Other Brexit trade impacts

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Roll-over trade deals

Other Brexit trade impacts include the roll-over of EU trade deals with other countries. The process began during the transition period and, by April 2024, the government had rolled over 69 EU agreements . Despite the effort involved, proved to be a ‘nothing burger’. The UK’s trade deals with non-EU countries ended up being very similar to those pre-Brexit. They were essentially ‘cut and paste’ versions of existing EU agreements with minor changes.

The UK had also signed Mutual Recognition Agreements (MRAs) that replicate some EU bilateral arrangements with the US and Australia (and New Zealand).

Points to note:

the Comprehensive Economic Partnership Agreement with Japan contains some useful improvements such as on financial services, but has worse export quotas for agricultural products;
the UK’s agreement with Turkey is now an FTA rather than a customs union;
for the UK’s larger partners, the new agreements are not as straightforward as the old ones, for example:
- they can complicate trade, particularly for goods imported into the UK from a non-EU country and then exported to the EU (due to the effect of rules of origin):
  - please see an excellent short explanatory video from the UK Trade Policy Observatory at Sussex University;
- the Swiss agreement has complications over Rules of Origin and MRAs;
- the Norway rollover relates only to goods, but excludes services, which were covered in the pre-Brexit EEA agreement.

Leaving EU VAT area

Leaving the EU VAT area created a big change on how VAT is charged on trade with EU member states, including:

payments occur earlier leading to potential cash flow consequences (which is particularly harmful for small businesses);
British companies trading across the EU in services need to become VAT-registered in each member state where they operate;
British importers have to:
- make import declarations for the first time – a change that affects around 130,000 businesses;
- employ a VAT representative in the country to which exporters are sending goods.
goods need to be held at the border until VAT is paid, which inconveniences UK consumers buying products from the EU over internet marketplaces;
new border infrastructure to impose VAT at the UK border, including with Ireland:
- new controls check packages coming into the UK from the EU (in the same way that packages from non-EU countries are inspected).

Sources:
What Brexit means for VAT, Prospect Magazine, April 2018
VAT: Brexit’s hidden border dilemma, Chris Giles, Financial Times, 30 May 2018

UK Global Tariff

The UK’s new tariff regime, UK Global Tariff’ (UKGT), applied from 1 January 2021 to imports from countries that have no trade deal with the UK: the US, China, Hong Kong and India are the main trading partners in this category. The UKGT provides a baseline for any UK negotiations for FTAs with the US and other countries.

Goods imported from developing countries continue to attract no tariffs, because the UK has replicated the EU’s Generalised Scheme of Preferences (see above).

The UKGT is broadly similar to the EU’s Common External Tariff (CET) but with some differences:

UKGT is simpler than the CET
UKGT tariffs are slightly lower than CET, which creates complications:
- for Rules of Origin (RoO) monitoring and reporting;
- for Northern Ireland into the Republic, it is more likely that more goods will be deemed ‘at risk’;
- increases need for border/customs controls, with a particular impact on Northern Ireland.

Under WTO rules, applied tariffs vary by commodity and are generally lower than the bound tariffs but cannot exceed them. The applied tariff, also called ‘Most Favoured Nation’ (MFN) tariff, is normally the highest tariff that the UK would use. However, the UK may raise its applied tariffs up to the bound level.

Average UKGT MFN tariff is slightly lower than the CET average (5.7% vs 7.2% per tariff line or 1.5% vs 2.1% by weighted value)
UK bound tariff is more liberal than the CET (60% by value are tariff free, compared to 50%).

Sources:
UK Trade Policy Observatory, Recommendations on the UK Government’s Global Tariff proposals, Briefing Paper 39, March 2020
UK Trade Policy Observatory, New tariff on the block: What is in the UK’s Global Tariff?, May 2020
UK Trade Policy Observatory, The UK’s ‘No Deal’ Tariffs: An Update, October 2019

Civil service trade capability

The UK needed to create its own trade capability in government and the civil service to replace the activities of the European Commission’s Directorate of Trade. The UK’s Department of International Trade (DIT) built a team with specialist skills to negotiate trade agreements. However, it focused initially on replacing existing EU agreements with other countries rather than negotiating new ones. The DIT became part of the Department of Business and Trade (DBT) in February 2023.

The DIT employs 3,300 staff in the UK to negotiate trade agreements, resolve disputes, help remove trade barriers and promote exports. There are also 1,400 overseas staff to support exports and the implementation of trade agreements.

By contrast, the European Commission had 717 staff members in DG Trade to support 27 member states (as of 1 January 2024). DG Trade not only negotiates but also maintains and monitors trade deals for the EU.

New border controls

To be effective, trade agreements require border controls, collection of tariffs, duties and VAT, plus ongoing monitoring and maintenance. To do this, the UK has had to design and implement new public and private sector infrastructure which has been a significant undertaking. The government has not helped by:

being slow to reach an agreement with the EU
poor planning
repeated delays in implementing its own system changes
failing to provide timely details of final new rules to the private sector.

The National Audit Office estimated that the cost of implementing new post-Brexit border controls for goods trade is £4.7 billion (£2.6 billion of which had been spent by March 2023). This related to:

putting in place the infrastructure and systems required to manage the border in the context of EU exit
wider programmes to improve the performance of the border, for example, through making better use of data to reduce costs for traders and government.

However, it excluded the new operational costs of managing the border, such as additional staff.

HMRC is responsible for collecting tariffs, duties and VAT.

Red tape for traders

Traders face new red tape and substantial costs to move goods across the EU–GB border.

£7.5 billion annual cost to UK businesses of completing customs declarations on trade between the UK and the EU, which it is yet to update (HMRC, 2019 estimate);
316,000 Export Health Certificates issued by the Animal and Plant Health Agency on goods exported from GB to the EU during 2023 (not including goods moved from GB to Northern Ireland);
£54 million annual cost to traders of the sanitary and phytosanitary (SPS) controls it introduced for EU imports between January 2021 and December 2023 (Department for Environment, Food & Rural Affairs’ estimate);
following the introduction of the remaining import controls: £469 million annual cost to traders of the SPS controls and safety and security declaration (SSD) requirements under the new Border Target Operating Model (government estimate).

Impact on SMEs

Brexit is a major challenge for small and medium-sized businesses (SMEs). Larger companies were better resourced and more capable of dealing with the changes.

See Appendix B SME case studies for three examples that bring this to life.

Pre-Brexit, over 200,000 UK companies (mainly SMEs) had only ever traded with the EU on a tariff-free, near frictionless, basis within a common VAT area. Post-Brexit, UK-based exporters to the EU require their own trade infrastructure and new capabilities to deal with customs checks and to certify the origin of goods.

The main consequences are:

many SME exporters do not have, or cannot afford, the expertise to deal with the complexities of import duties, transit documentation, additional VAT considerations etc.
this has led some firms to stop exporting or to establish commercial entities within the EU to service customers (and register in the EU for VAT purposes) (British Chambers of Commerce);
EU-based business customers and suppliers now find UK SMEs less attractive to deal with.

See the section “How big are the impacts?” for details of the trend in UK businesses trading with the EU.