Friday 28 July 2017

UK exit from customs union threatens Irish firms' viability

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Carol Lynch

Britain leaving the single market and customs union will threaten the viability of many Irish firms. This is especially true for those that export to the UK with products that offer a low profit margin.

That is not to be alarmist, but to be factual. The negotiators of the Brexit divorce deal need to be clear on its impact and it is the Government's job to highlight the potential impact of this to the negotiators.

Trade won't cease, but it will become much more complicated. The USA is outside the customs union and significant trade still occurs between Europe and America. Nonetheless, Britain's decision will have a big impact on Irish businesses both sides of the Border.

Businesses will have to lodge customs declarations for exports and imports, again albeit not in the traditional paper-based format, but it will be both timely and cost approximately €100 per economic movement.

It will inevitably mean some form of Border controls, albeit not necessarily at the frontiers. Electronic tagging and declaring your goods at designated warehouses could become the norm.

The impact of this means additional costs in terms of customs compliance, clearance costs, upskilling or employment of additional staff and potential for additional indirect costs due to the risk of border delays.

Finally, it may also mean additional customs duties, non-tariff barriers, licensing and other cross-border taxes. It means some companies trading today will struggle under this regime. That is what both sides in these negotiations need to understand.

Can this be avoided?

Yes, if the UK and Europe can agree frictionless customs arrangements to facilitate trade across our borders to keep the land border on the island of Ireland open and free-flowing.

To do this successfully in the context of the EU's obligations to protect the integrity of the single market will be challenging and there is no easy answer.

It will almost certainly involve the deployment of new technology.

And therefore, to achieve it we'll almost certainly need an implementation period for Britain to operate outside the customs union itself, but with current customs border arrangements remaining in place, at least until new long-term arrangements are up and running.

Unfortunately, this cannot be guaranteed until we see how the Brexit divorce negotiations progress between now and October.

What we all need to understand is just why Europe is obliged to protect the integrity of the single market, not just from a tariff's perspective, but also through the standardisation of goods.

Taking beef as an example, if the UK agrees a trade deal with Brazil, the European Union will be obliged to ensure that its own tough regulatory standards on food production are maintained. If beef, imported from Brazil, was allowed free and unfettered access to Ireland or any other EU country, then the concept of robust standard setting in food production by the EU would be undermined. There would be little point in both Irish and EU authorities forcing tough standards on Irish beef farmers, if cheaper and sub-standard goods were allowed free access to Ireland via Britain.

The whole concept of the single market would be undermined. Neither Ireland nor the EU can afford to let that happen.

Britain does need to understand why the EU needs to protect the single market. If the EU allow the single market to dilute, through British goods accessing Northern Ireland and going to other European locations, it undermines the powers of the EU as a regulatory body. We rely on the European Union to set our standards for legal obligations around environmental, consumer, labour law and safety standards.

The concept of the single market is that trade is seamless because everyone follows the same standards. This creates fair competition so that compliance costs with rules are not more costly in one member state than another. It also ensures that the European Union can compel food and car manufacturers to follow strict standards that protect consumers. The EU's strength in this instance comes from the size of the single market. A market of over 400 or 500 million has very strong negotiating power when it comes to setting environmental standards for industry. The European Union will resist strongly any efforts to undermine this.

When Britain says it wants to leave the customs union but still trade freely, they are seeking to undermine the concept of the single market, something which greatly benefits a small open economy like ours. An extensive customs clearance process is essential to ensuring that consumer and environmental standards are adhered to.

The central question which people assume the negotiations will answer is: How can Britain trade more with the rest of the world and still have access to the single market without customs controls?

Neither side has sufficiently explained how this conflicting scenario can work in order to allow businesses to plan and give comfort to them.

Putting together a customs regime in two years is virtually impossible. The extra staff, infrastructure and tariff categorisation procedures will be monumental - not only along the border, but at every major port and airport.

There is no other way to trade with third country states and still adhere to the single market. That reality is unlikely to change.

A deal is a long way away and we are advising clients not to panic. Trade between the EU and the US still happens on this basis so the issues can be managed. But there is no doubt the negotiators must grasp extremely difficult and complex problems and do so in a very short timeframe.

Trading with your neighbours is how almost all countries operate. The only exception to this is Israel.

Trade with Britain will not stop under Brexit, but it will become much more complicated. Passing goods between Dublin and Durham is seamless today but there will be many obstacles overcome to make sure this remains the case in future.

Carol Lynch is a Partner in the BDO Customs and International Trade Services department.

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