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Based on the government’s current red lines, the UK’s new relationship with the EU will be either an FTA or one based on WTO terms – with an FTA being the most likely option, should talks go smoothly.

International trade law, set out by the General Agreement on Tariffs and Trade (GATT) and then the World Trade Organisation (WTO), allows only a limited number of trading relationships between separate countries.

The first two types – a trade customs union or single internal market - are those represented by the European Union and other customs unions although there are some ‘half in, half out’ arrangements, such as the customs union the EU has with Turkey on manufactured goods.

The second bilateral relationship is a Free Trade Agreement (FTA), which must liberalise most barriers for goods in trade.

The third relationship is a multilateral one – trading with all countries on non-discriminatory terms under the auspices of the WTO.

"There will be friction, the question is how much and in what form."

Based on the government’s current red lines, the UK’s new relationship with the EU will be either an FTA or one based on WTO terms – with an FTA being the most likely option, should talks go smoothly.

Both of these options will require new customs relationships and the establishment of a customs border. Being external to the EU external tariff will mean goods will have to go through EU customs clearance and fill in basic EU customs paperwork.

There will be friction, the question is how much and in what form. Businesses are struggling to get straight answers from government, which is making planning and preparation difficult.

What are the UK’s negotiating objectives?

The Prime Minister set out a series of red lines in her Lancaster House speech in January 2017. This made clear the top-level objectives of the UK government of leaving the Single Market, leaving the oversight of the European Court of Justice (ECJ) and being able to exert greater national control of EU migration.

Her position on the Customs Union was less clear. She stated that she did not want to be bound by the EU Common External Tariff and have the freedom to negotiate new trade deals, but left the detail of what replaced it more vague, stating that the UK could want a "completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it". Later interpretations put a much more definitive line on the UK leaving the Customs Union.

Nonetheless, leaving the Single Market and the EU’s Common External Tariff, and the desire to have the freedom to negotiate new trade deals all suggest that UK exporters will be outside of the Customs Union and, inevitably, face some level of customs and paperwork ‘friction’.

Although the government has expressed its desire for ‘frictionless’ trade after Brexit, both the UK’s desire to leave the Customs Union and the rules of international trade mean that this is not going to happen – there will be friction, the question is how much and in what form.

"For exporters for whom the EU is a major market, this move from frictionless trade to inevitable friction is a concern." 

The preferential access provided by being in an FTA will require that UK exporters demonstrate compliance with rules of origin that are part of all FTA agreements. Leaving the Single Market will also probably require a border so that goods and services can be assessed for compliance with a range of regulatory and health and safety requirements, particularly in the most sensitive sectors like agriculture. In addition, new arrangements will have to be agreed for VAT.

Towards inevitable friction

Although the government can implement measures to make these forms of paperwork smoother – ideally online - in advance of the border, the basic administrative requirements will remain.

For exporters for whom the EU is a major market, this move from frictionless trade to inevitable friction is a concern. Many smaller exporters will only have ever traded with the EU – so will have no experience at all of customs paperwork. A survey for Business West found that a third of all their exporters had never used customs paperwork.  

Companies with low margins will worry about the impact on cost. Companies in ‘just-in-time’ supply chains will be concerned that these additional barriers will slow down their access to market and hurt their competitiveness. Companies in complex and intertwined European supply chains, with many components travelling back and forth across the UK – European border, will worry that the added cost and complexity of paperwork and demonstrating origin will mean their future viability in the European market is threatened. We have heard all of these concerns from member companies. 

For many of our exporting members uncertainty and lack of clarity has now become a pressing issue.  Despite an agreement in place on the duration of a transitional arrangement the detail provided by the UK government about the future of EU trade remains very vague, yet companies need to start planning how to adapt and cope.