With just five months to go, allowing three for ratification, what will the post-Brexit EU/UK relationship look like? On the colossal matter of post-Brexit arrangements, almost nothing has been agreed except the avoidance mechanism of 21 months of status-quo during the ‘transition period’ beginning late March 2019. And we are no closer to an answer to the most unnerving question: without any workable ‘deal’ on customs, will ports grind to a halt, generating gigantic queues of lorries? As recently as one month ago, a House of Lords report[1] still discussed the delusional UK customs proposals of August 2017 that had already been rejected by EU negotiators. The cliff-edge looms large over the UK government, the EU and business on both sides

Pelkmans, Jacques.

Archive of European Integration

 17 July 2018 
 
Jacques Pelkmans is Senior Research Fellow at CEPS. 
CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. As an 
institution, CEPS takes no official position on questions of EU policy. The views expressed are attributable 
only to the author and not to any institution with which he is associated. 
Available for free downloading from the CEPS website (www.ceps.eu)  © CEPS 2018 
CEPS ▪ Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ www.ceps.eu 
Shattered Illusions 
The new Brexit proposals on customs 
Jacques Pelkmans 
 
ith just five months to go, allowing three for ratification, what will the post-Brexit 
EU/UK relationship look like? On the colossal matter of post-Brexit arrangements, 
almost nothing has been agreed except the avoidance mechanism of 21 months of 
status-quo during the ‘transition period’ beginning late March 2019. And we are no closer to 
an answer to the most unnerving question: without any workable ‘deal’ on customs, will ports 
grind to a halt, generating gigantic queues of lorries? As recently as one month ago, a House of 
Lords report1 still discussed the delusional UK customs proposals of August 2017 that had 
already been rejected by EU negotiators. The cliff-edge looms large over the UK government, 
the EU and business on both sides.  
With time running out, the moment of taking decisions rather than chasing illusions caused a 
rupture in the UK government, though at least this opened the way to soften the Brexit notions 
of some. In the long-awaited UK White Paper on the future relationship between the UK and 
the EU-27,2 new customs proposals have been incorporated which should (according to the UK) 
govern compliance of future cross-Channel trade in goods. However, they have major 
implications for the UK’s non-EU trade as well. The proposals are also intended to ensure that 
the Irish/Northern Ireland border remains without physical controls or delays. The White Paper 
provides – for the first time – an overall approach of what Brexit could mean for the post-29-
March-2019 EU/UK relationship with plenty of possibly fruitful or at least potentially workable 
suggestions or concrete plans.3 In this sequel CEPS Commentary to my critical analysis of last 
                                                     
1 House of Lords, EU committee, UK-EU relations after BREXIT, 8 June 2018, HL Paper 149, pp. 29 – 31. 
2 Of 12 July 2018, Cm 9583, see https://assets.publishing.service.gov.uk/government/uploads/attachmen_data/ 
file/724982/The_future_relationship_between_the_United_Kingdom_and_the_European_Union_WEB_VERSION.pdf  
3 See Michael Emerson, Theresa May’s Brexit model: many questions, not least ‘why Leave?’, CEPS Commentary, 
16 July 2018. 
W 
2 | JACQUES PELKMANS 
 
year’s UK customs proposals,4 I focus solely on the hard core of future bilateral goods trade, 
including the ramifications for UK trade and trade policy with third countries.  
1. What has changed in 11 months? 
Three interesting changes have occurred in the Brexit customs saga. First, much of the debate 
in the UK has increasingly been on ‘time’ and (lack of) capacity. Until the agreement, in 
principle, between the UK and the EU-27 on having a transition period until the end of 2020, 
the spectre was raised of a stand-off between the EU, being highly sceptical if not downright 
dismissive of the August 2017 proposals, and the UK government, seemingly unwilling or 
incapable of producing more workable proposals. Both houses of the UK parliament began to 
favour staying in the EU customs union, as testimonies of specialists from business and the 
major UK ports demonstrated how doubtful the merits of the proposals were and how 
impossible the demands on customs, ports and business in the case of a ‘no deal’. Being outside 
the EU customs union would imply a very significant increase in customs staff, probably major 
structural expansion of port infrastructure and facilities and much heavier demands on the 
emerging – but far from ‘ready’ – Customs Declaration Service ICT system, replacing the old 
CHIEF system.5 In Dover, the biggest harbour of the UK and specialised in EU-UK trade, a no-
deal scenario would cause a hundredfold increase in the number of customs declarations.6  
Official reports have begun to speak of the serious risk of chaos in ports and airports (for air 
freight).7 There is simply no ‘quick-fix’. The agreement on a transition period (only arranged in 
principle, not yet in detail) may have lessened fears of immediate disruption, but it would only 
extend the UK’s stay in the customs union for another 21 months, hardly any time at all for 
developing an adequate response. The insistence by Brexiters on leaving the customs union is 
not a carefully considered preference after weighing the pros and cons. They seem 
uninterested in the nitty-gritty, even when the nitty-gritty is big and costly,8 and only focus on 
regaining freedom to conclude FTAs with third countries as a symbol of ‘Global Britain’. The 
option of negotiating some kind of participation and ‘say’ in EU trade negotiations – short of a 
veto – is apparently not even floated.  
                                                     
4 Jacques Pelkmans, The Brexit Customs vision – Frictions and Fictions, CEPS Commentary, 22 August 2017.  
5 It is also worth noting that many other departments are involved in customs affairs, mainly due to regulatory 
controls. 
6 There is no room to detail the possible impacts here, but, in just one example of the scale of the problem, it is 
estimated that the number of customs declarations in the UK would rise from 55 to 255 million, most by companies 
making them for the first time ever. See, for example, J. Owen, M. Shepheard & A. Stojanovic (2017), Implementing 
Brexit: Customs, Institute for Government, London, September; and the House of Commons Report, Home Office 
Delivery of Brexit: customs operations, 16 November 2017, which leans strongly on the Owen et al. paper.  
7 The ports of Dunkerque, Calais, Zeebrugge, Rotterdam and Antwerp might also suffer from capacity bottlenecks 
if flows of lorries are slowed or interrupted.  
8 The additional costs of losing the customs and trade facilitation and duty benefits are estimated to range between 
GBP 19 billion and £26 billion, while a no-deal would require some 3,000-5,000 extra staff needing to be trained 
and acquire experience. House of Commons Report, op. cit., p. 14. 
SHATTERED ILLUSIONS - THE NEW BREXIT PROPOSALS ON CUSTOMS | 3 
 
Second, one of the serious weaknesses of last year’s proposals was the absence of any clarity 
about UK preferences for the post-Brexit trade agreement with the EU. While the preference 
for an FTA with no bilateral tariffs has since become explicit, an FTA introduces rules of origin. 
These have not even been mentioned, but generate considerable costs and complications both 
for customs officers and business. The EEA-3 countries are not a useful example in this context. 
Due to their production structures and size, their industrial exports are very small in comparison 
to those of the UK, to say nothing of the manifold ways UK business is involved in complex 
regional and global value-chains.  
Third, in August 2017, the UK presented two proposals: a highly streamlined customs 
arrangement and a new customs partnership with the EU. On 12 July 2018, the UK presented 
a mix of the two previous proposals.9 It is called a Facilitated Customs Arrangement (FCA). The 
FCA may or may not work but, in any event, it is less unrealistic than the previous proposals. It 
is closely connected with the EU customs union and the enforcement of EU regulatory 
requirements at borders as well as with processes and procedures for VAT and excise duties. A 
close reading of the text10 gives the impression of yet another opt-out suggestion for the UK – 
be it once again with some fiction, here and there – as an EU member rather than a plain Brexit 
option. So, what is it?    
2. Nature and weaknesses of the FCA 
The UK advocates far-reaching accommodation and common arrangements leading to a 
situation for business and public administration (as well as numerous private intermediaries 
providing customs-related services) “as if” in a combined customs territory. However, the 
immediate Brexit addition is “while still enabling the UK to control tariffs for its own trade with 
the rest of the world”. The underlying purpose of the FCA is also a Brexit objective: being 
sovereign in concluding trade agreements with third countries. The FCA includes a ‘common 
rulebook’ for manufactured goods, agriculture, food and fisheries (and related forms of 
equivalence), common cross-border processes and procedures for VAT and excise, the 
Common Customs Code as well as robust domestic market surveillance and cooperation 
between the UK and the EU.11 How radically different this is from the picture that the UK would 
drift away from the EU when seeking to ‘take back control’.  
However, a little over half of UK goods trade is with third countries.12 The critical problem is, 
therefore, how the “as if” approach for EU-27/UK trade in goods can be combined with a 
                                                     
9 However, the highly complicated ‘tracking mechanism’ has been deleted. See Pelkmans, op. cit., note 7.  
10 White Paper, op. cit., pp. 15 - 19 
11 The latter also hinges on trust. In 2017, two major issues were reported that undermine trust in the discipline 
and rigour of UK customs authorities. One is that the UK would seem to have turned a blind eye to a massive 
Chinese-led fraud in textiles and footwear (a € 2 billion fine is mentioned); in addition, there is an infringement 
case against the UK for falling short on VAT collection. Source: Politico, “Brussels scoffs at Britain’s customs 
proposal ahead of Brexit talks”, 24 August 2017. 
12 Not in agro-food. 70% of UK agro-food imports are from the EU. This might change if, post-Brexit, the UK were 
indeed to lower the higher agro-food tariffs and relax tariff rate quotas, unilaterally or via FTAs.  
4 | JACQUES PELKMANS 
 
‘sovereign’ trade policy vis-à-vis third countries. It is helpful to quote the White Paper directly 
(p. 16): “As if in a combined customs territory, the UK would apply the EU’s tariffs and trade 
policy for goods intended for the EU. The UK would also apply its own tariffs and trade policy 
for goods intended for consumption in the UK”. Why this highly unusual proposal? Why not 
accept that the UK is a third country after Brexit, hence not act “as if” in a combined customs 
territory? The answer is that, if the UK could serve as a trusted agent for the EU customs union, 
for goods imported into the UK (from the rest of the world) but destined for the EU, the Brexit 
costs of formally moving outside the customs union would be drastically lower. Together with 
UK-produced goods intended for the EU-27, the FTA with the EU and the full acceptance of the 
rule book as well as the EU customs code, there would appear to be no need to incur 
significantly extra costs for EU-UK trade in goods in Dover and the Channel Tunnel, etc. But how 
can officials know, let alone be sure, what the ‘intended’ destination of goods imported in the 
UK from third countries is? And in the world of modern fragmented production processes and 
regional as well as global value-chains (GVCs), what does the term ‘destination’ really mean?  
Intermediate products might be upgraded in the UK and subsequently re-exported to the EU-
27 and they might well return to the UK after further adaptation, or, after inclusion in another 
intermediate or final good. This is not a small matter – almost 50 % of EU external trade is in 
intermediate goods. But even outside GVCs, logistical companies routinely modify marginal 
aspects or the packaging of goods before further – often highly dispersed – distribution 
throughout Europe.  
The White Paper does not offer convincing answers and hence looks much like the delusional 
proposals of August 2017. One answer is to “agree a new trusted trader scheme”. This is based 
on the assertion that trusted traders (AEOs)13 will “robustly” demonstrate the destination and 
hence pay the UK or the EU tariff, whichever applies. The UK notes that this is relevant for 
finished goods. It is anything but clear why AEOs would be the ‘robust’ partners for finished 
goods while SMEs and others (e.g. retail imports) would not be. . The reliance on AEOs appears 
to be an attempt to avoid the ‘repayment mechanism’ needed when the destination is 
uncertain and the higher (EU or UK) tariff would be levied, only to find later that the tariff paid 
was too high once the destination becomes verifiable. Though the repayment mechanism was 
included in the previous proposals, the UK now proposes an agreement between the EU and 
the UK on the ‘circumstances’ in which repayments can be granted. It is held that it would be 
relevant for intermediate goods. This repayment mechanism would enable the UK to further 
minimise differences between the EU-27 and the UK and hence “preserve frictionless trade for 
the majority of UK goods trade and reduce frictions for UK exporters and importers”. The White 
Paper asserts that it would apply to only some 4 % of UK goods trade.  
The repayment mechanism is yet another price the UK would pay for Brexit pulling the UK out 
of the EU customs union. The proposal includes attempts to soften the expected criticism that 
the repayments will lead to a nightmare of bureaucracy and delays: payments ought to take 
                                                     
13 Authorized Economic Operators, an existing scheme in the EU (and elsewhere). These are typically 
multinationals with a lot of intra-firm and intra-GVC trade. Accreditation is required for eligibility. 
SHATTERED ILLUSIONS - THE NEW BREXIT PROPOSALS ON CUSTOMS | 5 
 
place as soon as possible in the supply chain, e.g. when the good is “substantially transformed” 
rather than at the point of final consumption.14 The fear that SMEs will find this ‘solution’ an 
additional source of complications and red tape, along with an increased risk of late payments, 
is implicitly acknowledged. Similarly, the EU would need to be reassured by rules and processes 
governing the eligibility for repayment: this would involve risk profiling and effectively targeted 
audit and assurance efforts. All in all, despite being extremely burdensome, such arrangements 
would necessitate a great deal of trust (think of re-exporting tricks, etc.). In addition, the UK 
proposes a tariff revenue formula for (net) remittances, because the EU will not apply UK 
tariffs.15 
Finally, the White Paper is replete with suggestions, largely migrated from the previous 
proposals, conveying the UK’s firm intention to arrive at the least friction possible in trade. 
These include accession to the Common Transit Convention (not necessary inside the customs 
union and only relating to transits through the EU), mutual recognition of AEOs (again, in the 
customs union that is an EU accreditation process), allowing traders to calculate their own 
customs duties, speeding up authorisation processes via better use of data and making existing 
simplified procedures “easier for traders to access”.16 Much of this reduces the costs of exit 
and/or can be done just as well inside the customs union. Last but not least, the UK proposes a 
‘phased approach’ through discussions on the future economic partnership. There is one aspect 
– the emphasis on AEOs – that is possibly misleading and may well require some further factual 
information. The UK (in 2017) had 548 AEOs covering between 60% and 74% of all goods trade. 
The EU-28 has over 14,000 accredited AEOs. There is obviously nothing new about the 
arrangement. However, the UK customs currently processes declarations from some 145,000 
firms and another 180,000 firms would join them following Brexit. The AEOs, no matter how 
useful, are not the real problem or a solution. Moreover, while being an AEO reduces costs for 
major traders, it is far from certain that there will be any effective cost reduction for SMEs after 
Brexit, when the costs for traders might go up steeply.  
3. Conclusions 
The recent political turmoil in the UK and the White Paper, published in its aftermath, show 
that the illusions about the 2017 customs proposals have been shattered. The new proposals 
are less unrealistic and relate more closely to the EU regulatory acquis in several ways. A critical 
and helpful aspect is that the UK will embrace – or, retain, one might say – the application of 
the EU Customs Code. The document also sets out a much more cooperative agenda with the 
EU. However, there is still a considerable amount of wishful thinking and open-ended promises 
to ‘explore’ new ideas in the UK or together. Some proposals will require a high degree of trust 
                                                     
14 Another suggestion is to “explore an approach with the EU using concepts” found in the Regional Convention 
on pan-Euro-Mediterranean preferential rules of origin.  
15 As a result, the EU and the UK would have to agree on mechanisms including institutional oversight for ensuring 
that this process is resilient and verifiable. Still more intricacies, therefore.  
16 Even more speculative suggestions are made with respect to machine learning, AI and storing the entire chain 
of transactions for each goods assignment, none of them supported by any detail.  
6 | JACQUES PELKMANS 
 
between the EU and the entire UK customs organisation (some 30 instances), right after two 
painful failures on the UK customs side.  
The two connected weaknesses of the proposal are found precisely where Brexit matters most. 
Starting with the idea that leaving the customs union would not be so costly in terms of red 
tape, waiting time, strict requirements for GVCs and just-in-time systems as well as major public 
investment in compliance and infrastructure, if the UK could act as the EU’s customs for goods 
‘intended’ for the EU. For goods ‘intended’ for the UK, UK tariffs (or tariff rate quotas) would 
apply. Not only does it appear next to impossible to ensure this ‘intended destination’ in all 
cases, even without the ‘tracking mechanism’ of last year (now deleted) there is still a need for 
complicated compliance mechanisms. The distinction between finished and intermediate 
goods, supposedly fitting the designation of the destination in most instances, is not at all 
convincing. As a corollary, however, a repayment mechanism has to be put in place, which, it is 
feared, would be very costly in terms of red tape and the risk of delayed payments, especially 
for the overwhelming majority of firms not accredited as AEOs. Also between the EU-27 and 
the UK, the net remittance tariff formula promises to be controversial, given the shaky 
foundation of the arrangement. It is not a priori clear whether the EU would regard these 
proposals as sufficient to initiate negotiations on a workable arrangement for late 2020. What 
the EU might wish to do instead is to make a counter proposal, now that the UK is willing to 
embrace a full rulebook as well as the common customs code and suggesting a cooperative 
agenda. The firm intention to agree on a common (EU-based) rule book, including for indirect 
taxation, for all goods traded implies that the post-Brexit FTA with the EU is far deeper than 
CETA and – for goods at least – close to the EEA-3 model or (after another decade or so) 
Ukraine.  
 


Shattered Illusions: The new Brexit proposals on customs. CEPS Commentary, 17 July 2018

 17 July 2018  Jacques Pelkmans is Senior Research Fellow at CEPS. CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. As an institution, CEPS takes no official position on questions of EU policy. The views expressed are attributable only to the author and not to any institution with which he is associated. Available for free downloading from the CEPS website (www.ceps.eu)  © CEPS 2018 CEPS ▪ Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ www.ceps.eu Shattered Illusions The new Brexit proposals on customs Jacques Pelkmans  ith just five months to go, allowing three for ratification, what will the post-Brexit EU/UK relationship look like? On the colossal matter of post-Brexit arrangements, almost nothing has been agreed except the avoidance mechanism of 21 months of status-quo during the ‘transition period’ beginning late March 2019. And we are no closer to an answer to the most unnerving question: without any workable ‘deal’ on customs, will ports grind to a halt, generating gigantic queues of lorries? As recently as one month ago, a House of Lords report1 still discussed the delusional UK customs proposals of August 2017 that had already been rejected by EU negotiators. The cliff-edge looms large over the UK government, the EU and business on both sides.  With time running out, the moment of taking decisions rather than chasing illusions caused a rupture in the UK government, though at least this opened the way to soften the Brexit notions of some. In the long-awaited UK White Paper on the future relationship between the UK and the EU-27,2 new customs proposals have been incorporated which should (according to the UK) govern compliance of future cross-Channel trade in goods. However, they have major implications for the UK’s non-EU trade as well. The proposals are also intended to ensure that the Irish/Northern Ireland border remains without physical controls or delays. The White Paper provides – for the first time – an overall approach of what Brexit could mean for the post-29-March-2019 EU/UK relationship with plenty of possibly fruitful or at least potentially workable suggestions or concrete plans.3 In this sequel CEPS Commentary to my critical analysis of last                                                      1 House of Lords, EU committee, UK-EU relations after BREXIT, 8 June 2018, HL Paper 149, pp. 29 – 31. 2 Of 12 July 2018, Cm 9583, see https://assets.publishing.service.gov.uk/government/uploads/attachmen_data/ file/724982/The_future_relationship_between_the_United_Kingdom_and_the_European_Union_WEB_VERSION.pdf  3 See Michael Emerson, Theresa May’s Brexit model: many questions, not least ‘why Leave?’, CEPS Commentary, 16 July 2018. W 2 | JACQUES PELKMANS  year’s UK customs proposals,4 I focus solely on the hard core of future bilateral goods trade, including the ramifications for UK trade and trade policy with third countries.  1. What has changed in 11 months? Three interesting changes have occurred in the Brexit customs saga. First, much of the debate in the UK has increasingly been on ‘time’ and (lack of) capacity. Until the agreement, in principle, between the UK and the EU-27 on having a transition period until the end of 2020, the spectre was raised of a stand-off between the EU, being highly sceptical if not downright dismissive of the August 2017 proposals, and the UK government, seemingly unwilling or incapable of producing more workable proposals. Both houses of the UK parliament began to favour staying in the EU customs union, as testimonies of specialists from business and the major UK ports demonstrated how doubtful the merits of the proposals were and how impossible the demands on customs, ports and business in the case of a ‘no deal’. Being outside the EU customs union would imply a very significant increase in customs staff, probably major structural expansion of port infrastructure and facilities and much heavier demands on the emerging – but far from ‘ready’ – Customs Declaration Service ICT system, replacing the old CHIEF system.5 In Dover, the biggest harbour of the UK and specialised in EU-UK trade, a no-deal scenario would cause a hundredfold increase in the number of customs declarations.6  Official reports have begun to speak of the serious risk of chaos in ports and airports (for air freight).7 There is simply no ‘quick-fix’. The agreement on a transition period (only arranged in principle, not yet in detail) may have lessened fears of immediate disruption, but it would only extend the UK’s stay in the customs union for another 21 months, hardly any time at all for developing an adequate response. The insistence by Brexiters on leaving the customs union is not a carefully considered preference after weighing the pros and cons. They seem uninterested in the nitty-gritty, even when the nitty-gritty is big and costly,8 and only focus on regaining freedom to conclude FTAs with third countries as a symbol of ‘Global Britain’. The option of negotiating some kind of participation and ‘say’ in EU trade negotiations – short of a veto – is apparently not even floated.                                                       4 Jacques Pelkmans, The Brexit Customs vision – Frictions and Fictions, CEPS Commentary, 22 August 2017.  5 It is also worth noting that many other departments are involved in customs affairs, mainly due to regulatory controls. 6 There is no room to detail the possible impacts here, but, in just one example of the scale of the problem, it is estimated that the number of customs declarations in the UK would rise from 55 to 255 million, most by companies making them for the first time ever. See, for example, J. Owen, M. Shepheard & A. Stojanovic (2017), Implementing Brexit: Customs, Institute for Government, London, September; and the House of Commons Report, Home Office Delivery of Brexit: customs operations, 16 November 2017, which leans strongly on the Owen et al. paper.  7 The ports of Dunkerque, Calais, Zeebrugge, Rotterdam and Antwerp might also suffer from capacity bottlenecks if flows of lorries are slowed or interrupted.  8 The additional costs of losing the customs and trade facilitation and duty benefits are estimated to range between GBP 19 billion and £26 billion, while a no-deal would require some 3,000-5,000 extra staff needing to be trained and acquire experience. House of Commons Report, op. cit., p. 14. SHATTERED ILLUSIONS - THE NEW BREXIT PROPOSALS ON CUSTOMS | 3  Second, one of the serious weaknesses of last year’s proposals was the absence of any clarity about UK preferences for the post-Brexit trade agreement with the EU. While the preference for an FTA with no bilateral tariffs has since become explicit, an FTA introduces rules of origin. These have not even been mentioned, but generate considerable costs and complications both for customs officers and business. The EEA-3 countries are not a useful example in this context. Due to their production structures and size, their industrial exports are very small in comparison to those of the UK, to say nothing of the manifold ways UK business is involved in complex regional and global value-chains.  Third, in August 2017, the UK presented two proposals: a highly streamlined customs arrangement and a new customs partnership with the EU. On 12 July 2018, the UK presented a mix of the two previous proposals.9 It is called a Facilitated Customs Arrangement (FCA). The FCA may or may not work but, in any event, it is less unrealistic than the previous proposals. It is closely connected with the EU customs union and the enforcement of EU regulatory requirements at borders as well as with processes and procedures for VAT and excise duties. A close reading of the text10 gives the impression of yet another opt-out suggestion for the UK – be it once again with some fiction, here and there – as an EU member rather than a plain Brexit option. So, what is it?    2. Nature and weaknesses of the FCA The UK advocates far-reaching accommodation and common arrangements leading to a situation for business and public administration (as well as numerous private intermediaries providing customs-related services) “as if” in a combined customs territory. However, the immediate Brexit addition is “while still enabling the UK to control tariffs for its own trade with the rest of the world”. The underlying purpose of the FCA is also a Brexit objective: being sovereign in concluding trade agreements with third countries. The FCA includes a ‘common rulebook’ for manufactured goods, agriculture, food and fisheries (and related forms of equivalence), common cross-border processes and procedures for VAT and excise, the Common Customs Code as well as robust domestic market surveillance and cooperation between the UK and the EU.11 How radically different this is from the picture that the UK would drift away from the EU when seeking to ‘take back control’.  However, a little over half of UK goods trade is with third countries.12 The critical problem is, therefore, how the “as if” approach for EU-27/UK trade in goods can be combined with a                                                      9 However, the highly complicated ‘tracking mechanism’ has been deleted. See Pelkmans, op. cit., note 7.  10 White Paper, op. cit., pp. 15 - 19 11 The latter also hinges on trust. In 2017, two major issues were reported that undermine trust in the discipline and rigour of UK customs authorities. One is that the UK would seem to have turned a blind eye to a massive Chinese-led fraud in textiles and footwear (a € 2 billion fine is mentioned); in addition, there is an infringement case against the UK for falling short on VAT collection. Source: Politico, “Brussels scoffs at Britain’s customs proposal ahead of Brexit talks”, 24 August 2017. 12 Not in agro-food. 70% of UK agro-food imports are from the EU. This might change if, post-Brexit, the UK were indeed to lower the higher agro-food tariffs and relax tariff rate quotas, unilaterally or via FTAs.  4 | JACQUES PELKMANS  ‘sovereign’ trade policy vis-à-vis third countries. It is helpful to quote the White Paper directly (p. 16): “As if in a combined customs territory, the UK would apply the EU’s tariffs and trade policy for goods intended for the EU. The UK would also apply its own tariffs and trade policy for goods intended for consumption in the UK”. Why this highly unusual proposal? Why not accept that the UK is a third country after Brexit, hence not act “as if” in a combined customs territory? The answer is that, if the UK could serve as a trusted agent for the EU customs union, for goods imported into the UK (from the rest of the world) but destined for the EU, the Brexit costs of formally moving outside the customs union would be drastically lower. Together with UK-produced goods intended for the EU-27, the FTA with the EU and the full acceptance of the rule book as well as the EU customs code, there would appear to be no need to incur significantly extra costs for EU-UK trade in goods in Dover and the Channel Tunnel, etc. But how can officials know, let alone be sure, what the ‘intended’ destination of goods imported in the UK from third countries is? And in the world of modern fragmented production processes and regional as well as global value-chains (GVCs), what does the term ‘destination’ really mean?  Intermediate products might be upgraded in the UK and subsequently re-exported to the EU-27 and they might well return to the UK after further adaptation, or, after inclusion in another intermediate or final good. This is not a small matter – almost 50 % of EU external trade is in intermediate goods. But even outside GVCs, logistical companies routinely modify marginal aspects or the packaging of goods before further – often highly dispersed – distribution throughout Europe.  The White Paper does not offer convincing answers and hence looks much like the delusional proposals of August 2017. One answer is to “agree a new trusted trader scheme”. This is based on the assertion that trusted traders (AEOs)13 will “robustly” demonstrate the destination and hence pay the UK or the EU tariff, whichever applies. The UK notes that this is relevant for finished goods. It is anything but clear why AEOs would be the ‘robust’ partners for finished goods while SMEs and others (e.g. retail imports) would not be. . The reliance on AEOs appears to be an attempt to avoid the ‘repayment mechanism’ needed when the destination is uncertain and the higher (EU or UK) tariff would be levied, only to find later that the tariff paid was too high once the destination becomes verifiable. Though the repayment mechanism was included in the previous proposals, the UK now proposes an agreement between the EU and the UK on the ‘circumstances’ in which repayments can be granted. It is held that it would be relevant for intermediate goods. This repayment mechanism would enable the UK to further minimise differences between the EU-27 and the UK and hence “preserve frictionless trade for the majority of UK goods trade and reduce frictions for UK exporters and importers”. The White Paper asserts that it would apply to only some 4 % of UK goods trade.  The repayment mechanism is yet another price the UK would pay for Brexit pulling the UK out of the EU customs union. The proposal includes attempts to soften the expected criticism that the repayments will lead to a nightmare of bureaucracy and delays: payments ought to take                                                      13 Authorized Economic Operators, an existing scheme in the EU (and elsewhere). These are typically multinationals with a lot of intra-firm and intra-GVC trade. Accreditation is required for eligibility. SHATTERED ILLUSIONS - THE NEW BREXIT PROPOSALS ON CUSTOMS | 5  place as soon as possible in the supply chain, e.g. when the good is “substantially transformed” rather than at the point of final consumption.14 The fear that SMEs will find this ‘solution’ an additional source of complications and red tape, along with an increased risk of late payments, is implicitly acknowledged. Similarly, the EU would need to be reassured by rules and processes governing the eligibility for repayment: this would involve risk profiling and effectively targeted audit and assurance efforts. All in all, despite being extremely burdensome, such arrangements would necessitate a great deal of trust (think of re-exporting tricks, etc.). In addition, the UK proposes a tariff revenue formula for (net) remittances, because the EU will not apply UK tariffs.15 Finally, the White Paper is replete with suggestions, largely migrated from the previous proposals, conveying the UK’s firm intention to arrive at the least friction possible in trade. These include accession to the Common Transit Convention (not necessary inside the customs union and only relating to transits through the EU), mutual recognition of AEOs (again, in the customs union that is an EU accreditation process), allowing traders to calculate their own customs duties, speeding up authorisation processes via better use of data and making existing simplified procedures “easier for traders to access”.16 Much of this reduces the costs of exit and/or can be done just as well inside the customs union. Last but not least, the UK proposes a ‘phased approach’ through discussions on the future economic partnership. There is one aspect – the emphasis on AEOs – that is possibly misleading and may well require some further factual information. The UK (in 2017) had 548 AEOs covering between 60% and 74% of all goods trade. The EU-28 has over 14,000 accredited AEOs. There is obviously nothing new about the arrangement. However, the UK customs currently processes declarations from some 145,000 firms and another 180,000 firms would join them following Brexit. The AEOs, no matter how useful, are not the real problem or a solution. Moreover, while being an AEO reduces costs for major traders, it is far from certain that there will be any effective cost reduction for SMEs after Brexit, when the costs for traders might go up steeply.  3. Conclusions The recent political turmoil in the UK and the White Paper, published in its aftermath, show that the illusions about the 2017 customs proposals have been shattered. The new proposals are less unrealistic and relate more closely to the EU regulatory acquis in several ways. A critical and helpful aspect is that the UK will embrace – or, retain, one might say – the application of the EU Customs Code. The document also sets out a much more cooperative agenda with the EU. However, there is still a considerable amount of wishful thinking and open-ended promises to ‘explore’ new ideas in the UK or together. Some proposals will require a high degree of trust                                                      14 Another suggestion is to “explore an approach with the EU using concepts” found in the Regional Convention on pan-Euro-Mediterranean preferential rules of origin.  15 As a result, the EU and the UK would have to agree on mechanisms including institutional oversight for ensuring that this process is resilient and verifiable. Still more intricacies, therefore.  16 Even more speculative suggestions are made with respect to machine learning, AI and storing the entire chain of transactions for each goods assignment, none of them supported by any detail.  6 | JACQUES PELKMANS  between the EU and the entire UK customs organisation (some 30 instances), right after two painful failures on the UK customs side.  The two connected weaknesses of the proposal are found precisely where Brexit matters most. Starting with the idea that leaving the customs union would not be so costly in terms of red tape, waiting time, strict requirements for GVCs and just-in-time systems as well as major public investment in compliance and infrastructure, if the UK could act as the EU’s customs for goods ‘intended’ for the EU. For goods ‘intended’ for the UK, UK tariffs (or tariff rate quotas) would apply. Not only does it appear next to impossible to ensure this ‘intended destination’ in all cases, even without the ‘tracking mechanism’ of last year (now deleted) there is still a need for complicated compliance mechanisms. The distinction between finished and intermediate goods, supposedly fitting the designation of the destination in most instances, is not at all convincing. As a corollary, however, a repayment mechanism has to be put in place, which, it is feared, would be very costly in terms of red tape and the risk of delayed payments, especially for the overwhelming majority of firms not accredited as AEOs. Also between the EU-27 and the UK, the net remittance tariff formula promises to be controversial, given the shaky foundation of the arrangement. It is not a priori clear whether the EU would regard these proposals as sufficient to initiate negotiations on a workable arrangement for late 2020. What the EU might wish to do instead is to make a counter proposal, now that the UK is willing to embrace a full rulebook as well as the common customs code and suggesting a cooperative agenda. The firm intention to agree on a common (EU-based) rule book, including for indirect taxation, for all goods traded implies that the post-Brexit FTA with the EU is far deeper than CETA and – for goods at least – close to the EEA-3 model or (after another decade or so) Ukraine.   

http://aei.pitt.edu/94323/1/CEPS_Customs_Shattered_Illusions.pdf

Shattered Illusions: The new Brexit proposals on customs. CEPS Commentary, 17 July 2018

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