The Brexit deal is being celebrated as though it removes all tariffs. It doesn’t

Opinion piece (Prospect)
08 January 2021

The newly signed EU-UK trade and co-operation agreement (TCA) does little to remove bureaucracy at the border, or facilitate trade in services, but it does at least remove all tariffs and quotas, right?

In practice, the answer is: it depends. As large retailers such as Debenhams and Marks & Spencer are somehow reportedly finding out for the first time, tariff-free trade is not unconditional.

This might surprise you. After all, Boris Johnson has been keen to highlight that the TCA will “enable UK goods to be sold without tariffs, without quotas in the EU market.”

But in order for an exported product to qualify for tariff-free trade under the terms of the EU-UK TCA, it must have either been wholly obtained, or been subject to a significant amount of processing, in the EU or UK. Or to put it another way, the EU-UK TCA only benefits goods that can legitimately claim to have been made in the EU or UK. These so-called rules of origin are not uncommon and can be found in near-every free trade agreement.

This means that if your business model involves importing large quantities of clothes from Indonesia into the UK, and then selling them to shops across the EU, then tariffs might now be levied twice: when the clothes enter the UK, and then again when they enter the EU. The clothes are Indonesian, not British or EU originating, after all.

And while it might be easy to demonstrate that a leg of Welsh lamb is from the UK, and therefore qualifies for tariff-free trade, things get more complicated when you are thinking of exporting something more complex, for example a car, which contains parts sourced from all over the world.

For a petrol car to qualify for tariff-free trade under the terms of the EU-UK TCA, 55 per cent of its value must have been created in either the EU or UK. For carmakers with larger European supply chains this might not prove too difficult a hurdle to clear, but for those that source many parts from Asia it could prove trickier. And if they are unable to meet the 55 per cent threshold, then a 10 per cent tariff applies, with potentially significant implications for their business model.

The EU and UK have attempted to reduce the “day-one” burden for traders somewhat: agreeing that for the first year, exporters will not be required to have all of the evidence supporting their origin claims immediately to hand. But this does not mean the exporters don’t still need to comply with the rules and ensure their products are eligible.

Free trade is rarely free, and for many British companies, used to trading with relative ease across Europe, the new conditions and red tape will come as a surprise. And while some will surely adapt to the new normal, and continue on as before, others will turn their back on exporting all together.

Whether the apparent lack of awareness about these predictable challenges speaks to a wider problem with government communication, or is simply the forgivable result of crisis-fatigue, I leave others to decide.

Sam Lowe is a senior research fellow at the Centre for European Reform.