08 January 2019
Ready for Brexit: Your Supply Chain - Briefing 1
How to evaluate the risks around increases in tariffs and duties on goods being imported into the UK from both the EU and other countries
Starting our Commercial team’s series of briefings to help your business’s Brexit steering group work through the direct risks associated with different possible outcomes, we begin by looking at the import side of the equation.
Taking our inspiration from the approach taken by Next plc in last year’s report on its internal preparedness for Brexit, assessing this particular potential risk of increasing import duties, is an area which benefits from categorising the different origins of imported goods in order to understand the exposure created.
For any business, it should be possible to break down the raw materials sourced from outside the UK and imported into the UK as part of that business’s usual manufacturing or production process into the following groups:
- goods imported from countries in the Generalised System of Preferences (GSP);
- goods imported from countries which have an EU Free Trade Agreement (FTA);
- goods imported from countries outside the EU with which there is no existing trade deal and which are not in the GSP; or
- goods imported from the EU and Turkey, San Marino and Andorra.
Countries in the GSP are essentially a group of developing nations given preferential or zero tariff rates as an exemption to the general World Trade Organisation (WTO) rules. The UK Government has already confirmed its intention to maintain the same preferential tariff rates for such countries in an effort to ensure market access for those beneficiary countries is maintained consistently. Given this is a widely recognised set of exemptions to the WTO rules, it would seem very likely that a UK Government of whatever colour would seek to align with these same exemptions. As a result, materials sourced from any of these developing nations are unlikely to present a high risk for the purposes of tariff increases.
Countries which already have an existing trade agreement or FTA with the EU present a slightly more risky proposition when considering the tariff position post-Brexit. The current Government has stated a wish to maintain continuity by basing any new trade agreements on the existing FTAs which the EU has with those countries. However, this is obviously an area which the UK cannot determine unilaterally once it has left the EU.
The UK’s need to establish a new FTA with each of these countries, and therefore whether such a new FTA does ultimately align with the EU’s existing FTA, is open to negotiation on a country by country basis. So whilst the Government’s stated aim to align with existing FTAs as far as possible may be helpful in confirming the desired position, this is a category of countries which will be one to watch in terms of changes to tariffs resulting from the individual negotiations as they progress. If this category represents a large proportion of sourced materials into your business’s supply chain, then it may be necessary to plan for alternative sources if the negotiated positions present too great a risk of tariff increases.
Countries outside the EU
In general terms, those countries outside the EU, but which are not GSP countries or don’t have a FTA with the EU present a relatively low risk in respect of anticipating tariff adjustments. Essentially, the current state of affairs when importing goods from these countries should remain the same post-Brexit, so sourcing materials from these countries does not present a high risk of increased tariffs.
EU and Turkey, San Marino and Andorra
If goods are sourced from countries within the EU or from Turkey, San Marino and Andorra (which are in a customs union with the EU), then this is another key area to watch for. Tariff rates for importing goods from the EU into the UK will be the subject of the trade deal which is still to be done between the UK and the EU. So the outcome of that negotiation will determine what levels of duties apply to goods which are currently duty free when coming from the EU or Turkey, San Marino or Andorra and this may also depend on whether there is a no deal Brexit.
As the most high risk category, this is obviously an area on which to focus analysis and planning by working through worst case scenarios of tariff levels for importing goods into the UK. Perhaps a reasonable start point is to consider what your business’s import costs would look like if import duties were based on tariff rates applicable to the countries which are not GSP or have no FTA with the EU and see how this impacts the business to determine the level of exposure created.
If you would like any assistance in evaluating the risk of increased import tariffs for your business in its preparation for Brexit, please do get in touch with any member of our Commercial team whose contact details can be found here.