Brexit: The negotiating mandates and what they mean for retail

Comparing the mandates

There are a number of key issues that will impact the cost of sourcing retail goods from the EU. These are the provisions on market access and wider regulatory issues that are being collectively described by the EU as the “level playing field”.

In some areas, the UK and the EU are in broad agreement. In others, there are manageable differences; but in some, there are fundamental differences to be discussed.

There is broad agreement on the terms of a free trade agreement (FTA). However, significant diverging views exist on how to deal with all the level playing field issues that the EU insist must be covered in the agreement in order to allow the FTA to proceed. There are also important differences regarding the form of the agreements, dispute resolution mechanisms, remedies and other governance issues.

In most of the level playing field areas, it is possible to see a compromise that will, on the one hand, allow the UK to claim regulatory autonomy, and on the other, give the EU enough assurance its market will not be undercut by UK producers operating to lower standards. It is only regarding state aids in which opposing positions appear to be fundamentally incompatible.

What an FTA in line with the mandates means for UK retail

If the two sides agreed on an FTA in line with the mandates, UK retailers would be able to source all consumer goods from the EU free of customs duties and quota restrictions.

However, they would face some new administrative costs on imports from the EU arising from compliance with customs requirements. Typically, these involve lodging a customs declaration that classifies goods for customs purposes, records the value of the goods and confirms their origin. Such customs declarations are already required for any imports from outside the EU and cost only modest amounts. According to HMRC, the average cost of completing a customs declaration is £32.50 per consignment.

Businesses could also face higher administrative costs for importing goods that are subject to additional non-customs regulatory checks at the border. These would most notably apply to food products, which need to demonstrate compliance with sanitary and phytosanitary (SPS) rules at the border. However, UK food importers should be encouraged by the UK mandate, which states it will apply a risk-based approach to enforcement that aims to minimise the number of physical border inspections and simplify other administrative procedures.

Despite that, there are likely to be delays at the border resulting from physical inspections on some imports. The UK currently only physically inspects 2-3% of consignments from the rest of the world and the mandates suggests it would adopt a similar approach to EU imports.

Is a deal possible?

The two sides are far apart on many issues. The EU insists a comprehensive FTA is only possible if the UK continues to follow EU rules, or at least very similar legislation, on a range of issues. But the UK insists the objective of Brexit is autonomy over its regulations.

There are, however, three key reasons underlying the possibility of a deal.

First, the UK and the EU’s are aligned with their positions on regulation, so de facto on day one of any new trade agreement, the two parties will be operating on a level playing field. This gives the EU confidence from the outset that UK trade will not unfairly disrupt competition within the EU market.

Second, in most areas of the level playing field, the mandate wording is sufficiently vague to allow compromise, whereby the UK retains regulatory sovereignty but assures the EU it will not exercise regulations enabling UK producers to undercut EU producers.

Dispute resolution provisions would be key to enabling this to work, which may be why the UK mandate contains a firm rejection of any role for the European Court of Justice in any dispute mechanism governing the relationship.

Third, numerous devices and mechanisms exist, some explicitly referenced in both mandates, which would allow either side to compensate for any distortion to trade arising from changes to future regulation.

There may be some products, for example, that are extremely sensitive either politically, economically or culturally, which both sides cannot agree on regulatory issues for. As a result, such products could be excluded from the FTA altogether – exclusions and exceptions are commonplace in other EU trade agreements, mainly on agricultural and food products.

Importantly, such exclusions would not mean that trade in those products is banned – trade would instead be conducted on standard WTO terms.

The two sides could also apply additional duties to compensate for distortions arising from state aids or competition policy.

There is the possibility for new trade instruments to be negotiated to deal with other areas of competitive advantage gained as a result of diverging regulations. For example, the EU has considered a “border adjustment mechanism”, which would apply special duties to imports from other countries enjoying lower production costs from lower environmental standards and carbon pricing.

This idea could be developed, however, allowing the EU to apply additional duties to goods imported from the UK that benefit from reduced costs, as a result of lower environmental or climate change standards in Britain.

If these measures were applied to an FTA, we could expect a gradual introduction of new tariffs on certain trade where EU/UK regulation diverges, and where that divergence has caused a cost advantage in the market. It is most likely that any new tariffs will be applied by the EU to imports from the UK and not vice versa.

Will any new burdens and costs affect imports and exports equally?

The two negotiating mandates are strikingly different – in tone and approach. The EU mandate is extremely focused on ensuring UK producers cannot gain a cost advantage in EU markets. Consequently, the mandate has a strong emphasis on enforcement and control, implying that checks and inspections on the EU side are likely to be more onerous and intensive than checks and inspections on the UK side.

Will all products be equally affected by new costs in an FTA?

Almost certainly not. New costs on trade with the EU are likely to be concentrated on a few products, most of them likely to be food-related. This is because:

• Where tariffs apply, they are higher for food than non-food
• Food products are more likely than non-food to attract tariffs, even in an FTA
• Food products must comply with SPS and customs rules, multiplying costs for traders
• Physical inspections on consignments are more frequent for food than non-food

Next steps

Negotiations start this month, continuing intensively until the end of June, when the EU hopes a deal on fisheries would have emerged and a decision made on whether to extend the current transition period by one or two years.

At the end of June, the UK will decide whether an EU trade deal is possible by the end of this year, and if not, it may walk away from negotiations to concentrate on preparing for a WTO-based relationship with the EU on January 1, 2021, instead.