Brexit: “These aren’t ‘teething problems’: We have real structural difficulties.

29 March 2021

 

By Chamber International director, Tim Bailey (pictured right).

 

Months after the trade agreement with the EU, most advisers would say that the Government needs to stop papering over the cracks with expressions like “only teething problems” and recognise that there are real obstacles that importers and exporters face every day.

New rules of origin are causing traders the most – and very real - difficulties. The Government published 40 pages of guidance on December 29, which covers only the origin chapter of the Trade Cooperation Agreement (TCA) and, even then, without an introduction phase, we were looking at significant business disruption.

Add to this the 65, 300-page rollover trade agreements detailing different origin tests around specific production processes, minimal processing, transport rules and ‘cumulation’ – the ability to count imported parts, components or ingredients for manufacturing as originating in the UK - and you may grasp the huge challenge businesses have had adapting to the new regime at short notice.

Businesses have been bombarded with masses of guidance, email alerts and messaging. Many don’t know which way to turn.

A small engineering company in the North of England called me recently saying that they had so much information they did not know where to start. Could someone talk them through what they must do?

We have many calls like this and, months after the TCA was implemented, they continue. A recent email from a chemical company read: “Brexit! I need help to find the right commodity codes, speeding up customs, what to put on paperwork? “

Chamber International’s support, since the TCA took effect, has covered three main categories: customs, borders and origin of goods which can be summarised as how to manage your supply chain to get goods to market, mitigate border tariffs and operate rules of origin.

The customs element covers everything from raising the level of customs knowledge within companies assisting traders with import and export declarations and identifying ways businesses can mitigate duty and achieve cash flow advantages from applying some of the Government’s easements and customs simplifications.

EU trade today is not as beneficial as being in a customs union or single market but is better than no deal. Even so, while supporting exporters and importers under the new TCA, in the last 3 months we have realised that it is the worst possible agreement for distribution companies.

It means that businesses with a EU warehouse and UK distribution hub in the UK that buy goods and re-sell them within the EU, without any processing before re-exporting, face paying potentially crippling, double import-export duties.

A Chamber International London client is a distributor for several international brands of luxury fabrics and wall coverings, some of which are handmade, designed in the UK and woven in Pakistan and China.

Another part of their business is a boutique leather product from UK hides, finished in Italy and stocked in London before being sold to the European yacht industry. The business made their biggest investment ever in further finishing work with its Italian processors but believed customers would find EU suppliers if they faced additional duties.

In any trade agreement products must undergo a ‘substantial change’ in order to qualify for tariff-free trade. One way to avoid ‘double duties’ is to establish an EU distribution centre to by-pass the UK and companies are doing this.

More logistics companies are also offering comprehensive ‘end-to-end’ services where they will manage distribution from their continental warehouses and offer fiscal representation – tariffs and taxes - in EU markets.

Another option is to import goods under customs control and we are helping several businesses apply to become HMRC-approved customs warehouses, one being the London wall coverings and leather business.

However, for one Yorkshire company this approach means warehouse modifications to improve security, new operating methods and training staff in export procedures. While this is a substantial business that can cope with this disruption and absorb the additional costs, many smaller companies do not have the budget after a year struggling under coronavirus pandemic lockdowns and resulting cashflow problems.

One recent development that will help counter Brexit risks is the government Freeports initiative. From a customs perspective, businesses gain by being in one but the challenge for winning bidders to run Freeports will be to make them accessible to SMEs as well as bigger businesses.

The UK had seven Freeports between 1984 and 2012. They are beneficial because overseas goods aren't subject to the usual tariffs until they leave the Freeport and are transported elsewhere in the UK. Goods can also be sent overseas without charge.

The UK is to have eight new Freeports at East Midlands Airport, Felixstowe and Harwich, Humber region, Liverpool City Region, Plymouth, Solent and Thames and Teesside to help regenerate deprived areas. They are scheduled to come into operation later this year.

Even so, if before Brexit, a UK business was trading only within the EU, they will be used to ‘delivering’ goods to Europe and ‘acquiring’ goods from Europe.

For many firms, that is the extent of their international trade. For some of these, becoming a fully-fledged importer and/or exporter is going to be challenging, especially if they are running on a narrow margin.

Trade costs are just a line on a spreadsheet to bigger companies but, if not carefully managed, they can put small firms out of business.

Chamber International is focussing on where we can help ease the flow of trade between the UK and EU and support businesses in overcoming barriers created by the new TCA. Our customs brokerage service, ChamberCustoms, part of a national British Chambers of Commerce initiative, is central to this.

The Government forecast an increase in customs declarations from 55m to 260m a year on leaving the EU but this was later revised to 300m by the National Audit Office, showing just how much additional paperwork has to be undertaken.

Cargo clearance at UK ports is improving but we continue to get reports of border delays in the EU where the TCA requirements have been slow to filter down to some customs administrations particularly in Eastern Europe.

Some EU customers are also refusing to pay tax on UK goods and we’ve heard of consignments being returned for this reason.

Last week a firm got in touch after learning that their contract terms with a French customer, which couldn’t be changed, meant that they were responsible for paying duty and VAT.

This has to be a very important account for the company whose chairman said in his email: “if we cannot fix this, we’ll be out of business very quickly.” Brexit has put them in a position of ‘Importer of Record’, which makes them responsible for customs clearance in France and also duty and VAT.

Every week brings a new issue. It has also become clear that it is hard to give general advice on product origin matters. Reviewing an exporter’s trading profile against both the TCA and the new continuity trade agreements is focussed, time-consuming work.

In almost all cases, verifying whether products meet rules of origin starts with the right tariff number, a system of coding and classifying products invented by the EU and now used by most countries.

We had an enquiry from a company that imports dietary supplements from its EU manufacturing site requesting help in understanding the implications for their business when the import easements are lifted and new import controls and checks are phased in later this year.

This is complex, as, before mapping the requirements for health certificates and carrying out an origin audit, commodity codes for 800 products had to be checked.

In other hitches, Spanish customs has refused to clear business-to-consumer shipments and many companies cannot get European suppliers to comply with the TCA. When asked to establish the preferential status of goods they are typically saying: “Brexit is your fault and it’s your problem if you have to pay duty.”

In these situations, we work with clients’ EU suppliers and carry out the origin audit ourselves.

It will come as no surprise that in a recent British Chambers of Commerce survey of 1,000 businesses, a quarter said they plan to either reduce their EU activity or withdraw from EU trading in the next 12 months.

The Government has said that the TCA is a basis for further negotiations. If so, it should take into account grassroots experiences of British businesses and those who support them so they can seek the right, practical changes.

In practice, the current TCA is not the platform for a “great independent global trading nation” that we’d hoped for - at least not while it remains easier to do business with North America than the EU!

 

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