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The Red-Tape CurtainThe New Costs Afflicting Businesses After Brexit
Richard Barfield explains the deluge of restrictions and regulations that have been saddled on firms after the UK’s departure from the EU
In 1946, Sir Winston Churchill said that an “iron curtain” had descended between the Soviet Union and Europe. Seventy-five years later, on 1 January 2021, a red-tape curtain descended between Britain and the EU.
Yes, the UK-EU trade agreement has kept tariffs at zero. However, it has simultaneously created new, onerous barriers to trade that will affect both goods and services – barriers that will cause trucks to pile up at Dover, cause fish to rot at the border, and stop musicians from touring the continent.
The Brexit red-tape curtain will be expensive – costing an average of 8-9% for both goods and services, exports and imports. That’s around £25 billion a year in additional costs, saddled on UK exports.
For some businesses, lower sales and profitability will be manageable but, for others, their business model will fail.
The Goods, the Bad and the Ugly
Under its Brexit trade agreement, UK exporters to the EU now have to prove the origin of their goods. Without this proof, their goods are subject to tariffs. Complex rules decide whether a product is sufficiently ‘local’ to qualify as tariff-free. For a finished car, this covers thousands of components coming from a global network of suppliers, combined with the value added by UK manufacturers.
Goods constitute 58% of UK exports to the EU.
Small businesses play an important role in supply chains but are often poorly equipped to handle the stringent demands of customs processes. There are more than 140,000 small UK firms which export and employ more than two million people – accounting for about 30% of goods exports.
A recent survey found that 20% of smaller firms have temporarily stopped exporting to the EU to avoid trade costs and paperwork. This is despite the benefit of 12-month relaxations to make ‘rules of origin’ easier to apply, and the ability of some traders to self-certify the origin of their goods.
Yet, even tariff-free goods are subject to customs declarations and inspections, with the former expected to add roughly £15 billion a year to the costs of UK-EU trade, per HMRC estimates. These extra costs won’t be absorbed by the Government – they will be suffered by individual businesses.
Another headache for UK exporters is inspection and testing. Goods must meet EU regulatory and technical standards before they can be released into the Single Market. While the UK was an EU member testing bodies could certify compliance – but no longer. Instead, an EU-accredited body must now conduct the tests, within the EU. This means exporters have to use an EU subsidiary or find an EU-based agent willing to accept legal liability for conformity.
The deal allows simple products to be self-certified and other limited exceptions – for example, on pharmaceutical manufacturing practices, some vehicle certificates, and some aspects of aerospace production. However, unlike other trade agreements, there are no chapters on mutual recognition or conformity assessment – both of which would streamline the transfer of goods to and from the continent.
For chemicals – 16% of UK goods exports to the EU – the UK Government decided to create its own version of the EU’s regulatory framework. This doubles the admin for exporters, who must show that they comply with both sets of rules. The Chemicals Industry Association estimates that the extra cost to the industry will be £1 billion a year, although a future agreement on data-sharing would reduce this figure.
In relation to food, plants and animals, the EU no longer recognises the UK’s standards or tests (and vice versa) – meaning that additional tests are required when the goods arrive on the continent.
As we have seen already in the case of fish exports, cross-border food supply chains are competitive and often time-sensitive, so extra costs and delays are unwelcome. Fish from several UK-based companies has been rejected by Europe over the past few weeks, because of delays in the stocks being exported.
Surprisingly, the rules are more onerous than the EU’s deal with far-away New Zealand, which requires checks on only 1% of food imports.
Service No Longer Available in Your Area
Accounting for 42% of UK exports to the EU, services are increasingly important to international trade.
When the UK was an EU member, it could supply services to customers in the other member states under UK rules.
Now, however, UK service suppliers will have to comply with the specific rules drawn up by each sector and each EU member state. For financial services, it is possible that the EU may grant the UK regulatory equivalence in certain areas, but this can be revoked at short notice.
Firms also have to deal with another barrier: the EU no longer recognises UK licences or professional qualifications. This makes it more difficult for Britons to cross borders to deliver services in the EU. There is a list of activities that they can perform without a work visa, but this currently does not include musicians, performers, or artists.
Due to the new restrictions, firms face hefty new barriers to trade and their output will inevitably shrink.
One option for firms is to create a commercial presence in a member state to serve the EU market – as the Government now recommends. Many banks, airlines and large professional services firms have already done so. However, smaller firms will find this challenging – setting up abroad is not a cheap task. Plus, if and when they do, the UK will be deprived of investment, jobs and tax revenues.
Digital services are of growing importance to the world economy. So, it is concerning that the ability of UK businesses to transfer personal data from the EU will depend on a unilateral decision from the European Commission to grant adequacy to the UK. The EU’s criteria for sharing personal data with a third country are stricter than for EU members.
There are a few temporary reprieves enjoyed by firms. For example, the UK is not applying its full suite of import controls for six months – mainly because it wasn’t ready on 1 January.
When these temporary relaxations end, however, businesses will feel the full force of the Brexit red tape.
Churchill’s speech referred to the iron curtains that theatres used as a fire precaution, lowered at least once during a show. Ironically, the Government now says that it is looking for a bonfire of regulation.
Sadly, the Brexit red-tape curtain looks as if it will be fireproof.