Brexit
I get asked a lot about the challenges that British importers and exporters are facing at the moment and there’s no doubt that Brexit is the cause of some of the biggest headaches. Whilst we have what is frequently described as a zero tariff zero quota free trade agreement with the EU, that’s not strictly accurate, as anyone who wants to export steel to the EU will testify.
Also, to qualify for zero tariffs on exports, manufacturers have to prove that their products comply with the rules of origin set out in the UK/EU Trade & Cooperation Agreement which is a complex process that I’ll discuss in more detail further on.
Customs declarations are now required for all goods sent between the UK and the EU so now traders need to have an understanding of commodity codes and Incoterms which I’ll also explain later. In addition to customs declarations, food and drink suppliers now how to provide sanitary and phytosanitary certificates to prove their products still comply with EU standards which has been a particular bone of contention in Northern Ireland. Also, I should point out that while food and drink exports to the EU have dropped, they have actually been made up for by exports to outside the EU. This is likely to be because producers, having got to grips with customs declarations for the EU, realised that they now had the knowledge they needed to export anywhere and so broadened their horizons which is a very positive result. The latest trade figures show that gin, beef and tea products are particularly popular. Hopefully we’ll see other industries follow suit and start looking further afield for export markets because British products are still very much in demand all over the world.
I’ll also look at how the pandemic has had a huge impact on global supply chains and review the transition from CHIEF to CDS which is the software HMRC uses to complete import and export declarations. The last challenges I’ll examine are currency fluctuations and the uneven global economic recovery.
Customs Declarations & Processes
The first impact of Brexit I’m going to cover is the requirement for customs declarations. For companies that had previously only traded with the EU, they suddenly had to understand their products and the terms under which they traded with their customers in a lot more detail. The first thing they needed to get to grips with was the HS code or the commodity code for their products.
The commodity coding system is based on an internationally recognised set of classifications known as the Harmonized System that’s maintained by the World Customs Organization. It is designed to provide a method for classifying all physical goods in international trade and forms the basis of the customs tariffs of more than 200 countries, including the UK.
Commodity codes are an 8 or 10 digit number that tells everyone involved in the movement of goods what they are, what duties should be paid if any, whether a quota applies, if they should have a licence, what the labelling requirements are and so on. The 8 digit code is for exports and the 2 additional digits to make up the 10 digit code are for imports.
If incorrect commodity codes are used customs declarations may be refused which causes delays and additional costs as well as reputational damage. They are updated every 5 years and the latest update went live on January 1st this year. Several of my clients have been caught out by this, in France and the US, and it’s been very time-consuming and expensive to sort out. What happened was that whilst the codes were still relevant in the UK tariff, they had changed in the EU and US tariffs so it’s very important to check the tariff of both countries as there can be important variations once you get past the first 6 digits.
Incoterms
The next thing importers and exporters need to think about carefully that they didn’t really worry about before are Incoterms. Incoterms is short for International Commercial Terms and they are created, monitored and managed by the International Chamber of Commerce. The Incoterms rules explain a set of eleven of the most commonly used three letter trade terms which explain the Obligations, Risk and Costs in contracts for the sale and purchase of goods. The context in which most people use them is when goods are being transported from the seller to the buyer. They have been designed to help everyone involved in a contract for the sale and purchase of goods, to think carefully about how and where the goods are deemed to be delivered and what level of cost and risk each of the parties is prepared to take on. They also indicate who is responsible for customs formalities so a lot of British and EU companies have been struggling to get to grips with them for the first time since Brexit.
By Obligations we mean who is responsible for things like organising carriage and insurance or who obtains shipping documents or licences. The Risk element specifies where and when the seller “delivers” the goods, i.e. where risk transfers from the seller to the buyer and Incoterms also make clear which party is responsible for which costs for example transport, packaging, loading, unloading and checking or security-related costs.
You might think it’s pretty obvious where or at what point goods are delivered, but in fact, the customer’s premises is rarely where delivery is deemed to have taken place. Delivery means where the risk transfers from the seller to the buyer and it’s often at a port so the buyer needs to understand this so they can arrange transport for the final leg of the journey and also take out insurance if required. Again, I’ve had a couple of clients who’ve agreed to Incoterms they didn’t fully understand when negotiating a contract with a new customer and have then been caught out by responsibilities and costs they didn’t realise they were agreeing to which ate into their profit margin.
Rules of Origin
But far and away the most complicated aspect to trading with the EU post-Brexit is the need to understand rules of origin. From the beginning of this year you need to be able to prove that your goods comply with the relevant rule of origin if you or customer are going to claim preference in other words, reduced or zero duty.
This is a huge subject that’s causing manufacturers a lot of problems because it’s complicated and to be honest the information that’s available from HMRC isn’t easy to understand if you’re not a customs expert. The origin of goods is an important concept as it is central to determining the customs duties and taxes related to a specific good as well as to some trade restrictions such as quotas or labelling. Rules of Origin are the rules that determine where a good was obtained or manufactured, that is, its economic nationality. A lot of people find this confusing and think that having imported goods from China for example, if they then re-package them, or include them in a set with some other stuff that is of UK origin, when they re-export the final product to another customs territory like the EU, they can say the goods are of UK origin because that’s where they’re being sent from but that’s not correct and it’s important to understand because it affects import duty and you’ll be penalised by HMRC if you get it wrong.
Northern Ireland
Northern Ireland has remained in the UK but also continues to be part of the EU customs union. As such, goods produced or manufactured in Northern Ireland can be sent to the EU without the customs formalities that goods produced or manufactured in Great Britain are subject to. But, because the EU wants to prevent Great Britain circumventing those customs formalities by sending their goods to the EU through Northern Ireland, there is effectively a border in the Irish sea and so goods from Great Britain going to Northern Ireland are subject to the same customs formalities as when they go to the EU, even though Northern Ireland is still part of the UK. So, as Northern Irish traders have appreciated, they’re in a pretty good position for exporting because they can send stuff to GB and the EU without any checks. But of course GB producers are having to do all this paperwork which is time-consuming and expensive which is why the Prime Minister has drawn up a bill to override parts of the protocol that relate to this issue.
The main objectives are;
- Green and red channels
A green lane for goods from GB destined to remain in NI, allowing for fewer customs checks, and a red lane with existing checks for goods destined for the Republic of Ireland, i.e. the EU.
- Dual regulatory system
Allows British firms exporting to Northern Ireland to choose between meeting EU or UK standards on regulation. An example of how this is damaging some businesses is that the EU have just banned something called E171 that is used by bakers as a whitening agent. So Northern Irish bakers can no longer use it because they’re subject to EU regulations even though they only supply the UK market which puts them at a disadvantage to their competitors.
- Taxation and state aid
An end to EU control over state aid and value added tax in Northern Ireland. An example of this is that the recent VAT cut on energy-saving materials that benefits Great Britain could not be implemented in NI because of EU tax rules
- Curbing the ECJ
End oversight by the European Court of Justice on any trade disputes, which instead would be dealt with by “independent arbitration”
- Future powers
In Clause 15 of the bill, ministers are given sweeping powers to change almost every aspect of the protocol’s text. The government describes this as an insurance policy “rather than the right to sweep away further chunks of the agreement but you can see why the EU are unhappy about it.
Although I can understand what the government is trying to achieve, If the bill does get through the Commons and the Lords and the EU decide to impose tariffs on UK products in retaliation the fall-out will be pretty catastrophic for both economies in my opinion.
Covid-19
The challenge of the pandemic is mainly to do with the way it massively disrupted global supply chains. China’s zero-tolerance policy to Covid meant that factories and ports have been closed for weeks at a time which had a knock-on effect for many industries – especially products requiring semi-conductors, and there are still thousands of shipping containers in the wrong place clogging up ports. This meant that ships, who normally work to incredibly tight schedules in terms of the window in which they dock and unload, were waiting for days or even weeks or rerouted to other ports. This inevitably had an impact on prices and a container that used to cost $3000 to ship from Shanghai to New Jersey will now set you back closer to $12000. When you factor in the Evergiven getting stuck in the Suez canal it’s not surprising that a lot of industries are looking to reshore their supply chains or at least find suppliers much closer to home. The high cost of shipping means that locally made components, whilst costing more, are now competitive due to the lower transport costs.
CHIEF / CDS
In addition to all of the above, traders are being advised to consider training staff to prepare for when HMRC completes its switch to a new system for handling customs entries on goods leaving and entering the UK. The transition from the Customs Handling of Import and Export Freight (CHIEF) system to the Customs Declaration Service (CDS) is scheduled to be completed by 31 March 2023.
The training is required to ensure customs compliance on both the CHIEF and CDS systems, comparing how declarations are entered into both because the data declared into CDS varies from the data declared in CHIEF and introduces new elements. Traders need to understand these differences to ensure the correct data is submitted and to ensure customs declarations don’t fail, resulting in delays to goods movements.
Global Economy
Manufacturers are trying to navigate very turbulent waters at the moment and although The Organisation for Economic Co-operation and Development (OECD) confirmed in its latest Economic Outlook analysis that the world economy is on track for a strong but uneven recovery from the Covid-19 pandemic, the war in Ukraine and China’s zero-Covid policy were cited as the two root causes for slowing growth and a rise in inflation across the world.
Businesses require stability to thrive so that they can plan. The drop of sterling in the last 12 months against the dollar and the euro may translate in to improved export figures as British products become more competitive but for importers and the economy generally such a steady decline isn’t good news. With so much uncertainty to contend with it’s not surprising that a data set from S&P showed that manufacturing was facing increasing costs and falling output, both globally and in the UK and British manufacturing faced its lowest period of growth in the past seven months. Having said that, total exports of goods, increased by £2.2 billion (7.4%) in April 2022 compared with March 2022. This was driven by a £1.2 billion (8.1%) increase in exports to EU countries, while exports to non-EU countries increased by £0.9 billion (6.5%) and was mostly driven by machinery and transport equipment to both EU and non-EU countries and fuel exports.