On 24 December 2020, the UK agreed a 1,250-page Trade and Cooperation Agreement (TCA) with the EU, which takes effect from 1 January 2021.
For businesses that have not already assessed the impact of Brexit on their supply chains and how they do business, there is now at least certainty on what is required when exporting and importing goods across the UK-EU border (and increasing clarity on goods moving between UK and Northern Ireland).
Businesses that are not prepared could face increasing costs through delays or penalties from 1 January.
Another very real risk for un/under-prepared businesses is that suppliers or customers in the supply chain will switch to those that are prepared, to help ensure the smooth flow of goods under the new UK-EU trading regime.
To help businesses digest the agreement and make any remaining preparations, below is a summary of relevant TCA provisions for supply chains.
While the TCA avoids the dramatic consequences of a no-deal Brexit that many businesses had feared, the agreement will inevitably leave UK-EU trade more complicated than it was.
Crucially, the UK will leave the EU Single Market and Customs Union, and the free movement of goods will end.
While the UK has provided unilaterally for some transitional arrangements to offer firms a ‘soft landing’ (e.g. phasing in import requirements at the border), in general the EU has not reciprocated and most requirements will apply to imports from the UK from 1 January.
The TCA provides for zero tariffs and zero quotas on all goods traded between the UK and the EU, from day one.
But there are two important qualifications:
1. Tariffs may be imposed in the future in the event of a breach of the TCA (‘rebalancing tariffs’), or as a result of trade defence measures under WTO rules to protect, for example, against dumping or surges in imports;
2. For a product to qualify for a zero tariff (if it is not already zero rated), it must meet the rules of origin that determine how much of its content must be derived from EU or UK processing or materials:
- On the upside: the agreed rules are simpler and more accommodating than similar provisions in most FTAs; they provide for ‘full bilateral cumulation’, which captures not only the origin of materials used but also the value of their processing in the EU or UK; certificates of origin can be self-certified by the exporter, reducing the paperwork; and transitional arrangements will allow traders flexibility in collecting documentary evidence during the first year; but
- The rules inevitably create a new administrative burden; some products will not qualify for duty-free trade without changes to the sourcing of their components or processing; and the UK failed to achieve its (admittedly ambitious) objective of ‘diagonal cumulation’, which means that components from third countries with which both the UK and the EU have trade agreements (e.g. Canada, Norway, South Korea, Israel, Switzerland, Japan) cannot be counted as if they were made in the UK or EU.
This leaves Mexico as the only large market with which such arrangements will not be in effect from 1 January. A deal with Mexico is expected to enter into effect in ‘early 2021’, but before this happens, tariffs may be re-introduced on UK-Mexico trade.
Customs and VAT
As the UK will be leaving the EU Customs Union, all customs controls required under EU law – and under UK law, which largely mirrors the EU position – will apply to all goods traded between the EU and the UK.
These require, in particular, the completion of security and safety declarations, and import and export declarations. These in turn require that traders have EORI numbers, the Commodity Codes of their products and their customs valuation.
All imports must meet all the standards of the importing party and will be subject to regulatory checks and controls for safety, health and other public policy purposes. There are mechanisms to develop customs facilitations in future, but little substantive at this stage beyond mutual recognition of each other's ‘trusted traders’ status (Authorised Economic Operators) and agreement to facilitate roll-on/roll-off traffic.
While the TCA provides for administrative co-operation between governments on VAT, it does not change the main impacts of Brexit for traders: exports become zero-rated (subject to proof of export) while imports become subject to import VAT.
Non-Tariff Barriers/Product Regulations
Given the UK is no longer a part of the EU Single Market, goods exported to the EU from the UK will need to prove that they are produced according to standards that make them acceptable for sale in the EU and will be subject to any applicable regulatory compliance checks and controls (and vice-versa).
Requirements related to products standards – including the respective responsibilities of the manufacturer and the importer(s) for product safety, conformity assessment and labelling – will not change substantively as a result of the TCA.
The TCA contains a number of provisions to avoid technical barriers, although these are relatively limited in most sectors: basing domestic standards on international standards as far as possible and allowing for self-certification of conformity with the applicable standards by the manufacturer where this is currently applied.
Further steps have been agreed for the automotive, pharma, chemicals, aerospace and agri-food sectors. But even these fall far short of arrangements under the Single Market and, for example, agri-food traders will still have to meet all sanitary and phytosanitary import requirements and be subject to official controls at Border Control Posts.
The UK had sought agreement on mutual recognition of product conformity assessments conducted by accredited bodies, which would have reduced costs and administration for exporters by providing for a certificate of conformity issued by a UK body to be valid across the EU (and vice-versa). The EU has Mutual Recognition Agreements (MRAs) with Australia, Canada, Israel, Japan, New Zealand, the US, and Switzerland, while the UK now has MRAs with the same countries except Canada.
These arrangements are, however, limited to certain sectors – the UK had wanted more ambitious coverage with the EU, but no such recognition has been agreed.
As a result, certifications by UK-accredited bodies are not valid for the EU market after 1 January. UK exporters will need to either apply for a new certificate issued by an EU body or arrange for a transfer of the file and the corresponding certificate from the UK body to an EU body. Although a UKCA mark will be introduced from 1 January, the CE mark may continue to be used for most goods until 31 December 2021, unless product regulations diverge before then.
Since the UK will no longer be in the Single Market, UK service suppliers including eCommerce businesses will be required to abide by the domestic rules, procedures and authorisations applicable to their activities in each EEA state where they operate, unless they establish themselves in an EEA state.
However, the TCA does provide for the elimination of some restrictions on cross-border data flows, such as measures making such flows contingent upon the use of computing facilities or localisation requirements in one party’s territory.
The TCA provisions on trade in goods do not cover trade between the EU and Northern Ireland, which is governed by the Northern Ireland Protocol to the Withdrawal Agreement.
Under this Protocol, most EU customs and product-related regulations will continue to apply and trade between the EU and NI will not constitute imports and exports, but will remain ‘transfers’, with no customs or regulatory controls.
Movements of goods from UK to Northern Ireland will however be subject to certain requirements. The two sides have agreed to some facilitations to limit disruption, notably on export declarations and on the supply of medicines and of certain meat and other food products.
For help interpreting the TCA and what it means for your business, please contact a member of Fieldfisher's Brexit Taskforce.
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