First days of Brexit

After more than four years in the making, the EU and the United Kingdom have agreed on a Brexit deal, though there are still significant changes in the relationship between the two economies.

After more than four years in the making, the European Union (EU) and the United Kingdom have been able to agree on a Brexit deal thus avoiding worst-case scenarios, though there are still significant changes in the relationship between the two economies. While the anticipated miles-long backlogs have been largely absent from the news, arguably those happened unexpectedly at the end of December when France closed its borders in response to a faster spreading variant of COVID-19 and resulted in delays and disruptions (though had nothing to do with Brexit), they are still expected in the early new year (as a consequence of Brexit). Those long tailbacks have been able to be avoided due to the Brexit coinciding with the New Year holiday, companies either diverting shipments away from trucking towards sea, air and rail freight in addition to stockpiling, and businesses delaying orders to let new customs requirements bed down.

The deal was announced just days ahead of the deadline on Christmas Eve, marking the end of nearly half a century of cooperation under the umbrella of the EU. The new framework for the UK and EU escaped tariffs and quotas, yet still comes with a myriad of changes for virtually all industries, as the UK relies on $1.6bn worth of products crossing the border each day. Crucially, a mutual recognition of standards is not part of deal, which would have allowed firms to produce in the UK and export into the EU without extra certification processes. Now manufacturers will have to get their products approved separately by regulators in both markets, which might result in two separate production processes, if UK and EU specifications diverge, essentially doubling costs.

Companies that are exporting goods between the UK and the EU are allowed a year to produce supporting documents certifying the eligibility of their goods for zero-tariffs access to the EU, offering industries some relief. This 12-month grace period on elements of the so-called “rules of origin” declarations, requires exporters such as carmakers to certify their goods qualify as sufficiently made in the UK in order to avoid tariffs. This grace period to obtain supporting documents is a move which recognises the complexity of certain supply chains, such as the automotive industry, and its economic importance. UK auto manufacturers generated around $107bn in sales in 2019 and employed 180,000. Some of the rules include that gasoline and diesel cars need to be made with at least 55% local content in order to avoid tariffs, this is 5 percentage points more than what automakers and the UK wanted; electric vehicles and hybrids will need 40% local content, which is 10 percentage points more than what the UK argued for.

The trade deal also came as a relief to retailers, though they will still have to manage non-tariff barriers to manage extra customs documentation, which requires staff and adds costs. The pharmaceutical industry also heaved a sigh of relief as the deal prevented unnecessary duplication and thus costs, as inspections of drug manufacturing facilities will be valid in both regions. However, the deal fails to address the mutual recognition of batch testing, suggesting safety tests on medicines may need to be conducted again, which would add time and cost burdens back.

In an attempt to support the transition, the UK government published more than 300 pages of advice regarding the new trade border with the EU merely hours before it took effect, resulting in business groups renewing their requests for leniency in the coming months. According to an HMRC estimation, trade between the two economics will entail more than 215m additional customs declarations a year and add £7bn of bureaucracy to the costs of doing business with the EU. In the UK, goods coming from the EU will be subjected to controls phased in over a six-month period in an effort to alleviate some pressure from the new regulations and customs agreements.

The chaos that was expected with Brexit taking full effect might have been forestalled for now, but the risk of queues choking ports remains a major concern. Britain’s busiest crossing point for trucks, Dover, saw less than a sixth of its average from last year’s traffic. An average of 1,000 lorries crossed each day between December 31, 2020 and January 4, 2021, whereas the daily average was about 6,500 in 2019. The matter is further complicated by negative COVID-19 test requirements, which can cause additional pressures on ports and drivers. While the full impact of Brexit is yet to be seen, there is no doubt that this is a distinguishably different EU-UK relationship than it has been over the last few decades.

Source: Transport Intelligence, January 5, 2021

Author: Dila Cebeci