Trade without tariffs does not necessarily equate to free trade. UK businesses who trade with the European Union are learning this the hard way since the U.K. and EU signed the Trade and Cooperation Agreement (TCA) on 24 December 2020.
The EU operates as a single trading bloc, applying the same rules and processes EU-wide. By adhering to the same rules, EU based companies can sell and operate freely throughout the bloc, not only because there are no tariffs, but because the “non-tariff barriers”, such as customs declarations, mutual recognition of standards, veterinary equivalence, data adequacy, and financial services equivalence, are either non-existent or are relatively streamlined across all EU jurisdictions.
During the Brexit process, the UK made it clear that it did not intend to follow EU rules going forward, as “taking back control” of its own rules was the primary purpose of the project. Therefore, the TCA was signed in order to facilitate the UK’s divergence from EU rules, which is a novel approach to free trade negotiations.
In effect, the TCA did secure tariff-free access to the EU market (provided products meet specific rules to demonstrate origination in the UK or EU, known as Rules of Origin), but it also erected non-tariff barriers to trade.
Recent media reports have suggested that these non-tariff barriers are starting to bite UK SMEs. For instance, when UK goods are entering the EU, they must have accompanying paperwork to prove they comply with the Rules of Origin. Not only do customs declarations add time and cost to shipments, but some SMEs do not have the necessary registrations or in-house capabilities to complete the necessary paperwork and thus have to outsource the work, adding to the costs.
Additionally, goods that are of animal origin need to demonstrate compliance with EU laws on Sanitary and Phytosanitary Standards (SPS). Now that the UK has left the EU, specialist paperwork and frequent physical inspections are required for such products.
In response to these new barriers, a UK SME that used to sell to the EU prior to Brexit now has three options: 1) Stop selling to the EU; 2) Keep selling to the EU, shipping from the U.K. and navigating all the new barriers; or 3) Keep selling to the EU, but by setting up a distribution centre in the EU, and then shipping their products from there. With recent reports suggesting that callers to a UK government helpline for UK exporters were being encouraged to set up an establishment in the EU (which was subsequently denied), is this something that SMEs with customers in the EU should be considering seriously?
The appeal of such an option is likely to depend on the type of product SMEs are selling and the scale of their sales to the EU.
For instance, if the product being shipped requires the special SPS checks that require a veterinary certificate (which can cost over £100 each), then it could make sense for that producer to ship in bulk from the UK to an EU distribution centre, therefore minimising the cost and paperwork per item. Once the bulk order has entered the EU with all the required paperwork, it can move on from there with only onward shipping costs to consider, which may allow faster delivery of products to end users.
However, if the SME is producing a product that they know qualifies for tariff-free access, and does not require a SPS check, then it may make more sense to ship direct from the UK, especially if the volume they sell to the EU does not justify the expense and complication of setting up an EU-based distribution option.
When considering setting up a distribution centre in the EU, a UK business would have to weigh up the wider legal and tax implications of doing so, including compliance with EU consumer laws and complex rules surrounding VAT. This would certainly not be a step to be taken lightly.
Non-tariff barriers are the new reality for UK businesses. Once they have adapted to the current rules, UK businesses will have to keep an eye out for upcoming decisions from the EU (including regarding the adequacy and equivalency of applicable UK rules) that could affect their day-to-day operations, depending on where, and in which sector, they operate. Unfortunately, although businesses are looking for certainty, the TCA was just another step in the continuing process that is the new UK – EU relationship.
About the Authors
Melanie Wadsworth is a corporate partner based in Faegre Drinker’s London office. Melanie counsels clients through a wide range of compliance and transactional issues, including helping businesses with operations in the UK and the EU to navigate the legal implications of Brexit. London, +44 (0) 20 7450 4560 [email protected]
Christopher Jefferies is a trainee solicitor in Faegre Drinker’s London office. Chris helps advise clients on a broad range of Brexit related issues in commercial agreements and on structuring international data transfers and GDPR compliance post Brexit. London, +44 (0) 20 7450 4576 [email protected]