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In the event of a no-deal Brexit, UK chemicals will be subject to tariffs each time they cross the English Channel, unless companies can claim exceptions under strict customs rules, according to a trade expert.
The World Trade Organisation (WTO) tariffs of up to 6.5% will apply.
This applies even for products which are being transferred to a subsidiary of the same company and amount to a tax on intra-company trading, according to René van Sloten, executive director for industrial policy at Europe’s chemicals trade association, Cefic.
“If you export - even to your own company - you have to pay duty, and that will be the case between the UK and EU27,” Van Sloten said.
“There are a lot of intra-company sales and an import duty is simply a tax you pay on trading with yourself - that’s one of the reasons we are in favour of free trade,” he added.
There are two ways to claim exemption from tariffs, but these are subject to strict customs rules and controls.
Companies can make a claim a duty exemption for Inward Processing.
This is where a substance is exported as a raw material, processed into a different product and then re-exported.
Most countries have these kinds of arrangements.
Once it leaves the EU customs union, the UK would have to set up its own Inward Processing scheme.
Van Sloten explained that the auto sector is a good example where products cross the Channel several times and would accumulate duty multiple times.
“In some cases you may be able to claim Inward Processing. But it’s unlikely to be for the whole value chain, perhaps just one or two steps,” he said.
The other exception is where a claim is being made for Duty Suspension.
If a company is dependent on a substance not produced in sufficient quality or quantity within the EU, it is possible for the company to make claims under this scheme.
This will bring duties down to zero.
“A lot of chemical tariff lines benefit from this, saving the EU industry hundreds of millions of euros in import duties,” according to Van Sloten.
“The UK will have to set up its own system for these exemptions in the event of a no-deal Brexit,” he said.
CUSTOMS UNION DOWNSIDE
One of the options being pushed by some UK politicians is for the UK to enter a permanent customs union with the EU.
A ‘backstop’ customs union is also part of UK Prime Minister Theresa May’s Brexit deal.
This would allow relatively frictionless trade to continue while a free trade agreement is negotiated during a two-year transition period.
The deal has been rejected by the country’s parliament.
Van Sloten explained that there are disadvantages to being in a customs union.
If the UK enters a customs union with the EU, it must eliminate tariffs against any third countries where the EU has a free trade agreement in place.
However, the UK does not automatically benefit from zero tariffs on its exports to those third countries.
It must first negotiate its own free trade agreement with those third countries and that may not be simple.
Turkey, for example, is in a customs union with the EU.
The EU has a trade agreement with Canada, and so the country’s exports into Turkey will be zero-rated.
But Turkey will have to negotiate its own deal with Canada to enjoy zero tariffs on its exports to Canada.
“It’s a tempting thought that you can go to the third country and ask if you can do the same deal as the EU. But trade deals are painstakingly negotiated over many years, and as the EU27 or 28 you offer a big market to the third country which gives you leverage.”
“If the UK is alone, the amount of market access it grants to a third country is less - it’s not as straightforward as just copy and paste.”
Turkey currently cannot negotiate deals with other countries, unless the EU already has a free trade deal in place with those countries.
LACK OF UK TRADE EXPERTS
Van Sloten asked: “Does the UK have enough trade experts in its public service to negotiate all these free trade deals? I would say, “No,” you don’t have the experts any more - negotiating Rules of Origin is a nightmare.”
He explained that under a free trade agreement, countries want to know if the products are indeed really coming from that partner country.
For example, under the agreement between Canada and the EU, a producer in the US might ship something to Canada, do some minor processing and then benefit from zero duties.
The Rules of Origin are designed in order to prove that the last “substantial transformation” of a product happened in the partner country.
JAPAN DEAL IMPACT LIMITED
The UK will not benefit from the forthcoming trade deal between Japan and the EU in the event of a no-deal Brexit.
This is, however, not expected to make UK chemical exporters to Japan less competitive, because tariffs from Japan are considered low, typically at about 2-3%.
“The Japanese market is very difficult and tariffs are not the main barrier; relations and know-how are more important.”
“It will be a cost saving for EU exporters but (will) not result in a quick increase in trade with Japan,” Van Sloten added.
The forthcoming trade deal between the EU and Japan has to be agreed by the European Parliament before it goes into elections in May. Van Sloten hopes it can all be finalised this year.
Source: ICIS