resolve the issue of the EUs own FTAs with
third country partners. If these FTAs simply ceased to apply to the UK, this would threaten duties
on UK-based firms with supply chains that reach into countries with which the UK currently has an
FTA by virtue of its EU membership (currently over 60 third countries). To minimise disruption to
these established supply chains, the UK should seek to retain, or grandfather, these existing FTAs
with non-EU countries. These deals would not be automatically inherited by the UK after Brexit and
would require negotiation but, in principle, the UKs non-EU trade partners should have an interest
in maintaining preferential trade. Establishing this bilaterally could be relatively straightforward.
However, for supply chains that cut across the EU, UK and non-EU countries, duty-free trade also
depends on how Rules of Origin are applied within and across what will become a web of bilateral
agreements (see Annex II for further details).

3.1.3 Developing and least developed countries


Meanwhile, many developing countries currently benefit from schemes such as the General
Scheme of Preference (GSP) and Everything but Arms (EBA) agreements, which allow them to pay
less or no duty on exports to developed countries, such as the UK, without offering preferential
access to their markets in return.72 Unlike the FTAs described above, maintaining the status quo
with these countries would not require bilateral negotiation. Since these agreements rest on WTO
principles, outside EUCU the UK could unilaterally ensure that imports from these countries
continue to enjoy reduced or duty-free access to UK markets.

71
HM Government, The United Kingdoms exit from and new partnership with the European Union, p35.
72
This is a general exemption from the WTOs Most Favoured Nation principle, which establishes that member
countries treat imports coming from all other WTO member countries equally. See HM Revenue & Customs, UK
Trade Tariff: preferential trade arrangements for countries outside the EU:
https://www.gov.uk/government/publications/uk-trade-tariff-preferential-trade-arrangements-for-countries-
outside-the-eu/uk-trade-tariff-preferential-trade-arrangements-for-countries-outside-the-eu

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3.2. Rules of Origin (RoOs)


As noted in Section 1, UK withdrawal from EUCU to an FTA trade relationship with the EU will
necessitate RoOs in UK-EU trade. Under these rules, the local content of a UK product will
determine the duty it attracts when entering the EU.
There are two main concerns regarding RoOs. Firstly, the extent to which they will increase the
administrative burden of compliance for exporters in proving the origin of products. Secondly, the
impact RoOs can have on supply chains that span many countries, which means origin status can
be lost and products will therefore attract higher levels of duty.

3.2.1 Originating good thresholds in FTAs


The EU applies preferential rules of origin within FTAs with other countries or groups of countries.
RoOs can be straightforward for goods that are wholly obtained or produced in one country. They
become more complex where products are produced using materials from several different
countries. In this case, importers have to obtain proof of origin certificates to prove products have
been sufficiently processed in the UK and therefore qualify as a local good. The thresholds for
what constitutes sufficiently processed differ from product to product and FTA to FTA. For
example, the EU-South Korea FTA means that a South Korean automotive exporter would have to
show that no more than 45% of the value of materials used in manufacturing a car had been
imported from outside of the EU or South Korea to benefit from the FTA.73

3.2.2 Cumulation of RoOs


UK manufacturers of complex goods not only face complying with new Rules of Origin in trade with
the EU, but also face losing tools which currently liberalise origin thresholds in wider trade. As an
EUCU member, the UK benefits from how rules of origin are cumulated across the EU and with
third countries in an EU FTA with the EU. This means that those trade agreements treat UK
content and EU content as the same for RoOs purposes. There are three types of cumulation
bilateral, diagonal and full (see Annex II for a detailed explanation). Full cumulation is the most
liberal as it allows the production process or supply chain to be even wider than the more
commonly used bilateral and diagonal cumulation procedures.

Cumulation benefits UK firms in a number of ways. It enables UK exporters to take advantage of


FTAs with third countries even if only a small proportion of the value or processing of a good is
supplied by the UK, so long as the combined UK and EU content meets the RoOs requirements.
Similarly, it enables UK firms inputs to EU-manufactured products to be counted as EU
components for the purpose of duty-free export via an FTA to a third country. If it is no longer
possible to count UK and EU content as interchangeable, duty-free access to third country markets
is lost. This would push up costs and lead to the fragmentation of supply chains

The UK should aim for the most liberal rules of origin and cumulation with the EU. This should be in
the interest of both the UK and EU given that it will minimise disruption to trade for businesses and
supply chains. The UK could seek to do this in two ways:

73
See Confederation of British Industry and Clifford Chance, The future of trade for the UK: a guide for business,
February 2017, p31: http://www.cbi.org.uk/index.cfm/_api/render/file/?method=inline&fileID=0A100BEF-80B6-
4651-9E74912CA98B2AC0

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a) Bilaterally with the EU: This would mean agreeing the lowest possible thresholds for what
constitutes local content. The EU has a standard set of RoOs it offers trade partners but
individual agreements can provide a more liberal regime. For example, the Canada-EU
agreement (CETA) is based on the EUs standard preferential RoOs but the EU offered
limited derogations and more liberal rules in sectors including cars, textiles, fish and some
agricultural/processed agricultural products.74 It will be in the interest of both the UK and
the EU to agree a very liberal approach, particularly on products with complex supply
chains.
Another option in addition to developing a liberal approach to local content thresholds
could be for the UK and EU to waive RoO requirements for certain goods which are subject
to low WTO MFN tariffs. This idea was proposed in a joint report published at the end of
2012 by the Productivity Commissions of Australia and New Zealand.75 The Australian
Productivity Commission had calculated that the additional costs of re-exporting a product
from a third country via Australia to New Zealand were, on average, around 5% of the
products value. By logic, it would be unprofitable to ship a third-country product via
Australia to pay lower tariffs upon entry into New Zealand if the additional costs of re-
exporting were higher than the MFN tariff to which the product would normally be subject.
Therefore, there should be no need for RoO requirements to discourage this kind of
operation.
As a result, the 2012 report recommended waiving RoO requirements between Australia
and New Zealand on all products for which the two countries MFN tariffs are 5% or less.
This de minimis threshold is specific to trade between Australia and New Zealand, given that
it is based on the estimated costs of shipping products between them. The UK and the EU
would need to make their own calculations and develop a bespoke threshold, but the idea of
a waiver on RoO requirements deserves thorough consideration as it could significantly
reduce compliance costs for businesses on both sides of the Channel.
b) Multilaterally with the EU and third countries: In securing access to EU FTAs with third
countries in its own right, the UK should ensure that these agreements continue to allow
cumulation of UK and EU content (and ideally allow for cumulation of non-EU content). This
would mean that, for example, EU exporters to Canada under the CETA agreement could
count both EU and UK content as EU content or a UK exporter could count UK and EU
content as UK content under a new UK-Canada deal. This would require three-way
agreement between the UK, EU and Canada. The EU will likely need to renegotiate its FTA
agreements anyway, as a result of the UKs withdrawal, given its trade offering to third
countries will have changed. When the EU revisits these agreements, all parties should take
the opportunity to address how to coordinate cumulation systems.

The EU already provides for a system of advanced cumulation and liberal rules of origin between
the EU and the wider European neighbourhood under the Regional Convention on pan-Euro-
Mediterranean preferential rules of origin (PEM Convention).76 The PEM Convention among 23
contracting parties provides for diagonal, and in some cases full cumulation, provided that they
have a FTA in force with other contracting parties. 77

74
The rules of origin derogations (i.e. exceptions for which a more relaxed rule kicks in) apply for a limited quantity
of exports of certain products. In the case of textiles, reciprocal derogations providing for more relaxed rules of
origin were also granted by Canada to EU exports. See European Commission, CETA summary of final negotiating
results, 2016: http://trade.ec.europa.eu/doclib/docs/2014/december/tradoc_152982.pdf
75
Productivity Commissions of Australia and New Zealand, Strengthening trans-Tasman economic relations A joint
study, November 2012, Supplementary Paper A, p9: http://productivity.govt.nz/sites/default/files/10-trans-
tasman-supplementarya.pdf
76
European Commission, The pan-Euro-Mediterranean cumulation and the PEM Convention:
http://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/general-aspects-
preferential-origin/arrangements-list/paneuromediterranean-cumulation-pem-convention_en.
77
Full cumulation is currently operated within the European Economic Area (EEA, which comprises the EU, Iceland,
Liechtenstein and Norway) and between the EU and Algeria, Morocco and Tunisia.

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The Regional Convention on pan-Euro-Mediterranean preferential rules of origin

A pan-European cumulation system was established in 1997 to support trade within the European
Economic Area (EEA), which was created in 1994. Since then, it has been enlarged to include
neighbouring territories such as the Faroe Islands and Turkey (for industrial goods).

The most significant enlargement in the application of the pan-Euro cumulation system occurred in
2005, when the 15 members of the Union of the Mediterranean (formerly the Barcelona Process)
were included to create the pan-Euro-Mediterranean cumulation system.

The move to create a single instrument for establishing RoOs between countries in the pan-Euro-
Mediterranean zone was the Lisbon Treaty. In February 2013, the Regional Convention on pan-
Euro-Mediterranean preferential RoOs was published and replaced the protocols in FTAs between
these parties. It established harmonised ROOs between all parties to the Convention.

The 23 contracting parties to the PEM Convention are:

The EU;
The EFTA States: Switzerland, Norway, Iceland and Liechtenstein;
Member of the Union of the Mediterranean: Algeria, Egypt, Israel, Jordan, Lebanon,
Morocco, Palestine, Syria, Tunisia and Turkey;
The participants in the EU's Stabilisation and Association Process: Albania, Bosnia and
Herzegovina, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and
Kosovo;
The Republic of Moldova;
The Faroe Islands.

The PEM Convention allows for diagonal cumulation in circumstances where FTAs exist between
all contracting parties concerned. Importantly, the PEM Convention does not eliminate
requirements for traders to produce proof of origin (as in the case for members of the EEA and
EUCU). Originating status of products to be traded under preferential rates is proved largely by
movement certificates EUR-1 or EUR-MED (which are issued by the customs authority of the
exporting county).

3.2.3 High cost of complying with RoOs means companies do not always make full use of FTAs
One reason why it is so important to reduce the burden of RoO requirements is that, if they are too
cumbersome, they ultimately stop companies taking advantage of FTAs. It can be costly for
businesses to obtain the preferential access to which they are entitled under an FTA. There are
administrative costs stemming from the paperwork needed to prove origin, but also compliance
costs arising from the need to adjust methods of production to RoO requirements. It is hard to pin
down these costs, but some estimates put them between 4% and 15% of the value of the good
sold.78 When administrative costs are high, businesses may under-utilise FTA preferences. In
practice, this happens when companies find it so expensive to comply with RoO requirements that
it is no longer worth making use of preferential market access, even when it is on offer. 79

78
For a round-up of studies looking at the cost of complying with rules of origin requirements, see Centre for
Economic and Policy Research, Balance of Competence Review Trade and Investment, pages 56-58.
79
However, it is worth stressing that FTAs do also offer other benefits including the reduction of non-tariff barriers
to trade and the use of trade facilitation measures.

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The 2016 edition of the Global Trade Management Survey conducted by KPMG and Thomson
Reuters found that fewer than a quarter (23%) of respondents utilise all FTAs available in their
country and applicable to their products. Crucially, when asked about the biggest challenges in
using FTAs for import and export, 23% of respondents singled out the complexity of RoOs and a
further 20% mentioned difficulties in gathering raw material origin documentation from vendors.80

For the UK Government, the aim should be not only to strike a comprehensive FTA that protects
tariff-free EU trade, but also to design an accessible arrangement that offers the greatest
opportunity to UK traders to take advantage of preferences without imposing significant costs to
doing so. A similar aim should apply to the EU side. This means any UK-EU FTA should feature
liberal provisions on RoOs and cumulation.

80
Thomson Reuters and KPMG, Global Trade Management Survey 2016, p11:
https://home.kpmg.com/content/dam/kpmg/xx/pdf/2016/11/tnf-customs-global-survey-nov29-2016.pdf

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4. Conformity with product standards

As outlined in Section 1, EUCU withdrawal raises the question of UK goods conformity with EU
product standards. While technical conformity is not a direct customs issue (conformity is not a
requirement for customs documentation and declarations), compliance with relevant legislative
requirements may be assessed by border security agencies. Without existing arrangements for
assumed conformity, UK exporters could face an additional administrative burden to prove EU
legislation compliance, and may face increased time lost at the border.

4.1. Mutual Recognition Agreement (MRA) to cover product standards in harmonised and non-
harmonised sectors

Theresa May stated the governments intention to preserve the legal status quo following Brexit,
via the Great Repeal Bill. This will seek to incorporate existing EU law into UK law at the point of
Britains departure. The UK parliament will subsequently have the freedom to decide which
individual measures to repeal, amend, or retain.

The UK will have to address two key challenges on product standards in relation to the Great
Repeal Bill. First, the Bill is not sufficient to ensure the EU will accept UK products technical
compliance. The UK will have to work with the EU to agree mutual recognition of legislation. This
would eliminate the potential cost to UK exporters of proving compliance with EU requirements
once the UK is outside EUCU, and would also reduce costs for EU exporters. The optimal solution
would be to strike a blanket Mutual Recognition Agreement (MRA) to cover all trade in goods,
including harmonised and non-harmonised sectors.

In order to achieve this, UK legislation on product standards and conformity assessment would
need to be deemed as equivalent by the EU after Brexit. While in principle equivalence does not
mean replicating EU laws word-by-word, the UK would need to keep domestic legislation aligned to
the relevant EU legislation on removing technical barriers to trade. Indeed, the UK government has
already signalled willingness to take in elements of current single market arrangements in a future
FTA with the EU.81

As an example, the UK should uphold the regulations and directives embodied in the 2008 New
Legislative Framework (NLF). These establish a common legal framework for harmonised industrial
product standards as well as rules on the accreditation of conformity assessment bodies, known as
Notified Bodies.82 In general, the NLF ensures that EU technical requirements are limited to
minimal health and environmental regulation in most industries, apart from high-regulation
harmonised industries such as automotive and pharmaceutical sectors.

The NLF also provides for mutual recognition of national regulations in non-harmonised product
sectors.83 By ensuring continued compliance with the 2008 NLF, and other associated regulatory
frameworks, the UK can create the legal foundation for a blanket MRA on goods. This would allow
the current systems of presumed and accredited conformity to continue, and so eliminate
additional administrative burden on business to prove technical compliance. It would also facilitate
easier passage at the border, as conformity inspections would be waived.

81
The direct quote is from Prime Minister Theresa Mays Lancaster House speech, 17 January 2017.
82
See European Commission, Internal Market, Industry, Entrepreneurship and SMEs New legislative framework:
https://ec.europa.eu/growth/single-market/goods/new-legislative-framework_en
83
Ibid.

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The second challenge for the government on the Great Repeal Bill will be to account in UK law for a
new post-Brexit governance structure. EU legislation is embedded in EU governance structures,
and refers to EU agencies in areas where regulation and licencing takes place at the supranational
level. The European Medicines Agency (EMA) is referred to as the authority responsible for the
evaluation and supervision of medicines across the EU. Unless the UK continues to participate in
common EU bodies, the Great Repeal Bill will need to ensure that UK law refers to a new domestic
regime upon Britains departure. In relation to technical standards regulation, this will be most
relevant for industries where technical compliance must be accredited by a Notified Body. In some
cases, these already exist at the national level. The compliance of the UK automotive sector is
ensured by the UK Vehicle Certification Agency (VCA), which issues type-approval certification
that is recognised across the EU. However, in the case of bodies such as the EMA, the UK may
establish a national equivalent. UK law should therefore be amended to recognise the authority of
the national body, and an MRA with the EU should be in place to recognise the equivalence of
agency decisions and certification.

While in the immediate post-Brexit period it is unlikely that the UK would want to diverge
significantly from the EUs technical framework, it is unclear whether this would remain its longer
term position. For instance, in sectors where a significant proportion of UK businesses focus on the
domestic or third-country markets, there may be an incentive to deviate from EU regulations.
Equally, in product sectors where the UK has fewer defensive interests, such as agricultural
produce, it may seek flexibility to deregulate in the future in order to propose more liberal
standards in new trade agreements. For example, we know that food safety concerns and EU
opposition to genetically modified (GM) cultivation posed obstacles in the stalled Transatlantic
Trade and Investment Partnership (TTIP) negotiations between the EU and the US. Britain may
seek to establish more liberal food regulation standards to overcome such barriers to trade. If this
were a long-term interest for the UK, flexibility on total harmonisation of product standards in
such sectors would be necessary but initially at least, maintaining harmonisation with the EU is
sensible.

4.2. EU MRAs with other trading partners

The EU already operates a range of MRAs on the recognition of product standards and Notified
Bodies with other third-country trading partners. It has established a narrow single-sector MRA
with Israel on chemical testing practice, and a multisector MRA with the US covering
telecommunication equipment, electromagnetic compatibility, and medical devices. Switzerland
has established a comprehensive agreement, spanning all EU harmonised sectors, in return for
adopting the relevant EU legislation for all covered sectors.84 The UK should aim for the broadest
possible MRA, ensuring mutual recognition of products in non-harmonised sectors as well, and
should be willing to adopt the necessary legislative frameworks as part of the Great Repeal Bill in
order to ensure this is viable. The UKs product standards are identical to the EUs and will still be at
the point of Brexit. They may indeed diverge in due course, depending on decisions at UK and EU-
level.

4.3. European standardisation governance bodies

The UK currently participates in the development of standards at the international level via
membership of the International Organisation for Standardisation (ISO) and the International
Electrotechnical Commission (IEC). The participation of the UK standardisation body, the British
Standards Institution (BSI), in these organisations is unlikely to be called into question as a result of
Brexit.

84
See European Commission, Internal market, industry, entrepreneurship and SMEs Mutual recognition
agreements: https://ec.europa.eu/growth/single-market/goods/international-aspects/mutual-recognition-
agreements_en

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The UK is also a party to corresponding European bodies for standards, the European Committee
for Standardisation (CEN) and the European Committee for Electrotechnical Standardisation
(CENELEC).85 Membership of these bodies is not, however, limited to EU member states. For
example, 34 National Standardisation Bodies (NSBs) sit at CEN, including the EU, along with
Iceland, Norway, Serbia, Switzerland and Turkey.

While the UKs National Standardisation Body, the BSI, has expressed its desire to retain
membership of both European organisations, 86 this may not be politically palatable. This is because
membership of CEN and CENELEC requires states to apply the EU notification procedure, whereby
national work on a product standard must standstill when the European Commission calls for the
production of a harmonised European standard. Once the harmonised standard is developed by
CEN and CENELEC, members must withdraw national procedures and apply the harmonised
standard. It could be argued that membership of these organisations would run counter to the
governments Brexit strategy, as it continues to provide for the supremacy of EU-wide regulation.

85
British Standards Institution Group, European Standards and the UK, 2016:
https://www.bsigroup.com/LocalFiles/en-GB/EUREF.pdf
86
British Standards Institution Group, European Standards and the UK, p13.

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5. Processes and systems to minimise friction at the border

The government has committed to keeping trade with the EU as frictionless as possible.
Completely frictionless international trade arguably does not exist. Even as a member of the
customs union, UK businesses must comply with EU regulations and procedures to benefit from
free passage at borders. Compliance is merely ensured at point of production rather than the
physical border.

Given the Governments commitment, the joint UK-EU aim should be to establish a virtual border
for trade, including at air and sea ports, in particular at the Irish land frontier (the Irish border will
be discussed in detail in the next section). In practice, this means modelling a new relationship on
elements of the EUs existing highly-integrated customs framework, and dispensing as far as
possible with requirements to produce documentary evidence or undergo security inspections at
the border.

There are two broad methods for the UK and EU to achieve this commitment. First, as part of a new
agreement, they must ensure the vast majority of documentation approval and cargo clearance
occurs before the border. Second, both should streamline the procedure for releasing goods at
borders to reduce time lost, such as by digitalising customs posts. The proposals outlined below
could be undertaken unilaterally by the UK, but this will only ease friction for importers. The EU, or
key EU member states, must also implement comparable measures at their borders, and this should
be agreed jointly.

5.1. Do more before the border

The UK and the EU should aim to complete the vast majority of customs clearance procedures,
including processing declarations and decisions, before the border i.e. electronically. From the
UKs perspective, customs clearance procedures are already efficient. The UK should aim to
achieve this level of efficiency in processing customs documentation from EU traders once outside
EUCU. It should continue its overhaul of customs IT in line with the EUs new Union Customs Code
and establish an online one-stop shop for all trade related business-to-government interaction.
Equally, EU member states will need to prepare for the UK leaving EUCU and avoid burdens on
local business or importers.

5.1.1 Upgrading customs infrastructure

Once outside EUCU, the workload of HMRCs customs service will increase to include processing
customs documentation and declarations from the EU. The UK will need to expand its electronic
customs systems and personnel to cope with this increased volume.

UK customs IT infrastructure is already being upgraded as part of the introduction of the revamped
Union Customs Code (UCC), the new EU framework of regulations on the customs systems and
procedures (see Annex III).87 The UK should uphold its commitment fully to implement the new
customs code in domestic legislation. The UCCs broad aims include streamlining and standardising
customs procedures across EU Member States, and ensuring full digitalisation of EU customs
services. As a positive consequence of continuing full implementation, the UK will simplify its
customs systems and processes in line with all member states, which will reduce compliance costs
to trade with the EU outside EUCU.

87
European Commission, Taxation and Customs Union Union Customs Code:
https://ec.europa.eu/taxation_customs/business/union-customs-code_en

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The UK may seek to diverge from the UCC in future. For instance, it may change how long it
requires businesses to retain customs documentation after trade, in order to reduce the
administrative burden. Yet, there will be benefits to ensuring the UKs customs code remains
broadly aligned with the UCC after Brexit. Given that the UCCs aim is to standardise
implementation of customs procedures across the EU, a UK customs regime that is broadly
compliant with the provisions of the EU code would help ensure HMRCs customs regime remains
EU equivalent. This would in turn make it easier to achieve the wider goal, which is to minimise the
need for paperwork and ensure customs formalities can be fulfilled before and after the border to
the fullest extent thanks to technology and self-assessment.

In the immediate term, full implementation will allow the UK to prepare and reinforce its customs
framework to cope with its exit from EUCU. For instance, one key UCC initiative is the Authorised
Economic Operator (AEO) system upgrade, a measure which aims to simplify and standardised the
process of applying for and authorising AEO accreditation in the EU.88 AEO is an internationally-
recognised status awarded to traders that indicate security of supply chain and conformity with
customs rules and procedures.89 Benefits to AEO accreditation include reduced customs
procedures in trade, such as fewer physical and document-based controls at the border.

In the EU, AEO status is a regional certification that is approved and awarded at member state level.
When the UK leaves the EU, it will need to establish a fully-fledged national AEO framework in line
with World Customs Organisation (WCO) recommendations.90 UCC modernisation plans for the
EU AEO programme could provide Britain with the building blocks to construct an efficient national
programme in preparation for Brexit. For instance, the UK should implement UCC provisions for
AEO accredited traders to submit any customs documentation as periodic self-assessments. This
would allow registered operators to pay customs duties in arrears perhaps on a monthly basis, as
per the Canadian model rather than shipment-by-shipment (see Section 6.3.2 for a broader
discussion).91

In general, the IT overhaul in response to the UCC is an important preparation for the expected
increased workload. For instance, as part of UCC upgrades, HMRC are creating a new electronic
customs system, the Customs Declaration Services (CDS), which will be essential in order to cope
with the surplus of customs documentation anticipated after the UK withdraws from the EU. 92 Its
attainment of operational status pre-Brexit will be crucial. It is currently expected to come online in
early 2019.93 However, given the UCC Work Programme lays out a phased schedule of
implementation from 2017-2020, not all infrastructure upgrades are scheduled to be in place
before the UKs expected withdrawal around April 2019. For instance, AEO upgrades are not due
to be fully implemented until October 2019.The UK should accelerate the implementation of UCC
initiatives and ensure key programme upgrades (such as AEO modernisation) are in place in time
for testing prior to its withdrawal from EUCU. This is an important area for ministerial attention.

88
European Commission Implementing Decision 2016/578/EU: http://eur-lex.europa.eu/eli/dec_impl/2016/578/oj
89
HM Revenue & Customs, Authorised Economic Operators, last updated on 30 November 2015:
https://www.gov.uk/guidance/authorised-economic-operator-certification
90
World Customs Organisation, SAFE Framework of standards to facilitate and secure global trade, June 2012:
http://www.wcoomd.org/en/topics/facilitation/instrument-and-
tools/tools/~/media/55F00628A9F94827B58ECA90C0F84F7F.ashx
91
Canada Border Services Agency, Customs Self-Assessment Programme: http://www.cbsa-asfc.gc.ca/prog/csa-
pad/import-eng.html
92
Ibid.
93
Information provided by Jim Harra, Director General of Customer Strategy and Tax Design at HMRC, in evidence
to the House of Commons Treasury Select Committee, 7 February 2017.

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How UK customs IT currently works: Intrastat and CHIEF

Within EUCU, goods can move across borders without customs declarations. Nonetheless, most of
these movements are monitored for statistical purposes. Since 1993, statistics on EU trade in goods
are collected via the Intrastat system.94 Any VAT-registered UK business that, in the previous
calendar year, moved more than 250,000 worth of goods to other EU member states or received
more than 1.5 million in goods from the rest of the EU needs to register for Intrastat and submit
information on a monthly basis.95 Intrastat requirements are similar across the EU.

UK traders who want to import goods from or export goods to a non-EU country need to submit a
declaration to HMRC. Importers generally need to pay the applicable customs duty and import VAT
although duties ultimately depend on the trading arrangements in place between the relevant
third country and the EU.96

Declarations can be filed manually or electronically via the Customs Handling of Import and Export
Freight (CHIEF) system. The latter allows for the online processing of exports and imports
including the calculation of duties, currency conversion, and the automatic clearance of
consignments.97 HMRC also uses CHIEF for risk assessment purposes, since the system identifies
consignments, or parts of consignments, that need to be physically inspected before entering or
leaving the UK. In practice, this means low-risk goods are granted faster passage through UK
customs.

In 2014, HMRC unveiled plans to replace CHIEF with a new Customs Declaration Services (CDS)
programme. This should be ready by early 2019, before the UK formally leaves the EU.98
Importantly, HMRC explained that the shift from CHIEF to CDS was needed to accommodate for
the upcoming changes from leaving EUCU.99

94
HM Revenue & Customs, Notice 60: Intrastat general guide, updated on 22 December 2016:
https://www.gov.uk/government/publications/notice-60-intrastat-general-guide/notice-60-intrastat-general-
guide
95
UK businesses operating below the current Intrastat thresholds only need to provide HMRC with the total value
of goods imported or exported to the rest of the EU as part of their VAT Return (boxes 8 and 9):
https://www.gov.uk/government/publications/notice-60-intrastat-general-guide/notice-60-intrastat-general-
guide#para23
96
For further details, see HM Revenue & Customs, Imports from outside the EU, retrieved on 1 February 2017:
https://www.gov.uk/guidance/importing-goods-from-outside-the-eu
97
For further details, see HM Revenue & Customs, Customs Handling of Import and Export Freight: The processing
system of trader declarations, last updated on 7 March 2014: https://www.gov.uk/guidance/chief-trader-import-
and-export-processing-system#how-to-submit-importexport-declarations
98
See The Times, Fears that customs computers cant cope, 23 January 2017:
http://www.thetimes.co.uk/article/warning-over-customs-chaos-276p0lvc0
99
HM Revenue & Customs, Customs Declaration Services programme, 7 March 2014:
https://www.gov.uk/government/collections/customs-handling-of-import-and-export-freight-chief-replacement-
programme

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Full application of the UCC post-Brexit would also mean UK security regulations covering trade
with non-EU countries would remain aligned with the EUs customs security procedure. This would
allow for a Mutual Recognition Agreement (MRA) on pre-clearance of UK goods, similar to the
2009 Switzerland-EU agreement on customs security procedures.

The 2009 Switzerland-EU Agreement on Customs Security and Facilitation

As part of the 2009 Switzerland-EU Agreement on Customs Security and Facilitation, Switzerland
adopts EU security regulations on the transfer of goods with non-EU states, including on prior
notification and risk analyses.100 In return, Swiss traders are exempt from the EUs prior
notification requirement on the transfer of goods between Switzerland and the EU, even after the
introduction of new, tighter EU security regulations.101 As such, Swiss goods are pre-cleared by the
EU prior to departure through computerised risk analysis. This is an important facilitation process,
given that 20,000 trucks pass the Swiss-EU border every day.102

An agreement for mutual recognition of UK-EU customs systems would require all EU member
states to have uniformly and fully applied UCC programmes. As this may not be achieved by the
2020 deadline, and certainly not before the UKs expected departure in 2019, Britain should focus
on coordinating systems with key partners. This will require intense bilateral cooperation between
the UK and those EU member states with which it has the closest customs links. In 2015, six of the
top ten trade routes in terms of exports from and imports into the UKs major ports were with EU
countries.103 However, some of them do not run as efficient a customs system as the UK. France, for
instance, is the UKs second-largest trade route but ranked only 17th on customs performance.
Spain and Ireland are the UKs eighth- and sixth-largest trade routes, but ranked 24th and 25th.

100
Swiss Government, Federal Council requests approval of the EU agreement on easing customs formalities and
customs security, 27 November 2009:
https://www.admin.ch/gov/en/start/dokumentation/medienmitteilungen.msg-id-30382.html
101
Under the EUs prior notification procedure, third country traders must give the relevant EU customs authority
24-hour notice of goods arriving on their territory.
102
See, for instance, Swiss Federal Department of Foreign Affairs, The major bilateral agreements Switzerland-EU,
February 2017: https://www.eda.admin.ch/dam/dea/en/documents/folien/Folien-Abkommen_en.pdf
103
See Department for Transport, UK port freight statistics 2015.

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5.1.2 Establishing a harmonised national single window system

The UK should use the opportunity presented by UCC upgrades further to streamline HMRCs IT
infrastructure and create a one-stop shop for all business-to-government trade communication.
HMRC has already outlined its ambition to use the new CDS system as the technology platform to
launch its Single Window ambition.

Trade single windows provide one, common gateway for trade-related communication between
business users and relevant government departments. It reduces the administrative burden on
traders by creating a single electronic access point for submission of all documentation and
declarations. These can subsequently be shared among relevant domestic authorities and
government agencies, before a decision is transmitted back to the user.

The efficiency gains to such schemes are well-documented. Singapores fully electronic and
integrated TradeNet Single Window saw the average time to process customs applications
reduced from over two days to only ten minutes.104 Mexicos fully-integrated trade Single Window,
VUCE, has reduced trade related formalities by 60%, documentary requirements by 41%, and
registered data by 44%.105 UK efficiency gains would depend on the efficiency of the current
system.

The UK should unilaterally pursue a national trade Single Window by integrating UK business-to-
government trade systems and platforms into one common framework. There are examples of
operational Single Window frameworks being launched within months. For example, New
Zealands Trade Single Window (TSW) was introduced in stages, beginning in April 2013. By August
2013, 70% of the TSW was live and operational.106

The UK can start by integrating customs, excise, and VAT initiatives for related programmes. For
example, at present, separate trusted trader platforms exist for customs and VAT procedures.
Alongside establishing AEO certification for customs simplification, businesses must apply for
Simplified Import VAT Accounting (SIVA) certification in order to take advantage of VAT duty
deferment schemes designed for demonstrably secure traders.107 Yet, AEO accreditation for
customs requires businesses to show good tax compliance and commercial record-keeping, and so
the operation of separate trusted trader schemes for customs and VAT likely produces data
duplication. The UK should consolidate these systems. Indeed, implementation of the UCC will be
an important building block in this, given the new code requires businesses requesting SIVA
authorisation to meet AEO customs simplification standards.108

104
Asian Development Bank, The progress of paperless trade in Asia and the Pacific: Enabling international supply
chain integration, October 2014, p2.
105
Andrea Schwaiger Calvos and Christian Campos, Mexico: Single Window for foreign trade, in Falk Rmmele and
Silverman (editors), Digital Government, Springer International Publishing, 2017, p98.
106
New Zealand Customs Service, Testing underway for last stage of Trade Single Window, Customs Release No 379,
4 November 2016: http://customsrelease.customs.govt.nz/testing-underway-last-stage-trade-single-window
107
HM Revenue & Customs, Notice SIVA 1: Simplified import VAT accounting, last updated on 13 June 2016:
https://www.gov.uk/government/publications/notice-siva-1-simplified-import-vat-accounting/notice-siva-1-
simplified-import-vat-accounting
108
See BDO UK, Authorised Economic Operator: Is now the time to apply?, 15 November 2015:
https://www.bdo.co.uk/en-gb/insights/tax/vat-and-indirect-taxes/authorised-economic-operator-is-now-the-time-
to-a

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5.2. Streamlining customs processes at the border

The UK and the EU should pursue frictionless trade by reducing customs procedures that take place
at the borders. This should include establishing mutual recognition of AEO traders to expedite
clearance of demonstrably secure trade.

5.2.1 Mutual recognition of AEOs

As we noted earlier, Authorised Economic Operator (AEO) approval is an internationally-


recognised status that indicates security of supply chain and conformity with customs rules and
procedures. AEO approval grants operators quicker access to certain simplified customs
procedures, and in some cases allows consignors a fast-tracked route through customs safety and
security checks.

It is in the UKs and EUs interest to agree mutually to recognise each others AEO systems and
allow secure traders to benefit from accelerated border clearance procedures, including fewer
physical and document-based controls at the border. This should be achievable. Firstly, the WCO
recommended global AEO mutual recognition as part of its 2012 SAFE Framework, so a UK request
for mutual recognition would be in line with international guidelines.109 Secondly, the EU has
already achieved mutual recognition of AEO systems with trade partners including Norway,
Switzerland, Japan, Andorra, the US, and China.110

The agreement of an MRA for AEO traders should be a key UK-EU ambition, given the knock-on
effect this would have on expediting clearance at the border. For instance, the 2016 MRA of AEO
approved traders between Australia and New Zealand (see Annex I for a broader discussion)
established bilateral border express lanes. Secure Trade Lane users are subject only to randomised
inspection procedures, significantly reducing time at the border.

The US and Canada use Radio-Frequency Identification (RFID) screening at trusted trader lanes to
fast-track movement across their border (see Annex I for further details). Registered AEO traders
can sign up to a shared programme, NEXUS. They receive an RFID-enabled NEXUS card, which
stores a reference ID for their consignment. This allows them to use reserved NEXUS lanes at the
border. The card is read by RFID equipment on approach to NEXUS lanes, offering customs officials
access to the consignments customs and trade documentation automatically as the vehicle enters
the booth.

Analysis of the Douglas-Peace Arch crossing between Washington State and British Columbia
found that users of NEXUS RFID cards in priority NEXUS lanes experienced an average inspection
time at both US and Canadian customs booths of ten seconds.111 This compared to 51 seconds at
standard US Customs Border Patrol lanes and 47 seconds at standard Canada Border Security
Agency lanes.

109
World Customs Organisation, SAFE Framework of Standards to Secure and Facilitate Global Trade, 2012, p28.
110
See European Commission, Taxation and Customs Union Authorised Economic Operator (AEO):
http://ec.europa.eu/taxation_customs/general-information-customs/customs-security/authorised-economic-
operator-aeo/authorised-economic-operator-aeo_en#who_can_become
111
Border Policy Research Institute, A business case for increasing RFID at the Canada-US land border, October
2015, p 6.

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Systematic use of RFID technology at UK air and sea ports could feasibly produce significant
efficiency gains, but this rests on widespread use of the AEO platform. At present, UK companies
with AEO status account for around 60% of UK imports and 74% of UK exports.112 However, only
508 UK businesses are currently AEO certified.113 This suggests the majority of UK AEO certified
traders are large firms.

In contrast to the UK, Germany has 5,984 AEO traders, and the Netherlands has 1,511.114 A 2013
Deloitte report suggests that large discrepancies exist between member states because different
trading practices present varied advantages to obtaining AEO status.115 Deloitte highlights that a
significant number of traders in Germany, unlike other EU countries, use customs warehousing
operations which require AEO clearance. These operators are therefore incentivised to AEO
accreditation. However, Deloitte notes that the low number of UK AEO operators is surprising.

Britain should raise awareness of the increased advantages of AEO status once outside EUCU and
should encourage businesses to register as trusted traders. Given that UK AEO registered traders
currently appear to be large businesses, the UK should focus particularly on helping SMEs gain
accreditation. This should be a priority for the Department of Business, Energy & Industrial
Strategy (BEIS), and the Department for International Trade (DIT).

112
Data cited by Lord Bridges of Henley, Parliamentary Under-Secretary for Existing the European Union, in the
House of Lords debate on the European Union (Notification of Withdrawal) Bill, 27 February 2017:
https://www.theyworkforyou.com/lords/?id=2017-02-27c.577.7#g669.1
113
Legatum Institute, Brexit, movement of goods and the supply chain, February 2017, p22.
114
Ibid.
115
Deloitte Netherlands, The Authorised Economic Operator (AEO) concept A blessing or a curse?, 13 August
2013, p5.

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6. The UK-Irish Border

The border between Northern Ireland and the Republic of Ireland (RoI) presents a unique challenge
in Brexit negotiations, particularly given the complex political history. This is also the only land
border the UK shares with an EU member state.

At present, this border is invisible. Any citizen or vehicle, either private or commercial, can travel
between Northern Ireland and the RoI without crossing border checkpoints or enforcement
agencies. Once the UK withdraws from EUCU, this border should in principle be subject to new
customs controls as an external frontier of the EUs customs union. Yet, both Prime Minister
Theresa May and Irish Taoiseach Enda Kenny have advocated a solution which enables us to have
as seamless and frictionless a border as possible, so that we can continue to see the trade, the
everyday movements that we have up until now.116 The aim for both parties is a solution that seeks
to maintain, in so far as possible, the invisibility of current border arrangements at the inland
frontier.

A future customs border between the UK and Ireland will not serve as a barrier to the movement of
citizens. Free passage of people between the UK and Ireland is protected by the Common Travel
Area (CTA) agreement, which came into force in 1923, way before either party joined the EU. Since
the UKs decision to Leave, Theresa May and Enda Kenny have confirmed their commitment to
maintaining the CTA.117 More recently, Irish Ambassador to the UK Daniel Mulhall has also
stressed how the EU has given assurances that Protocol 20 of the Treaty on the Functioning of the
European Union (TFEU), which enshrines the CTA in EU law, will continue to apply post-Brexit.118

6.1. Context The cost of an Irish border

As discussed in earlier sections, the objective of a customs border is to ensure both revenue
collection and security of goods trade. If, as we suggest, the UK establishes equivalent customs
systems and procedures with the EU, and a broad mutual recognition agreement to cover product
standards, the function of a border between Northern Ireland and the RoI would be largely limited
to collecting customs revenue.

The monetary value of this function should be contextualised. As a 2012 House of Commons report
found, due to tobacco smuggling at the Irish border, the UK is potentially already losing excise duty
in value equivalent to its total annual customs revenue. The report found between 1-3 billion in
excise duty is lost to the UK economy annually due to tobacco smuggling in Northern Ireland.119
The HMRC estimates annual collection of customs duty at 3 billion, across the whole of the UK.
Only a fraction of this is levied at the land border.120 In other words, when the existing annual
estimate of excise duty evasion is priced in, the potential economic gains from implementing
customs collection at the border appear insignificant. The UK and Irish governments should
therefore evaluate the economic and political costs of imposing a hard customs border against the
expected gains to security and revenue.

116
Reuters, UKs May wants as seamless an Irish border as possible, 30 January 2017.
117
RT News, Taoiseach says Common Travel Area will be preserved, 17 January 2017:
https://www.rte.ie/news/2017/0117/845587-theresa-may-brexit-speech-reaction/
118
London Irish Centre, In conversation with Irish Ambassador Daniel Mulhall, 16 February 2017.
119
House of Commons, Northern Ireland Affairs Committee, Fuel laundering and smuggling in Northern Ireland, Third
Report of Session 2010-12, 20 March 2012:
https://www.publications.parliament.uk/pa/cm201012/cmselect/cmniaf/1504/1504.pdf
120
HM Revenue & Customs, Customs Vision for 2020, January 2016, p5.

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6.2. Displace the inland border?

A possible option for maintaining the free transit of goods between Northern Ireland and the RoI
after the UK leaves EUCU would be to establish customs controls at the external border of the
island of Ireland. This means all goods would be cleared on entry to the island of Ireland and would
then be in free circulation across the EU.

However, this idea would face significant practical and political hurdles, and has already been ruled
out by Northern Ireland Secretary James Brokenshire earlier this year.121 Importantly, the creation
of an all-island border would fail to address Irelands unique political situation, likely inflaming
tensions in Northern Ireland. Furthermore, special EU recognition for the region of Northern
Ireland risks undermining the cohesion of the UK which Theresa May has made clear she intends
to protect and would not be viewed kindly by the Scottish National Party, which has been denied a
bespoke Brexit arrangement for Scotland.

Alternatively, the UK and Ireland could look to establish a shared customs border around the
external perimeter of the whole of the British Isles. However, this would also be politically
complicated. The EU would need to consent to Ireland adopting parallel customs arrangements
with a third country. In essence, this would mean Ireland disassociating itself from EUCU. Given
Ireland rejects any change to its membership of the EU, it is highly unlikely to support this
arrangement.122 Equally, given the EUs unified opposition to cherry-picking solutions, this
arrangement seems infeasible.

There are significant political costs to these approaches. The UK, Ireland the EU should therefore
focus instead on establishing a virtual internal border. In practice, this means dispensing, in as far
as possible, with requirements to produce documentary evidence or undergo security inspections
at the border between Northern Ireland and the RoI.

6.3. Towards a virtual inland border

A virtual arrangement would waive the need for customs checkpoints and agencies at the border,
making its presence imperceptible. This does not mean that customs control requirements can be
removed entirely. Rather, much can take place before and after the border, via pre-departure
electronic clearance of goods, and post-arrival auditing. Cooperation between Norway and Sweden
presents the most developed international model of a virtual border between two trading partners
not sharing a customs union. However, some border checkpoints continue to exist.

6.3.1 Norway-Sweden border cooperation

Customs checks cannot be wholly eliminated between Norway and Sweden, as this is one of the
external borders of EUCU. However, both partners have agreed to the imposition of light-touch
customs checks. Along the 1,640-Km border, only ten customs checkpoints exist in Norway, each at
major border crossings. These are operated jointly by Norwegian and Swedish authorities,
removing the need for double border checks. There are many more passenger crossings. In 1995,
Norway estimated the savings to economic operators from shorter waiting times and the waiving of
double border stops at approximately USD 39 million per year.123

121
The Belfast Telegraph, Special status for post-Brexit Northern Ireland wrong approach, says Brokenshire, 1
February 2017: http://www.belfasttelegraph.co.uk/news/northern-ireland/special-status-for-postbrexit-northern-
ireland-wrong-approach-says-brokenshire-35415301.html
122
RT News, Kenny rejects suggestion Ireland should leave EU in major Brexit speech, 15 February 2017:
https://www.rte.ie/news/2017/0215/852892-taoiseach-brexit-speech/
123
World Trade Organisation, Border agency cooperation: Customs border cooperation between Norway, Sweden
and Finland a contribution from Norway, 10 June 2005, p3.

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Furthermore, customs crossings are only required for commercial vehicles: private vehicles enjoy
essentially undisrupted movement along all other uncontrolled border crossings.124 Security is
ensured by the creation of a juxtaposed control zone, which encompasses a 15km radius either side
of the border and allows Swedish customs officers to carry out spot-checks on private vehicles up
to 15km into Norwegian territory and vice versa.125 This helps to move inspection procedures off
the border to prevent bottlenecks and delays at crossings (see Annex I for further details).

6.3.2 Establishing a virtual border between the UK and Ireland

The UK, Ireland and the EU should aim for a more ambitious arrangement whereby no customs
procedures take place on the border.

For instance, both the UK and Ireland, with the support of the EU, should aim electronically to pre-
clear substantially all bilateral trade in goods. Such goods could then be transported across the Irish
border without any requirements to stop. As we have noted earlier in this paper, this is not an
unrealistic target given HMRC currently receives 99% of customs applications electronically and
successfully clears 96% within seconds, with only the remaining 4% required to undergo
documentary assessment at the border.

For Authorised Economic Operators (AEOs), the process could be even more efficient. For instance,
a bilateral agreement mutually to recognise UK and EU AEO accreditation should allow for
authorised trusted traders to submit customs self-assessments. This would allow importers to pay
customs duties in arrears, rather than on a shipment-by-shipment basis. Under this scheme,
importers would submit monthly returns reporting the value and origin of goods traded, as well as a
breakdown and payment of duties owed.

This is not without precedent either. Intrastat returns, which include much of the same trade data,
are currently submitted by EU operators as monthly self-assessments. Furthermore, an importer
self-assessment system already exists for AEOs in both the US and Canada. 126 Finally, the EUs
upgrade to the UCC specifically allows for customs declarations to be based on self-assessment in
future. As such, there is the longer-term possibility to expand this system wider than the AEO
programme, to include a broader range of trade between the UK and EU members, including
Ireland. The EU has already shown itself open to expanding trade facilitation to non-AEOs as part of
its Smart and Secure Trade Lanes project with China.127

There will of course be certain goods that fail an electronic pre-clearance procedure. Yet, under the
virtual arrangement, these would not undergo inspection at the border. Instead, vehicles carrying
non-cleared goods would have to stop at an inspection zone away from the border. This would
allow the required security procedures to take place for higher-risk consignments, without
necessitating checkpoints and customs officials at the boundary between Northern Ireland and
Ireland. In the longer term, UK and Irish traders could sign-up to an all-island trade network that
provides registered members with electronic customs ID cards. RFID technology could then be
used on approach to inspection lanes, allowing customs officials quick access to the electronic data
already submitted on the consignment. This would reduce congestion in these stations.

124
Ibid.
125
Ibid.
126
Canada Border Services Agency, Customs Self-Assessment Programme: http://www.cbsa-asfc.gc.ca/prog/csa-
pad/import-eng.html
127
European Commission, Taxation and Customs Union Smart and Secure Trade Lanes Pilot (SSTL):
https://ec.europa.eu/taxation_customs/general-information-customs/customs-security/smart-secure-trade-lanes-
pilot-sstl_en

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A virtual border arrangement would need to address border security more broadly in particular,
how to ensure that non-cleared vehicles attend inspection sites before crossing. Other than
randomised audits of importers, the Norway-Sweden model of vehicle spot-checks off the border
provides a good solution. However, the operation of a control zone, whereby UK security
authorities have licence to operate in Irish territory and vice versa, is unlikely to be a viable
solution. Historic political sensitivities mean that the UK and Ireland should instead bilaterally
agree to conduct equivalent spot-checks in their own territory.

Both should also follow the Norway-Sweden model and waive standard customs procedures for the
transit of all private vehicles between UK and Ireland. Given 1.85 million cars cross the Irish border
monthly, this will be vital in preventing bottlenecks at inspection zones.128

The UK and Ireland should cooperate to ensure the earliest possible harmonisation and interaction
of respective electronic customs systems, by efficiently implementing UCC customs procedures
and adopting bilateral agreements where necessary. This would pave the way for broadly
interoperable national customs databases, allowing data submitted to the Irish customs authority
by an exporter in Ireland to be shared with the UK customs system for automatic submission of the
importer declaration (and vice versa).

Finally, management of the UK-Ireland border will require long term cooperation and investment
from both parties. There clearly is appetite for institutional bodies managing cooperation between
the UK and the RoI over Brexit-related issues. Indeed, a high-level working group of officials from
Northern Ireland and the RoI was already established last year to exchange and coordinate views
on Brexit.129

A specific UK-Ireland Border Working Group could be established as a forum to plan for the
management of the shared border, supervise and evaluate progress on identified initiatives, and
identify areas of further work. The Northern Irish Executive should be involved in this process and
continue to work closely with the UK and the Irish Government with a view to proposing ideas and
solutions on a matter of such mutual interest.

128
Oral evidence given by Irish Ambassador to the UK, Daniel Mulhall, to the House of Commons Northern Ireland
Affairs Committee, 8 February 2017.
129
RT News, North-South meeting on Brexit best discussion so far, says Taoiseach, 18 November 2016:
https://www.rte.ie/news/2016/1118/832608-north-south-meeting/

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Conclusions

In the forthcoming negotiations, the UK Government will need to strike the right balance
between minimising obstacles to UK-EU trade and ensuring the UK is in a position to shape its
own trade policy after Brexit.

The half-in, half-out UK-EU customs arrangements we have examined in this report would
come at the expense of creating obstacles to trade with non-EU partners, be highly complex in
their application, and therefore risk being unnegotiable with the EU. It is difficult to reconcile
any of these options with the Governments stated ambition to establish a Global Britain.
Leaving EUCU is essential if the UK is to conduct a truly independent international trade policy.

The UK and EU should seek a comprehensive trade deal, which should include a dedicated
chapter or be accompanied by a separate agreement on full cooperation on the practicalities
and administration of customs procedures. This would be far from unprecedented. The EU has a
bilateral agreement on customs facilitation and security in place with Switzerland, while CETA,
the Canada-EU trade deal, includes a specific chapter on customs and trade facilitation.

Indeed, an intensive UK-EU customs cooperation agreement would be in line with the general
direction of travel of trade negotiations at the global level. As import tariffs have decreased
globally, efforts at the WTO level are now focusing on Non-Tariff Barriers notably including
the facilitation of customs procedures. The WTOs new Trade Facilitation Agreement entered
into force earlier this year and addresses precisely how to speed up the movement, release and
clearance of goods.

Customs unions are not a pre-requisite for free trade. Fewer than 10% of all regional trade
agreements notified to the WTO are customs unions. In 2015, the US was the single largest
destination country for UK goods exports (16.6% of the total). There is neither a customs union,
nor even a preferential trade agreement, in place between them.

However, none of the alternatives to EUCU would guarantee an equally frictionless movement
of goods between the UK and the EU. We believe Britain is able to offset these costs via a mix of
UK-EU agreements, trade liberalisation with non-EU partners and domestic reform.

Businesses and governments across Europe will need to adapt to a new environment for UK-EU
trade. The challenges and opportunities can vary significantly from one industry to another
and sometimes even between different companies within the same industry. For instance, the
majority of UK exports (74%) and imports (60%) are conducted by large businesses with AEO
accreditation. Large firms are likely to face fewer challenges than SMEs. Not only are they big
enough to adapt more easily, they are also more likely to benefit from AEO expedited
procedures. Some individual companies will need to look again at their supply chains and adjust
their business model to the new reality.

The UKs current membership of EUCU means that the UK and the EU have a unique
opportunity to create a world-leading customs border, if there is the political will. Minimising
friction in trade between the UK and the EU after Brexit is in both parties interest and will be
best achieved by concerted effort on both sides. It will require not only UK-EU cooperation, but
also intense bilateral cooperation between the UK and those EU countries that have the most
extensive trading links with the UK.

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A customs facilitation agreement between the UK and the EU should harness global best-
practice and the latest technology by including: liberal Rules of Origin requirements that
provide for cumulation; a blanket Mutual Recognition Agreement (MRA) on product standards
and conformity assessments, so that the testing of goods by UK authorities is recognised as
valid by the EU and vice versa; the continued interoperability of computer systems, so that
customs clearance is granted electronically to the widest possible extent and the risk of longer
waits at the border is significantly reduced. Enabling self-assessment by trusted traders could
allow importers to pay customs duties in arrears, rather than on a shipment-by-shipment basis.
This would shift administrative procedures away from points of entry and ease the burden on
businesses.

While the UKs preferred option outside EUCU should be a UK-EU FTA and intensive bilateral
cooperation, it can unilaterally undertake measures to improve customs processing.
Encouraging AEO status should be a priority for the UK government, which should also
consider specific support for smaller businesses. HMRC should update its customs systems and
increase its workforce to cope with expected increase in workload outside EUCU. The UK
should also improve data-sharing and cooperation between government agencies at the
borders, and implement RFID technology at key ports (e.g. Dover) to expedite clearance. The
UKs long-term ambition should be to establish a Single Window or one-stop shop for custom
and border issues.

As it prepares formally to leave the EU, the UK will need to devise its own customs code and
regulations. It would make sense to continue implementing the Union Customs Code (UCC) in
domestic legislation, which will smooth the process towards mutual recognition of customs
procedures. The UK would be free to diverge from EU regulations over time, although that
might end up creating trade frictions.

The future of the land border between Northern Ireland and the Republic of Ireland is the most
complex challenge that arises from the UK leaving the EUs customs union. Our research
concludes that, while a customs border will be necessary, a number of measures can be adopted
to reduce it to an indispensable minimum.

With the support of the EU, the UK and Ireland should aim to electronically pre-clear
substantially all of their bilateral trade in goods, so that trucks can travel across the UK-Irish
border without any requirement to stop. For those goods that need checking, inspections could
take place at dedicated zones away from the border meaning that checkpoints and the
physical presence of customs officials at the border would not be necessary.

Management of the UK-Irish border will require long term cooperation and investment from
both sides. As such, the two countries should look to establish a UK-Ireland Border Working
Group as a forum to plan, supervise and evaluate progress on jointly agreed initiatives, and
identify areas of further work. Mindful of the political sensitivities and significance surrounding
the UK-Irish border, the EU should display flexibility and readiness to allow for closer bilateral
customs cooperation between the UK and Ireland.

A transition period of one or two years after the end of the Brexit negotiations, during which
the UK would essentially extend its membership of the EUs customs union by one or even two
years, should be thoroughly considered. It would help businesses in Britain and on the continent
adapt to the new reality, and would allow enough time for the UK and other EU member states
to upgrade their customs procedures (e.g. the respective computer systems) so that they can be
properly tested before the shift to the new arrangement takes place. The UKs political
calendar, with the next general election due in 2020, may be an obstacle to a longer transition.

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Annex I: Case studies

1. The North American Free Trade Agreement (NAFTA)

The North American Free Trade Agreement (NAFTA) came into force on 1 January 1994,
liberalising trade and investment between the US, Canada and Mexico. NAFTAs original trade
facilitation measures included: immediate cessation of tariffs between the participating countries;
the enforcement of uniform regulatory standards for customs-related provisions; and the
implementation of off-border verification of origin and content of traded products.130

Yet, as tariffs become a less significant impediment to trade than Non-Tariff Barriers (NTBs),
modern trade facilitation schemes aim to correct for non-economic efficiency costs, such as border
delays and submissions of duplicative data. In this light, the US, Canada and Mexico are developing
national trade Single Windows and furthering the interoperability of American, Canadian and
Mexican trade data systems, with an aim to establishing an integrated North American Trade
Portal.131

National Single Windows

All three NAFTA nations are investing in national Single Window schemes. The US Automated
Commercial Environment (ACE) scheme only entered into force as the primary trade data system
from the end of 2016. Prior to this, a number of sub-national Single Windows were established that
streamlined data processing by allowing inter-agency data-sharing. For instance, the Participating
Government Agency (PGA) Messaging Set allowed for data collected from export declarations via
the Automatic Export System (AES) to be extrapolated for inbound and outbound forms, preventing
the need for separate trade and import declaration submissions.132

The US Customs and Border Protection (CBP) department also trialled a pilot Document Image
System (DIS) programme in July 2015 that integrated electronic submissions of previously paper-
based image trade documents into the PGA Message Set, demonstrating the modular stages that
lead to the construction of a fully functional national trade Single Window.133

Under the 2008 US-Canada Beyond the Border Action Plan launched to reduce the
administrative burden on industries to conduct bilateral trade Canada will implement its own
Single Window Initiative (SWI) in order to align itself as closely as possible with US import and
export procedures. The SWI will function as an integrated electronic portal, transmitting
information between actors in the trade chain and the relevant government agencies.

While Canada has established nine government agencies committed to participating in the SWI, the
initiative remains still to be launched at the time of writing. Prior to this, however, Canada has also
implemented sub-national common trade portals, such as the Integrated Import Declaration (IID),
which functions as a commercial import reporting tool to join-up and harmonise trade data
received and held at government agency level.134

130
US Customs and Border Protection, North American Free Trade Agreement (NAFTA):
https://www.cbp.gov/trade/nafta
131
US Advisory Committee on Supply Chain Competitiveness, Trade automation and the North American Trade Portal,
January 2015, p3.
132
Ibid.
133
Ibid.
134
Ibid.

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Mexico is the first of the NAFTA states to implement a harmonised national Single Window, the
Ventanilla nica de Comercio Exterior (VUCE), which was launched in 2012. The VUCE system
creates a single electronic record for the submission, review and approval of all import, export and
transit-trade to Mexico.

A 2017 report helps outline the capacity and complexity of the VUCE trade data system: it has 103
million subscribers, including all trade-related businesses established in Mexico (73 million); it
services 198 formal procedures (according to the traded product); and in the period between
September 2013 and June 2014, it processed approximately 400,000 transactions.135 The ratio of
subscribers to transactions under VUCE is demonstrative of its ability to simplify the formalities of
trade flows, by harmonising and integrating transacting parties and trade documentation. Indeed,
the national Ministry of Economy has found that VUCE has reduced formalities related to trade by
60%, requirements by 41%, and registered data by 44%.136

2. The US and Canada

The US and Canada have also developed bilateral trade facilitation schemes, given their particularly
close trading partnership. In 2014, the US and Canada exchanged $660 billion in goods (both ways),
amounting to around $1.8 billion a day in goods trade. 137 Approximately 84% of vehicles crossing
the US-Canada border move by land, and over half (54%) are transported by truck.138 Furthermore,
given that the volume of trade passing the frontier tends to be routed through select strategic
crossings, such as those between Ontario and Michigan/New York, rather than broadly using the
8,891km border, efficiency at customs ports is paramount to stable trading relations.

NEXUS and Radio-Frequency Identification (RFID) technology at key US-Canada gateways

On top of the NAFTA initiatives outlined above, one tool used at the US-Canada border to ease
congestion of goods traffic is Radio-Frequency Identification (RFID) screening. This allows customs
officers to pull up the electronic customs documentation relating to a vehicles cargo as they
approach the customs booth. Not all commercial vehicles or traders benefit from expedited RFID
clearance procedures. In order to preserve border security, fast-tracked electronic procedures for
commercial vehicles are connected to Authorised Economic Operator (AEO) frameworks, such as
the US-Canada NEXUS trusted trader programme.

The business-to-business NEXUS network provides registered US or Canada-based traders with a


NEXUS customs card. These cards are equipped with vicinity-readable RFID tags. Unlike RFID
software in electronic passports which must be in physical contact with a reader, these cards can be
read at a two-meter distance by border equipment.139 This equipment is already used to facilitate
travel at toll-crossings for regular users. When scanned, the RFID tag displays a serial number,
which allows access to the relevant documentation on the issuing-agencys server (accessible under
the terms of data-sharing agreements).140 Therefore, equipment at the entry to specialised customs
lanes can read an RFID card on the vehicles approach to the booth.

135
Andrea Schwaiger Calvos and Christian Campos, Mexico: Single Window for foreign trade, in Falk Rmmele and
Silverman (editors), Digital Government, Springer International Publishing, 2017, p89.
136
Ibid., p98.
137
Eastern Border Transportation Coalition, The importance of efficient Canada/US border crossings and
recommendations for action, 2016, p2.
138
Ibid.
139
Whatcom Council of Governments and Border Policy Research Institute, A business case for increasing RFID at the
Canada/US land border, October 2015, p2.
140
Ibid.

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A 2015 analysis by the Canadian Border Policy Research Institute (BPRI) of the Douglas-Peach
Arch crossing found that users of NEXUS RFID cards in priority NEXUS lanes experienced an
average inspection time at both the Canadian and US customs booth of 10 seconds. This compared
to 47 seconds at standard Canada Border Security Agency lanes, and 51 seconds at standard US
Canada Border Patrol lanes. While some of these efficiency savings are attributed to the
streamlined procedure for accredited AEO traders (discussed in Section 5), non-NEXUS RFID
identification holders (private citizens carrying Enhanced Drivers Licences (EDLs), a US Passport
Card or modernised Green Cards) using RFID-enabled ready lanes on the US side also saw a
reduction in average inspection time, down to 30 from 51 seconds.

The systematic efficiency gains through RFID scanning are significant, but rest on widespread use
of the initiative. The BPRI reports notes that an insufficient proportion of US-Canada border
crossings take place under the NEXUS or other RFID schemes, limiting the potential economic gains
to RFID border technology.141 The 2015 Beyond the Border Implementation report identified that
12% of all traveller crossings and 15% of all vehicle crossings took placed under the facilitated
NEXUS scheme in 2015.142 Less prevalent usage may be due to lack of knowledge, cost of
registering, or restricted operating hours of NEXUS lanes.

The BPRI report estimates that a 20% uptake in RFID document holders would reduce the standard
border clearance time on the US side by 46.6%. Meanwhile, a 40% increase in RFID enabled
travellers would reduce the US baseline by 65.4%.143

The installation of RFID border port infrastructure, as well as the investment in awareness
campaigns to drive uptake among commercial users, and the cost of producing RFID
documentation, will be significant. However, as a long-term strategy, the efficiency gains may
provide one method of implementing a light-touch customs operation at UK borders, without
undermining or compromising security systems. Crucially, however, this initiative relies of
significant cross-border exchange of personal data.

Real-time border delay updates

Certain key crossing points benefit from the publication of real-time clearance time schedules to
help users plan their journeys more effectively. US and Canadian authorities list times on their
webpages, and mobile applications have been created to further expand access to this information.
However, little is publically available on the specific wait-time technology used along the US-
Canada frontier, nor on their accuracy in predicting anticipated traffic flows. Further research is
needed to evaluate the benefits this scheme can provide to both private passengers and sectors
operating just-in-time supply chains.

3. The EU and Switzerland

The 1990 Switzerland-EU Agreement on the Carriage of Goods was updated in 2009 with the
Agreement on Customs Security and Facilitation. Under this deal, Switzerland forms part of the
EUs Joint Security Area. This means the only security check to which cross-border trade is subject
(other than post-border randomised spot checks) is pre-departure computerised risk analysis.
Importantly, traders are not required to submit prior notification to the opposite customs authority
under the 24-hour rule in World Customs Organisation regulations, which were introduced
following increased threats to security post-9/11.144

141
Ibid.
142
US Customs and Border Protection, Beyond the border implementation report, 2015, p10.
143
Whatcom Council of Governments and Border Policy Research Institute, A business case for increasing RFID at the
Canada/US land border, p7.
144
Swiss Federal Department of Foreign Affairs, The major bilateral agreements Switzerland-EU, p6.

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Regulatory compliance testing is therefore contained to the pre-departure and post-arrival stages
of the customs clearance process, reducing pressure on traders at the point of crossing to prove
compliance and ensure goods are released fast enough to market-side. This is an important
facilitation process given on average 20,000 HGV trucks pass the Swiss-EU border every day.145
Furthermore, under the 2009 agreement, both contracting parties adopt comparable risk analysis
on the entry of third-party goods to ensure the security of the Joint Security Area.146 The alignment
of safety and security measures at the external border is significant for the Swiss experience given
its geographical importance as a transit area for goods bound for the EU. Harmonisation of risk
analysis measures, short of complete standardisation, requires both parties to maintain
transparency and close exchange on national strategies of risk criteria. Under the 2009 Agreement,
relevant authorities from Switzerland and the EU participate in joint committee meetings at least
once a year to ensure coordination with the broad principles of risk assessment procedures.
Mutual recognition of compliance with agreed product regulations, while not directly implicated in
customs procedures, do also help to reduce the technical barriers to market entry for traders. For
instance, Swiss traders dispatching goods to the EU (in the twenty product sectors covered by the
MRA) need only fulfil Swiss test procedures, and hold Swiss test certificates and conformity marks
to be judged legally authorised for sale in the EU.

4. Australia and New Zealand


Australia and New Zealand both operate national AEO programmes: the Australian Trusted Trader
scheme (ATT) and the New Zealand Customs Secure Export scheme (SES). These are national
accreditation programmes that recognise traders with a secure supply chain and compliant trade
practices.147 Domestically-based operators participating in international trade activities that gain
AEO accreditation benefit from trade facilitation measures such as streamlined trade
documentation requirements, reduced fees when lodging export entries, and border clearance
privileges with MRA-holding partner countries.148
From June 2016, Australia and New Zealand border and customs authorities signed an MRA to
recognise their equivalent secure trader programmes. Given its recent entry into force, the
quantitative benefits of this agreement are yet to be seen. However, at signing it was predicted to
allow $3 billion worth of New Zealand exports to Australia to be fast tracked and benefit $7.5
billion of Australian exports to New Zealand by 2020.149
This trans-Tasman [Sea] MRA on AEO status also paved the way for a Secure Trade Lane (STL) for
the expedited clearance of cargo between Australia and New Zealand. In particular, the STL allows
for real-time data-sharing of exporter cargo information, eliminating the need to the opposite
customs authority to wait for an import declaration before clearing goods for trade. It therefore
allows for accelerated customs procedures for AEO registered traders at the point of crossing, and,
in particular, the reservation of an express lane for recognised trusted traders. Such express lanes
will operate a random inspection programme to further reduce the average time for border-
crossing and allowing traders to maintain lean and efficient business models.

145
Ibid.
146
Swiss Government, Federal Council requests approval of the EU agreement on easing customs formalities and
customs security, 27 November 2009.
147
Australian Government, Department of Immigration and Border Protection, Australian Trusted Trader:
http://www.border.gov.au/Busi/cargo-support-trade-and-goods/australian-trusted-trader
148
New Zealand Customs Service, Benefits of the Secure Export Scheme:
http://www.customs.govt.nz/features/ses/sesbenefits/Pages/default.aspx
149
Australian Government, Department of Immigration and Border Protection, Australia and New Zealand sign
arrangement to streamline trade, 19 July 2016: http://newsroom.border.gov.au/releases/australia-and-new-
zealand-sign-arrangement-to-streamline-trade

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5. Norway and Sweden

Customs border cooperation between Norway and Sweden is governed by bilateral Border
Cooperation Agreements, which came into force in 1960 and 1969.150 These cover the cross-
border movement of goods and aim to promote the use of simplified procedures, and data
processing and transmission techniques at ports.151 However, customs checks cannot be fully
eliminated as the border between Norway and Sweden represents one of the external frontiers to
the EUs customs union of which Sweden is a member and Norway is not.

Nonetheless, both partners have aimed for a light-touch customs border in terms of infrastructure.
For instance, across the 1,630km border between Norway and Sweden, only ten customs
checkpoints exist at major border crossings. The operation of these customs offices is a shared task
between Norwegian and Swedish customs officials. Furthermore, private vehicles are not required
to pass these formal customs offices, the use of which is intended primarily for commercial traffic
and heavy goods vehicles.

Private vehicles enjoy essentially undisrupted movement between Norway and Sweden, in large
part as both countries belong to the Schengen passport-free travel area. However, in order to
ensure this is compatible with the purpose of customs to provide security of entry, the partners
introduced a security buffer control zone in 1960. The control zone is instituted up to 15km on
both sides of the border. This zone allows Swedish customs officers to carry out controls 15km into
Norwegian territory, and vice-versa, on a system of integrated data and bilateral resource pooling.
This dramatically reduces border intervention by pushing checks off the frontier, and ensuring
authorities only perform selective stop-checks. In 1995, Norway estimated public savings from
restraining customs authorities infrastructure and limiting Norwegian customs officers amounted
to approximately USD 16 million per year.152

This initiative relies on two key foundations: intense cooperation of customs authorities and the
operation of juxtaposed security spot-checks (that is, the legal authority of Swedish authorities
within 15km inside the Norwegian border and vice-versa). The implementation of both of these
provisions requires not only significant political will and trust by both contracting parties, but legal
provisions for the recognition of the authority of a security agency in the corresponding
jurisdiction. For Norway and Sweden, this is largely facilitated via their memberships of Schengen
and the European Economic Area (EEA).

150
World Trade Organisation, Border agency cooperation: Customs border cooperation between Norway, Sweden
and Finland a contribution from Norway, 10 June 2005, p1.
151
Ibid.
152
See The Irish Times, Close Sweden-Norway ties despite EU border dividing them, 13 June 2016:
http://www.irishtimes.com/news/world/europe/close-sweden-norway-ties-despite-eu-border-dividing-them-
1.2683072

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6. Singapore

The most developed international example of a national Single Window is Singapores TradeNet
framework. The TradeNet gateway was launched in January 1989 and was used for all trade
transactions by 1991.153 The average time to process permit applications and deliver a customs
decisions was estimated in 2009 to be ten minutes for 99% of transactions conducted, down from
an average of at leasy two days prior to the introduction of the Single Window for paperless
trade.154 The system held over three thousand subscribers in 2009, processing over nine million
declarations annually, and was responsible for collecting all payable tariffs and duties.155

TradeNet has since been reformed multiple times, to encompass technological developments, to
take into account new free trade agreements, and to comply with WCO regulations. For instance, in
1995, it became interactive, allowing users to receive real time updates on submissions and
declarations, reducing the average document processing time to 2.5 minutes.156 TradeNet, which
provides a portal for business-to-government and government-to-government trade, is now also
complemented by a TradeXchange platform, to streamline business-to-business transactions.

Singapores experience is a strong example of the benefits of establishing a single integrated trade
portal for the joined-up submission and processing of all trade documentation. However, Singapore
transferred to TradeNet from a previously paper-based customs organisation, offering a skewed
vision of the transformative effect of Single Window initiatives for already highly-developed,
electronic customs administrative systems, such as the one currently operated by the UK.

Furthermore, Singapores trade profile, dominated by petroleum and machine circuit exports (23%
and 19% respectively of total exports from Singapore in 2014) and imports (28% and 15%), does
not offer a like-for-like model of what form of trade a UK Single Window initiative would support.
The UKs trading profile is more diversified, with cars being the highest value traded good (9.7% of
total exports and 7.1% of total imports).

153
World Customs Organisation, Singapores approach to streamlining trade documentation, October 2014, p41:
http://www.wcoomd.org/~/media/wco/public/global/pdf/topics/wto-
atf/dev/singapores_approach_to_streamlining_trade_documentation__wco_news_october_2014.pdf?la=en
154
Asian Development Bank, The progress of paperless trade in Asia and the Pacific: Enabling international supply
chain integration, Working Paper series on regional economic integration, No 137, October 2014, p2.
155
World Customs Organisation, Singapores approach to streamlining trade documentation, p43.
156
Ibid.

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Annex II: Systems of cumulation and rules of origin


Goods traded between two countries in an FTA only qualify for the reduced tariffs if they originate
in one of the countries. FTAs therefore grant preferences based on the origin of the final good.
Cumulation is a system which allows these preferences to be applied at the component level. This is
because cumulation allows two countries in an FTA to share production of a good, where both
countries input can count as originating, rather than foreign material. Originating material is
known as local input.
Certain systems of cumulation allow components from a country outside the FTA to be considered
local input, if enough processing work is conducted on this material in one of the FTA countries.
The EUs standard FTA Rules of Origin require 60% of a cars input to be local in order qualify for
the FTA preferences. Under a cumulative system, component originating in countries with which
the EU has an FTA, and even third country material that undergoes further processing in the EU,
can be considered towards the 60% local composition.
There are three key systems of cumulation:
Bilateral Cumulation
This applies between two parties to a bilateral FTA. For instance, the EU and Mexico have an FTA.
As part of this, components originating in the EU can be considered towards the Mexican
composition of a final good, and vice versa. For example, if the total proportion of Mexican plus EU
components in a car manufactured in Mexico equals 60%, the vehicle can be legally classified as a
Mexican good and can benefit from preferential tariffs under the MEX-EU FTA when exported to
the EU.

Diagonal Cumulation
This applies between three parties all holding FTA with one another. For instance, the European
Union, Turkey and Switzerland all hold FTAs with one another and therefore can benefit from
diagonal cumulation. If a Swiss car producer sources vehicle engines in Turkey, manufacturers the
vehicle in Switzerland, and exports the final good to the EU, this good could still be classified as a
Swiss product (provided it reaches the 60% local input threshold once Turkish material is included).
This would be possible even if no value-added processing takes place in Switzerland on the Turkish
engine or not.

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Full Cumulation
RoO allowances for full cumulation exist for trade within a multilateral preferential trade
arrangement, such as the European Economic Area (EEA). Full cumulation allows for all
manufacturing and processing that takes places within the free trade zone to be counted towards
the local input of a good. This means that material not originating within the multilateral free trade
network could still be qualify as local, provided value-added processing on this component within
the free trade zone was sufficient to achieve local input requirements.

For instance, imagine a UK electronic equipment manufacturer imports the component parts for an
in-car entertainment system from Singapore. Manufacturing of the product starts in the UK where
the head-unit is fitted. It is then sent to Germany where the speakers are wired, before being sent
to the Netherlands, where the amplifier is wired. The value-added processing in the UK, Germany
and the Netherlands can be combined and counted towards local input. Provided this exceeds the
RoO threshold of the total value of the good, this entertainment system can now be sold as an EU
product, despite the use of non-originating material.

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Annex III: The Union Customs Code


The Union Customs Code (UCC) is the new framework of regulations on customs systems and
procedures that applies throughout the EU.157 The UCC, whose substantive provisions came into
force on 1 May 2016, was a revision of the EUs Modernised Customs Code.

The UCC, and associated delegated and implementing acts, aims to:
Streamline and harmonise customs procedures across EU;
Simplify customs systems and processes to increase efficiency and reduce compliance
costs;
Ensure full digitalisation of EU customs services;
Reinforce fast-track customs procedures for AEO approved traders.
UCC initiatives are expected to be fully implemented by late 2020, with electronic systems set to
be finalised in 2019 and 2020. Below are examples of modernisation upgrades the UCC envisages
for EU-wide customs systems.158

Initiative Date(s) of deployment


Modernisation of the Authorised Economic Operator (AEO) system

The project aims to improve the business processes related to AEO


applications and authorisations. The first phase of upgrades to EU AEO Phase 1: March 2018
systems aims to improve harmonisation of the customs decision-making
procedure. The second phase will establish an electronic form of the
AEO application and decision procedure to operate on a harmonised EU Phase 2: October
interface. 2019

UCC Customs Decision Procedure

The project aims to harmonise the processes related business


applications for customs decisions, notably through EU-wide
standardisation, and electronic management of data across the EU. This
project will create a Trans-European customs decision system, including
an EU trader portal, a customs decisions management system and a October 2017
customer reference system.

UCC New Computerised Transit System (NCTS)

The project will upgrade the NCTS to align with new UCC data
requirements including the transmission of en route goods data, and October 2019
the development of an NCTS interface with other computerised March 2020
systems

UCC Centralised Clearance for Imports

The project allows for a centralised customs clearance process for good Deployment to begin
placed under a customs procedure. It aims to integrate and coordinate in October 2020 with
the processes of customs declaration and goods release between dates of full roll-out
related customs offices across Member States. yet to be defined

157
See European Commission, Taxation and Customs Union Union Customs Code.
158
The full list of projects related to the development and deployment of electronic systems under the UCC is
included in the European Commissions Implementing Decision 2016/578/EU: http://eur-
lex.europa.eu/eli/dec_impl/2016/578/oj

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Annex IV: EU and international agreements facilitating the movement of goods


In addition to the trade agreements and facilitation measures discussed in this paper, the UK should
strongly consider membership of the following EU and international agreements to facilitate the
movement of goods:
1. Convention on a Common Transit Procedure
Contracting parties include the EU, the EFTA countries, Serbia, and Turkey. The common transit
procedure allows non-EU goods to enter into free circulation once inside the area covered by the
convention.159 This means the payment of customs duties and taxes, and the requirement for
customs checks, are waived on non-EU goods moving in that territory. As part of the common
transit procedure, the UK should also maintain access to the New Computerised Transit System.160
This is the electronic data exchange system used to submit transit declarations in EU and EFTA
countries
2. Transports Internationaux Routiers Convention (TIR) - International Road Transport
As the international customs transit system with widest coverage, there are 70 parties to the TIR
procedure. The TIR procedure allows goods to move across international borders under customs
controls without paying the duties or taxes that would normally be imposed.161 In order to be
covered by TIR, goods should be transported by road.
Each EU member state is already a contracting party; therefore maintaining UK membership should
be simple. However, the EU is considered a single territory for the purposes of the procedure. This
means that TIR is only used in the EU for the transport of goods from, to, or via a third country.
Post-Brexit, the UK should ensure use of TIR procedure in trade with the EU.
3. Community road haulage licencing
The free movement of goods does not mean the free movement of trucks. Outside EUCU, UK heavy
goods vehicles will need to present permits to move goods to the EU. The UK should retain access
to Community Licences.162
These are available to any EU or EFTA haulier that holds a Standard International Operators
Licence. Community Licences allow hauliers to use a single permit when transporting goods in the
EU. It allows hauliers to transit through the EU when moving goods to and from a third country, and
the right to cabotage (journeys with only one other EU member state).
4. Customs Information System (CIS) and Naples II Convention
These conventions are used by EU members, but the UK should establish similar provisions as part
of a UK-EU bilateral agreement. The EU Customs Information System (CIS) is an information
exchange database used to improve cooperation between member states in customs fraud
investigations.163 The Naples II Convention allows for mutual assistance between national
authorities across the EU to prevent, investigate and prosecute customs infringements.

159
European Commission, Taxation and Customs Union Common and Union transit:
http://ec.europa.eu/taxation_customs/business/customs-procedures/what-is-customs-transit/common-union-
transit_en
160
HM Revenue & Customs, Using the New Computerised Transit System to move goods across the EU and Common
Transit countries, last updated on 5 April 2016: https://www.gov.uk/guidance/using-the-new-computerised-
transit-system-to-move-goods-across-the-eu-and-efta-countries
161
European Commission, Taxation and Customs Union TIR (Transports Internationaux Routiers, International
Road Transport: https://ec.europa.eu/taxation_customs/business/customs-procedures/what-is-customs-
transit/tir-transports-internationaux-routiers-international-road-transport_en
162
Department for Transport, International authorisations and permits for road haulage, last updated on 26
February 2016: https://www.gov.uk/guidance/international-authorisations-and-permits-for-road-haulage
163
See, for instance, European Data Protection Supervisor, Customs Information System:
https://secure.edps.europa.eu/EDPSWEB/edps/site/mySite/SCIS

62
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