The UK has now published the tariffs it expects to apply after the Brexit transition period expires on 31 December 2020 (unless it is extended). What do these mean for business and why is the government planning to impose tariffs on more goods than it proposed last year in the event of a no deal Brexit?
The UK's post-Brexit tariff schedule: what does it mean for business?
- What are tariffs and who pays them?
- Are there limits on the tariffs governments can impose?
- What tariffs will the UK apply after the end of the Brexit transition period?
- What tariffs will be payable on products from the EU?
- Why is the UK planning to impose more tariffs than envisaged in its proposal in the event of no deal last year?
- Could the UK publish a further interim tariff schedule?
- What should businesses do now?
What are tariffs and who pays them?
Tariffs are duties which governments levy on imported products. They are usually paid by the importer, although as between the importer and the exporter, it is possible for the parties to agree that the exporter will pay them.
WHAT TARIFFS APPLY NOW?
At present, no tariffs apply on goods arriving in the UK from EU Member States. The UK does, however, impose tariffs on certain goods arriving from outside the EU. Similarly, goods arriving from outside the EU into EU ports such as Rotterdam for onward distribution to the UK may be subject to tariffs (payable in the EU Member State where the goods first arrive). The tariffs currently applicable to these goods are set by the EU under its Common External Tariff (CET).
Are there limits on the tariffs governments can impose?
The amount of any tariff may be constrained by governments' commitments to other WTO members and by free trade agreements with other states. For example, under the General Agreement on Tariffs and Trade (GATT), governments typically set out the maximum tariffs they reserve the right to impose; these are known as bound tariffs. However, in practice, many governments set their actual tariffs at a lower level than this; these are known as applied tariffs. They may also have agreed that products from certain countries – with which they have free trade agreements – can enter tariff-free or at lower rates.
What tariffs will the UK apply after the end of the Brexit transition period?
The UK has now published the tariffs it will apply to products from countries with which it does not have free trade agreements after the expiry of the Brexit transition period (currently expected to end on 31 December 2020). These tariff rates are generally below the bound tariff rates which the UK has committed not to exceed as a member of the WTO. They are also somewhat more liberal than the EU's CET as regards products from outside the EU; according to the UK Trade Policy Observatory (UK TPO), about 70% of such products will enter tariff free, as compared with about 52% at present. The UK has also reduced some tariffs below the level in the CET. For some businesses, therefore, these changes will produce savings on their purchases of non-EU products. However, in most cases these savings will be in the order of a few percentage points on the wholesale price, not the retail price paid by final consumers (which often incorporates a very significant mark-up to reflect other costs such as premises and the need for a profit margin). In addition, as noted below, these savings could be cancelled out if the UK does not reach a trade deal with the EU.
What tariffs will be payable on products from the EU?
Unless the UK concludes a free trade agreement with the EU, thereby eliminating tariffs on most if not all imports from the EU, any gains from the liberalisation of the UK tariff are likely to be cancelled out by the imposition of duties on EU products which currently enter the UK tariff free. The UK TPO estimates that in the absence of such an agreement, 56% of imports from the EU would be subject to tariffs.
THE IMPACT OF NO TRADE DEAL ON IMPORTS FROM THE EU
In cases where tariffs are relatively low (e.g. 5% or less), this may be a level of additional cost which many businesses can absorb without too much difficulty - although lower margin businesses may have concerns and a wide range of businesses are likely to notice some increases when the costs of additional paperwork and potential border delays arising from the UK's decision to exit the EU's Single Market and Customs Union are taken into account. However, the UK is maintaining higher tariffs on a wide range of products which are subject to high tariffs (often 10% or more) in the CET, such as agricultural products, textiles and vehicles. These higher tariffs are generally being maintained to protect domestic production or, in some cases, to protect imports from developing countries which benefit from preferential treatment. Businesses reliant on imports of these products from the EU will almost certainly feel the impact of tariffs if no free trade agreement can be reached with the EU.
Why is the UK planning to impose more tariffs than envisaged in its proposal in the event of no deal last year?
In 2019, the UK Government published an interim tariff schedule which was intended to apply if the UK left the EU without any agreement at all. This would have removed tariffs on 87% of imported goods by value (including those from the EU) and meant that UK firms relying on imported goods would have paid substantially less in tariffs than they will under the rates envisaged under the UK government's new tariff schedule.
The main aim of that interim schedule was to mitigate some of the potential adverse impact of a no deal Brexit by lowering costs for importers across a wide range of goods. By contrast, the UK Government's main aim in publishing the new tariff schedule at this juncture is probably to incentivise the EU and others (such as the US) to enter into free trade agreements, which would be expected to reduce tariffs on their exports (hence the higher overall level of tariffs being put forward).
Could the UK publish a further interim tariff schedule?
If it appears likely that the UK and EU cannot reach agreement on a trade deal, it is quite possible that the UK government could produce a further interim schedule later in the year, aimed at providing temporary relief for importers from tariffs on certain products. However, that is by no means guaranteed and for the time being, we would suggest planning for the future on the basis of the rates in the new schedule (or, potentially, as a very worst case scenario, the UK's bound tariff rates).
What should businesses do now?
Although the uncertainty over the outcome of negotiations with the EU is frustrating, time is also short and recently, the signals from the negotiators themselves have been less than encouraging. We therefore strongly recommend that businesses assess the impact of there being no trade deal at the end of the transition period and make plans to mitigate any significant adverse effects – unwelcome as this may be alongside the many additional stresses imposed by COVID-19. We are very happy to assist with any no deal planning.
If you rely on products imported from the EU, do you know how much more these will cost if they were to be subject to tariffs? What additional costs will you face from increased paperwork requirements on such imports (note that these costs are likely to apply even if a deal is reached with the EU)? Does this mean you would be better off buying from UK or other non-EU suppliers? And do you know how imported products reach you? For example, if they arrive from China into Rotterdam, you could be paying for two sets of tariffs and paperwork – once on entry into the EU and then again when the products enter the UK. Again, this may mean you would be better off having the products shipped direct to the UK rather than via an EU-based wholesaler (or you may need to look at arrangements such as bonded warehousing).