Richard North, 08/01/2021  

It only took a couple of days looking at the TCA to pick up the big hole in the tariff-free provisions, which I reported on 28 December.

The point I made was that, while the TCA generally provided for tariff-free trading between the UK and EU Member States, key exceptions were made for goods bought in from the rest of the world which were not subject to sufficient processing or other operations to qualify as UK origin.

If exported [from the UK] to EU Member States, I wrote at the time, these goods become subject to tariffs at the prevailing rates, under the "insufficient production" caveat within the "rules of origin" provisions.

Caught in this "trap" were preserving operations such as drying, freezing, keeping in brine and other similar operations, where their sole purpose was to ensure that the products remain in good condition during transport and storage.

Others included the breaking-up or assembly of packages; washing, cleaning; removal of dust, oxide, oil, paint or other coverings; ironing or pressing of textiles and textile articles; and simple painting and polishing operations.

But crucially, they included simple placing in bottles, cans, flasks, bags, cases, boxes, fixing on cards or boards and all other simple packaging operations. This extended to "affixing or printing marks, labels, logos and other like distinguishing signs on products or their packaging".

Well, it hasn't taken very long for this piece of "red tape" to exert its effects, with the main impact being felt with a vengeance by British retail operations which sell into the European Union customs area.

So serious is this that even a number of media outlets have noticed, although in the lead once more is the Financial Times. It has the headline: "UK retailers stumped by post-Brexit trade deal with EU", with the sub-heading: "Brands review supply chains to Europe threatened by terms of accord with Brussels", which tells you something of what is going on.

However, it doesn't seem yet as if the full impact of the "insufficient production" provision has fully sunk in, with the paper telling us that "Britain's leading retailers are reviewing their supply chains to Ireland and other European markets while they work out how to avoid tariffs imposed by the UK's post-Brexit trade deal with the EU".

The point is, of course, that as long as the retailers continue with their current trading model – which involves buying cheaply finished goods from overseas and reselling under their brand, with a substantial mark-up – they cannot avoid the "insufficient production" tariff.

The FT does at least pinpoint the problem, telling us that the TCA "includes detailed stipulations on rules of origin that determine whether tariffs are levied on goods that are imported into the UK and then re-exported to EU markets with little or no further processing".

Steve Rowe, chief executive of Marks & Spencer, is then cited, saying that: "Tariff free does not feel like tariff free when you read the fine print" – which is rather what one has to do with treaties.

Apparently, more than 100 retail executives held a call with government officials last Wednesday to discuss the problem. One person on the call said there was the sound of "pennies dropping…?everyone can now see significant issues of additional friction which is pure cost".

William Bain, trade policy adviser at the British Retail Consortium, tells the FT that "at least 50" of their members were facing potential tariffs on re-exports. Some companies, including John Lewis and TK Maxx, have suspended deliveries to customers in Northern Ireland, while others are trying to work out whether they can continue supplying their stores in the EU from the UK.

Bain, though, clearly hasn't got it. "We appreciate that the rules of origin in the [trade agreement] were designed to be facilitative on trade in goods but we need a solution which genuinely reflects the needs of UK-EU supply and distribution chains for goods", he says.

Obviously not understanding the "insufficient production" provision, he refers to the more general rules of origin, stating that, to qualify for zero tariff treatment, goods must be able to demonstrate that they "originate" in the EU or the UK, with approximately 50 per cent UK content for most products.

Ironically, there is a nasty trap built into the rules: clothing imports from developing countries such as Cambodia, Myanmar and Bangladesh are tariff-free under the Global System of Preferences, if sent directly to the EU. But if they are sent to the UK and then re-exported without further processing, they attract tariffs.

Nigel Oddy, chief executive of New Look - which has 27 stores in the Republic of Ireland supplied from the UK - is trying unravel all of this. And he's not on his own. Online fashion marketplaces such as Asos and Zalando are also affected.

Remedies, it appears, are complex. One way out is to invoke transit processes and bonded warehouses, so that the goods stay under customs control while they are in this country. But this means unpicking logistics designed to serve the UK and Ireland as one market.

Another solution is to set up subsidiaries in the EU and import directly to them. Dixons' business in Scandinavia is run this way, and leisurewear group JD Sports was investigating options for stocking European stores without involving UK facilities. However, that means less flexibility in stockholding and will usually require maintaining increased inventories – all with cost and cash flow implications.

Needless to say, it will be mostly the SMEs which will be the hardest hit, and some firms will have to make the decision to abandon the EU market or relocate their businesses there.

The Cabinet Office says it is working closely with businesses "to help them to adapt to any new trading requirements", but one sceptical retailer thinks that a complete solution would require concessions from the EU. Since the EU has copied out the CETA provisions – giving Johnson exactly what he asked for – the chances of any movement from the EU would seem slight.

Meanwhile, the Guardian is also on the case. It is reporting that customers in Europe buying products ranging from furniture to pet food from UK companies are receiving unexpected bills for VAT and customs declarations, or finding household names have stopped shipping to the continent, as post-Brexit trading rules bite.

It cites Thom Basely, who lives in Marseille, who bought a €47 [£42] shelf from Next for his bathroom. "On the morning it was supposed to be delivered we received an 'import duty/tax' demand for over €30, like a ransom note. It came as a complete surprise", he says.

A Frankfurt resident who ordered cycle clothing from a UK company was sent a tax and customs demand for €102, while a woman in the Netherlands who bought trousers in December "with no issues" faced a €40 bill for two more pairs ordered in January.

Online retailer Amazon is reacting to the situation by adding an "import fees deposit" to orders from continental Europe placed via its UK website, nearly doubling the cost of some items and making it significantly cheaper to find an EU alternative.

Other buyers, ordering from the UK, are facing a nasty shocks when using international shipping companies, such as DHL or UPS, being faced with unexpected charges which they are obliged to pay, cash on delivery.

The worst of it is that many vendors aren't even able to tell their customers what the full range of extra charges will be, adding uncertainty to transactions which can only damage sales prospects. EU buyers are being advised not to order anything from the UK, until the situation is clarified. That may be some time never.

On the border itself, though, the situation may be about to deteriorate as the Financial Times warns of tougher French border controls in the offing, as traffic starts to pick up next week.

By then, the steady trickle of Brexit-related stories - not least the report of Scottish seafood exports facing being sent to landfill - might be starting to expand, which is more than one might say for the UK's trading prospects.

Also published on Turbulent Times.

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