The optimal outcome of the negotiation process pursuant to Article 50 TEU in respect of tariffs on trade between the UK and the EU would be a full free trade agreement. This would deal not only with tariffs and quotas but with all trade, services and investment matters,including customs cooperation and trade facilitation. If this cannot be agreed, either due to differences between the parties or because of the expiry of the two-year negotiation period before terms can be concluded, the UK should offer an agreement that tariffs and quotas will not be applied by either side, as part of the framework for the future relationship, on an interim basis for a limited period with a view to a free trade agreement.

If the EU will not agree to this, it is still possible for the UK to remain competitive and lower the overall cost of manufacturing here by reducing tariffs on imports and benefiting from the depreciation in the value of sterling, for as long as the current exchange rate persists. The shape of such tariff reductions needs careful consideration, as unilateral tariff reductions must be extended to all WTO members under the WTO’s MFN rule. We have set out some of the factors to be taken into account and work is continuing to model the likely outcomes of a
range of options.

Whether or not tariffs are imposed, the introduction of customs formalities will lead to
disruption and additional costs for importers and exporters. However, customs procedures across the UK and member states are highly efficient and mutual recognition of trusted traders under existing schemes and continued close co-operation should ensure that costs and administrative burdens are minimised. The availability of reliefs from payment of duty on materials that are imported for processing then re-exported or are only in transit through a country mean that supply chains will be protected from cumulative duties on components that cross borders multiple times.

Even if tariff free trade is agreed, rules of origin will be applied, which also entail costs to manufacturers. The EU’s default rules are relatively liberal, and there are other examples in free trade agreements, including where the EU is a party, where more flexible rules have been agreed. Processes also exist for exporters to self-certify origin and agreeing these and ensuring as many businesses as possible sign up to them should be a priority. Traders may need an interim period to adjust their supply chains and be able to satisfy and certify origin requirements, during which rules of origin should be waived, subject to the UK and the EU maintaining the Common External Tariff on imports from the rest of the world.

HMRC will need to be resourced to deal with the increase in customs activity and should run a programme to raise awareness among businesses who currently trade with EU countries and not outside of the customs union. If it is agreed that tariffs will not apply this will be more straightforward as it will not include payments and applications for reliefs.

Product conformity assessment can be done by manufacturers of goods even where they are outside of the EU, except in respect of certain products where certification by an authorised body is required. In such cases, the EU has mutual recognition agreements with a number of third countries permitting bodies in those countries to assess and certify those goods, and mutual recognition of assessment bodies between the UK and EU should be sought.

Membership of standards bodies CEN, CENELEC and ETSI and global regulators such as UNECE is open to non-EU members and the UK should continue its participation.

Close trading partners such as the USA and Canada and Australia and New Zealand, as well as European neighbours such as Switzerland and Norway operate efficient borders to facilitate trade without being in a customs union. Contributors from Australia and Canada have summarised their respective regimes.

Interim measures such as extended membership of the customs union or a transitional
arrangement to facilitate customs clearance for a short period of time (no more than one year, to ensure that opportunities with third countries are not lost) to ensure that customs IT systems and personnel are ready and businesses have been able to adapt to rules of origin and other formalities may be required. Ultimately these matters should be covered in a trade facilitation chapter of a free trade agreement.

About the Special Trade Commission

The Legatum Institute Special Trade Commission (STC) was created in the wake of the British vote to leave the European Union. At this critical historical juncture, the STC aims to present a roadmap for the many trade negotiations which the UK will need to undertake now. It seeks to re-focus the public discussion on Brexit to a positive conversation on opportunities, rather than challenges, while presenting empirical evidence of the dangers of not following an expansive trade negotiating path.

The STC will draw upon the talent of experienced former trade negotiators from the US, Canada, Mexico, Australia, New Zealand, and Singapore, among other nations.

In 2016, the STC will host a number of public briefings that offer advice to key stakeholders on EU negotiations. The latest briefing took place on Thursday, 8 December and focused on the future of Britain’s agriculture and fisheries industries post CAP and CFP.