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Brexit: UK Issues Customs Draft Law While Facing Tough Criticism for Being Unprepared for a No-deal Scenario

On 2 November 2017, the UK government published the Taxation (Cross-border Trade) Bill, previously known as the Customs Bill, to be debated and passed by its Parliament. This will enable the government to set and vary its own tax and customs rates. However, the more important issue is how customs declarations will be handled with the EU. While Brexit Secretary David Davis said in a recent speech that the UK would seek to “maintain what we already have” in terms of customs cooperation, including the sharing of product safety data, the government has been criticised as unprepared for the potential chaos that might follow a no-deal Brexit.

Five-fold increase in customs declarations: In a report published on 13 November 2017, the UK Parliament’s Public Accounts Committee warned that Brexit could lead to a fivefold increase in customs declarations from the current level of 55 million to 255 million, if the UK leaves the EU’s customs union. The government was urged to have a customs system in place well before March 2019 when the UK is set to leave, as anything else could lead to massive disruptions in bilateral trade. The Public Accounts Committee’s Chair, Meg Hillier MP, commented:

“Failure to have a viable customs system in place … would wreak havoc for UK business, trade and our international reputation. Confidence would collapse amid the potentially catastrophic effects. [HM Revenue and Customs (HMRC)] is under considerable pressure to deliver the new Customs Declaration Service [CDS] in time, but it does not yet have funding to increase the capacity of CDS to deal with the consequences of Brexit—nor to develop contingency options.”

The body recommended that funding be made available by the government no later than December 2017, and that the HMRC report back regarding its preparations by March 2018.

Lack of contingency planning: Three days later, on 16 November 2017, the UK Parliament’s Home Affairs Committee delivered equally harsh criticism towards the government’s preparations and readiness. Increased staffing and changes in technologies and infrastructure will be needed after Brexit. The report noted that the Home Office’s planning relied on an implementation period sought by the UK government. However, such a deal cannot be guaranteed. The report therefore called for all government departments to urgently put in place contingency plans covering a no-deal scenario. With March 2019 a mere 16 months away, the report noted that time was already in short supply. The report also noted the Home Affairs Secretary’s testimony that adequate preparations were important for the UK’s ability to maintain its bargaining power. Without contingency plans at home, the UK would not be able to credibly threaten to walk away from a bad deal.

The Parliament’s report drew heavily from another report prepared by the Institute for Government, a British think-tank focused on improving government efficiency. The latter estimates that if the UK leaves the EU Customs Union and Single Market, introducing customs declarations could cost traders between £4 and £9 billion a year. In addition, traders are charged for checks on goods and the report notes that costs for an examination by port health authorities varies between £106 and £600 per container tested. Beyond direct costs, any delays caused will have a devastating impact on fresh produce as well as the highly integrated supply chains in the manufacturing industry. In order to maintain efficiency, many manufacturers do not keep stocks larger than a day’s worth of production and therefore cannot sustain significant delays from EU suppliers.

These are important considerations for Hong Kong firms whose goods are either exported (e.g., from Hon Kong or mainland China) into continental Europe and then sold on to British industries, or whose goods are supplied to British companies dependent on further inputs from other EU countries. Hong Kong traders are advised to closely follow the contingency planning of the UK government, and adjust their own contingency plans accordingly.

Maintaining customs cooperation: The abovementioned costs can of course be avoided even if the UK leaves the Single Market and Customs Union, if checks along the border are minimised. Brexit Secretary David Davis expressed such hope at a speech in Germany on 16 November 2017, saying that “UK and European businesses should be able to continue to work together through integrated supply chains.” Taking the car industry as an example, Mr Davis stated: “currently, that car only has to undergo one series of approvals, in one country, to show that it meets the required regulatory standards” and that “those approvals are accepted across the European Union.” This is essentially what is referred to as “passporting”, usually invoked in relation to financial services, allowing product approvals in one country to be recognised throughout the Union. Mr Davis noted that such recognition had been going on for decades.

Yet it is important to note that such approval occurred within the context of a unified legal framework, where both EU regulations and judgments of the EU courts have direct effect in EU Member States, ensuring harmonised standards. This could be achieved for non-Union members, but would presumably be undertaken through recurring reviews of the other party’s regulatory framework. Another model would be that of the European Economic Area (EEA), comprising Iceland, Norway and Lichtenstein (along with all EU countries). These countries have full access to the EU’s Single Market, but they also have to follow EU law and jurisprudence. Unfortunately, such supranational legal obligations are unlikely to be accepted by Brexit supporters.

On the other hand, EU negotiators have stated that one of the three fundamental principles underpinning their negotiation position is the EU’s “autonomy of decision”, meaning EU institutions are supreme and must be able to set the rules. Recognition by the EU of other regulatory systems exempted from the oversight of the EU’s Court of Justice would therefore be highly problematic and therefore unattainable.

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