Think Brexit’s all over? Wait until the grace periods end…

Meme by the author

Despite the best efforts of 87 per cent of the mainstream media (by circulation) trying to distract you from the battering Brexit is giving to business up and down the UK, news is at last filtering through. And, bad as this news is, we have yet to see the worst because the Trade and Cooperation Agreement (TCA) contains a number of grace periods which are putting off the evil hour when Brexit finally, genuinely bites. What’s more, the TCA itself has not yet been ratified by the European Parliament, so we face yet another Brexit cliff-edge at the end of this month and could still end up with no-deal Brexit.

Ignoring for a moment the thunderous no-deal Brexit cloud on the horizon, it is important to realise that the United Kingdom’s situation (the four home nations) is different from that of Great Britain (the three nations of the mainland). The Irish Protocol (IP), which is part of Boris Johnson’s ‘oven-ready’ EU Withdrawal Agreement, came into force on 31 January, 2020. The objective is to prevent a hard border between Northern Ireland and the Republic of Ireland, which Brexit would otherwise entail.

Essentially, it keeps Northern Ireland within the EU single market and customs union, while setting up an international border within the UK in the Irish Sea. However, as we were still in the Transition Period the border was not operational (and Johnson persistently lied that it did not and would not ever exist) only coming into effect with the TCA on 1 January, 2021. Only then did the impact of the Irish Sea Border begin to be felt. But  we still aren’t experiencing ‘full Brexit’. The IP and the TCA have grace periods which are delaying some of the pain yet to come.

TCA grace periods

[Ed: We have omitted to cover the grace periods for Financial Services and Data in this article, but both have very serious implications for the UK going forward. Suffice it to say, they provide further evidence of a lack of forethought. ]

1. Rules of Origin (RoO)

The TCA only applies to goods that are deemed British or EU-made so it’s important to determine the level of local content in a product. That’s where rules of origin come in, and they are a bureaucratic nightmare. If you’re unable to buy a favourite product, it could well be because the application of rules of origin have made it uneconomic to sell into the UK.

There is no problem if a product is made in the UK with inputs that are 100 per cent British or from the EU. Where it gets tricky is when non-British or non-EU ingredients or components are used. There is a different threshold for every item. For example, 20 per cent of the weight of honey can be from outside the UK or EU, but that falls to zero per cent for other foodstuffs, like meat.

It is possible to get round RoO by “processing” a product brought in from another country so that it is very significantly changed. However, the rules about what qualifies as a transformation and how much the product has to be transformed are complex. Painting or packaging goods do not count as processing, for example.

Rules of origin are standard in any free trade agreement (FTA), but because the UK and the EU’s supply chains are so integrated, there needed to be a more tailored approach that went above and beyond the bog-standard RoO clauses. Unfortunately, the British government was in too much of a hurry to boast about having got ‘Brexit done’ and refused the offered extension to the Transition Period that would have enabled it to negotiate a much better deal. We are all paying the price.

One famous case, Marks and Spencer’s Percy Pigs sweets, illustrates the problem. The sweets are manufactured and packaged in Germany and shipped to the UK for onward distribution. No tariffs are payable, because all has occurred within the area of the FTA. However, if the UK now ships them to the Republic of Ireland, tariffs are payable, because the product has not been modified in any way. Tariffs could only have been avoided if something had been done by M&S in the UK to create additional value. In other words, the TCA did not make any provision for the UK acting as a hub – importing from one EU country and then distributing onwards to other EU countries without further processing in the UK. Oversights like this highlight just how amateur and ignorant the British Brexit negotiating team was. Take a look at Daniel Lambert’s articles on what it’s meant for his wine business for another example.

At the moment, and until the end of the year, exporters only have to self-certify that their products fulfil the rules of origin. However, from 1 January next year, exporters will have to present a certificate of origin from the suppliers of every ingredient or component in their product. It is to be hoped that the Government is helping companies to prepare for this additional bureaucracy, but based on past form, it is unlikely. It will result in reduced consumer choice, higher prices and shortages.

2. Grace periods on customs checks

This is where the situation between GB to EU and GB to NI diverge. For GB to EU, for those products that still qualified for export (and some, like shellfish and bivalve creatures, did not), there were no grace periods. The EU was ready to apply third-country checks, as it would to any other country. This is not a punishment. Go to Australia or the United States and you will see similar checks being applied. This is because EU countries have a duty of care to protect the health and welfare of their citizens. The rules are based on World Trade Organisation (WTO) standards.

However, the UK government was not ready at a practical level to implement these customs checks on 1 January. Facilities are still being built, systems are still being developed, and staff are still being hired. Our government therefore unilaterally declared a grace period for all goods coming in to the country. It tried to palm this off as a benefit for businesses, to whom it only gave one week to wade through the TCA and figure out what the impacts would be at the end of last year. This was insulting. Changing internal processes and information technology systems in so short a time is an impossibility. Businesses were not fooled by this apparent act of magnanimity. They know that had it been ready, our “F*** Business” government would have thrown them to the wolves.

As no customs documentation is required or checks performed on goods coming in to the country at the moment, we effectively have a smugglers’ charter, albeit that is just a hypothetical ­—until somebody gets caught exploiting the opportunity.

However, there are two very real impacts that arise immediately. Absence of checks on EU imports are yet another hit to the competitiveness of British businesses since to export they have to jump through all sorts of hoops that competitors on the continent do not. This makes it much harder for UK companies to compete in EU markets.

Meanwhile it’s a free for all for importers, as EU companies do not face the same barriers in the UK market. This leads to the second immediate impact: if we aren’t enforcing proper documentation and customs procedures, all sorts of goods of, at best, unknown and, at worst, suspect origin are circulating in the economy. A nightmare for UK competitors and a risk for consumers.

For those businesses that did everything they could to prepare for Brexit, the grace period extensions just add insult to injury. They have invested in new processes, systems and staff that now cannot go live until the UK’s unilateral grace period ends, leaving them carrying a very heavy cost base and leaving them at a disadvantage to competitors. British companies could be forgiven for thinking that they are no longer on a level playing field and that it is their own government that is showing more favourable treatment to their competitors!

The new (unilateral) deadlines are:

1 October 2021 —Pre-notification and export health certificates (EHCs) required for animal-origin products. This includes goods that are only transiting through the UK, say from France to the Republic of Ireland. EHCs have been one of the biggest issues on GB-EU trade with minor errors leading to delayed shipments. They are time-consuming (and expensive) and must be completed by a vet, or other qualified person.

1 January 2022 —Physical checks to begin at the border, including on animal and plants products, along with requirements for safety and security declarations. Some products, such as chilled mincemeat and fresh sausages, will be completely banned from entering GB from the EU.

March 2022 —Physical checks to begin on live animals and low-risk plant products

From a cynical perspective, the benefit of these new deadlines for the government is that they kick the worst effects of Brexit still further down the road, delaying those empty supermarket shelves once dismissed as ‘Project Fear’. They want to get to the next election with as many voters as possible still not realising that Brexit was a bad idea and its worst impacts are yet to come. It’s a big reason why many speculate that Johnson will call an early general election.

What’s going on in Northern Ireland?

Northern Ireland should be performing the same checks on qualifying goods (those listed as being at risk of entering the EU) as GB ports should be performing on goods coming from the EU. However, the government agreed a grace period with the EU for food and parcels coming from GB until 1st April, 2021.

Even within that grace period, there have been serious difficulties, as some of those GB businesses selling into the Northern Ireland market are uniquely domestic players, not exporters, and so are unused to the complexity of “international” trade. The net result has been those infamous empty supermarket shelves in Northern Ireland. While Michael Gove was still responsible for Brexit (before Lord Frost got the gig), he requested to extend the grace periods until 2023 and then acted unilaterally to do so.

European Commission Vice President Maroš Šefčovič said the move amounted to “a violation of the relevant substantive provisions” of the IP. As a consequence, the EU would respond in accordance with the “legal means” established by the protocol and the wider Brexit deal. There has since been an announcement that the EU will take the UK to court over the matter.

 This one will run and run…meanwhile some unionists feel so betrayed by the way the British government has implemented Brexit, that they have been out on the streets every night since Easter, lobbing petrol bombs and other projectiles at the police.

Half-baked Brexit

The moral of the story? If you try to rush a trade deal, fail to include the right ingredients and then don’t let it cook for the required amount of time, it will come out half-baked. This is what has happened with the TCA, and that is one hundred per cent due to the callous negligence of our government. When grace periods finally run out, the full extent of the mess will be plain for all to see.