Preparing for the Withdrawal of the United Kingdom from the European Union without an Agreement

Introduction

The UK Government has already indicated that it intends to maintain an integrated economic and trade relations between the European Union (EU) and the United Kingdom (UK) while at the same time seeking not to remain under the EU single market or establish a customs union with the EU. In fact, according to Sacerdoti (2017), the preliminary agreement that was reached by the EU and the UK in December last year clarified that the "hard" Brexit scenario would most likely be avoided. Actions are underway as negotiations on post-Brexit relations are scheduled to start early 2018 followed by a transition period of two years after UK exist the EU at the end of March 2019 (Sacerdoti, 2017). This means that the EU will maintain the UK in the customs union and single market. However, the extent of the relationship that will be maintained after Brexit is yet to be elaborated as the UK has already signalled that it does not intend to remain part of either the single market or the custom union, while also maintaining a 'regulatory alignment' with Ireland, for example, the avoidance of border reestablishment with Ireland (Sacerdoti, 2017). The EU Guidelines for the Brexit negotiations, as established under the 2007 Treaty on European Union (TEU) Article 50, clarifies that a non-member of the customs union is not entitled to enjoy similar benefits as a member, or even participate in the EU single market (Lazowski, 2012). TEU Article 50 constitutes withdrawal ramifications from the EU, which stipulates that "any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements" (TEU Article 50). Art. 50(2) TEU does not provide guidance in that it requires arrangements for "withdrawal, taking account of the framework for its future relationship with the Union" (Lazowski, 2012, p. 2).

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Customs Union is an important trade cooperation strategy, and Lyons (2017) articulates it as a tool for peace. It was incorporated in Article 13 of the Single European Act, which required there to be an area that had no internal frontiers but it was inconsistent with the existence of customs controls (The Single European Act, Art. 13). As Lyons (2017) highlights, the Court of First Instance said that the abolition of customs and tax frontiers was due to Article 13 of the Single Act, which became Article 7a of the EC Treaty, which provides that 'the internal market shall comprise an area without internal frontiers'. It is thus a direct and necessary consequence of that provision (Edouard Dubois et Fils SA v. Commission [1998], para. 460). The EU, however, articulates that while work on trade relations agreement can be initiated even though Art. 50 TEU pends, negotiations can only be finalized once the UK is no longer an EU member state. In effect, establishing a frictionless trade regime for UK post-Brexit appears to be problematic. Due to this uncertainty, this paper examines the consequences from a customs perspective, the withdrawal of the UK from the EU without an agreement.

Single Market and World Trade Organization Deal

Under the single market, the EU states along with their additional counterparts in the European Economic Area (EEA), enjoy reduced trade costs due to the reduction on non-tariff barriers (Financial Times, 2016). The non-tariff barriers include some measures that raise the costs of trade including rules of origin checks, border controls, and cross-country differences in regulations over things like standards and safety of products and services. For this reason, under the single market system, the UK enjoys favorable customs. However, these can be lost if a hard Brexit scenario is realized. This will prompt the UK to join the World Trade Organization (WTO) deal. The WTO is a global body that governs international trade. It affords member countries that do not have a free trade agreement with each other to trade, mainly via the WTO rules (Dhingra, 2017). For this reason, if the UK does not reach a favorable agreement with the EU on a futuristic oriented trading relationship after Brexit, the default position is that the EU member states and the UK will follow the WTO rules (Dhingra, 2017). The rules will guide trade between the UK and the EU, as well as between the UK and other countries with which the EU has already established trade deals. The WTO provides global multilateral agreement on the trade of goods, as well as certain types of services between member countries based on two principles: national treatment and most favored nation treatment. The national treatment principle highlights the obligations that accord the same treatment to foreign goods and services as the member accords to its goods and services (Slaughter and May, 2016). On the other hand, the most favored nation (MNF) treatment principle holds the obligation not to discriminate between goods and services on the basis of their country of origin (Slaughter and May, 2016; Swinbank, 2017).

Additionally, there are two agreements under the WTO provisions: the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services (GATS). In both of these agreements, there are common principles that are upheld (Slaughter and May, 2016). Firstly, each WTO member state has the obligation of according the MNF treatment in respect to trading goods and services supplied by each WTO member. This implies that the member is prohibited from charging lower tariffs on goods that originate in one WTO member compared with what is applied to goods that come from another WTO member state. However, the only exception is that under GATT for free trade agreements and customs unions, as well as under GATS for economic integration agreements, which cover preferential trade agreements, for example, the North American Free Trade Agreement (NAFTA), the EU, as well as other bilateral agreements (Rana, 2015). GATT stipulates that each member accords national treatment to other WTO members, which means that member nations must always treat goods that come from abroad, once they have paid tariffs, similarly as domestic goods (Slaughter and May, 2016). Under GATT, it is also possible to apply sanctions to protect the local industry against unfair trade and adopt economic safeguards that protect the domestic industry in instances when fair trade is impacting the country adversely.

Full/Hard Brexit Scenario

In this model, WTO rules would apply in maintaining UK-EU financial services relations, which prescribe for the "most favored nation" clause where countries do not apply discriminatory stances towards their trading partners (Black, 2017; Dhingra & Sampson, 2016). Therefore, if a nation grants another exceptional condition, such as lowering the customs duty rate for products or services, the same has to be applied to all other WTO member nations. As such, under the WTO model as a post-Brexit alternative, custom and tariff barriers, as well as non-tariff barriers would continue to guide UK-EU relations, unless the UK and the EU adopt UK and EU rules respectively (it is vital to note that the UK rules are considered equivalent to the EU rules) (Black, 2017; Dhingra & Sampson, 2016). In such a scenario, the UK companies will not have the right to establish branches in the EU, and thus, they would not be able to exercise passporting rights, including a passport to services such as financial in the EU (Black, 2017; Dhingra & Sampson, 2016). However, in this case, the movement of capital would be reserved.

In this scenario, foreign direct investments into the UK will potentially take a hit primarily because the UK has always been a vital point of entry into the EU single market regime, especially in offering financial services (Black, 2017). Another problem with this alternative is that the UK would not be able to access the EU Court of Justice, which means that UK-EU dispute settlement would only take place via WTO (Black, 2017). Even so, the UK would be able to negotiate multi- or bilateral trade agreements but would not pay EU budgetary contributions among other programmes in the EU. Even though this would be a politically palatable campaign to leaving the EU, it is the most expensive regarding economics, primarily because it adversely affects the financial sector in the UK.

Consequences of UK from EU from a Customs Perspective

If no agreement on the future relationship between the UK and the EU, then post-Brexit, UK will have to conduct trade under the WTO rules, which as highlighted before, offer the basic international framework. However, for this to happen, then the UK has to establish itself as a fully independent member of the WTO (Hunt, & Wheeler, 2017). Additionally, this requires a number of steps, but this paper mainly focusses on the consequences. According to Deloitte (2016), the biggest customs related change that UK companies are likely to see include the recognition of trade with EU member states as exports or imports. However, depending on the outcomes of the cessation negotiations, paying duty may be when the goods are moving to or from the EU countries. However, with the prevailing uncertainty, anything is possible, and there could be export and import formalities that can subsequently result in trade impediments.

A failure to reach an agreement will consequently make the UK a third country from a customs perspective. This means that the UK will no longer be part of the existing customs union and import duties/VAT will, therefore, need to be taken into account (Emerson, 2016). In effect, the UK will need to formulate its customs legislation, as well as new customs procedures. Besides, the UK will no longer be recognized as part of the FTAs concluded by the EU (Emerson, 2016). Pertaining to court cases, the European Court of Justice will not apply once Brexit fruitions.

The EU is mainly recognized as the customs union where its members apply similar tariffs and common policy measures when trading in goods between the union and other nations outside the customs union's territory (Lyons, 2017). Also, the movement of goods within the customs union is free, and no tariffs or other common policy mechanisms apply for intra-union trade. Therefore, Brexit means that the UK will be considered as an outsider. In effect, this will trigger payment of customs duties, as well as raise the trading costs between the UK and the EU, which are mostly calculated based on the classification, origin, and value of goods. Since the UK will be ousted from the union, it will have to implement its system that will be used for determining export and import duties for each of these elements. Once outside the EU customs union, the UK will be able to decide its external tariffs. For instance, the EU has relatively high tariffs on agricultural products, footwear, and clothing as it seeks to protect thee industries against low-cost producers (Lea, 2016). However, a future UK government can slash tariffs on these products, which can give a boost to consumers, preferring to support domestic producers only (Lea, 2016). In fact, trade under the WTO terms means that both the UK and the EU are needed to impose their tariff schedules, based on the MFN basis as in the absence of customs union and FTA, there can be no other way around this (Eeckhout, 2017).

The customs union, being a uniform system that establishes how goods are handled upon transiting, export, and import, there is a common set of rules, which are encapsulated in the Union Customs Code. This is beneficial as it cuts the red tape for b...