Seven weeks after the UK left the single European market and Customs Union, the asymmetry inherent in the Brexit settlement has become clear.
Brexit will have a far greater negative impact on UK exporters to the EU than on EU exporters to the UK, because the UK relies more heavily on the EU for imports and exports than vice versa. Half of the goods imported into the UK come from the EU and half of the UK’s exports go there – yet only 4% of EU exports of goods is sold to the UK, and 6% of the EU’s imports are from the UK.*
For an EU importer, an alternative to the extra bureaucracy and cost associated with buying from the UK is to source a similar product from elsewhere – from a competitor based in the EU.
For a UK importer, dependent on goods manufactured the EU, there’s far less alternative.
Mindful of the shock of leaving the single market and Customs Union, the British government decided to phase in the move to full third-country status, delaying phytosanitary and veterinary controls on EU foodstuffs and plant-based products entering the UK until 1 April, and full (rather than simplified) customs declarations until 1 July. This has had the effect of preventing sudden shortages on supermarket shelves in early January. [The situation regarding Northern Ireland, a part of the UK that has in effect remained within the single European market and Customs Union, is more complicated, and causing political headaches for the British government. The border between Great Britain and Northern Ireland is in the Irish Sea, so checks on goods travelling from one part of the UK to another are now in place.]
However, EU governments have implemented the full third-country regime (albeit from a country with a tariff-free agreement on trade) on 1 January. UK businesses exporting to the EU, and EU importers of goods from the UK, have faced major disruption as border control delays, incorrect documentation and lack of familiarity with the new procedures have hit hard.
One BPCC member firm which imports goods from the UK reports that typical delivery time has increased from five working days to 12, and that of six deliveries made after 1 January, three have failed to reach Poland because of incorrect or missing paperwork, the fault of either exporter or haulier – or over-zealous border controls. Another BPCC member firm, exporting goods from Poland to the UK, has reported no great difficulties (although onward transit to Northern Ireland has become far more problematic).
Multiplied across the economy, the UK’s departure from the single market and Customs Union has harmed UK exporters far more than the EU’s. The Road Haulage Association has reported a year-on-year 68% drop in the volume of UK exports to the EU in January; however this drop needs to be adjusted for the effects of Covid and also for the massive stockpiling that took place in the fourth quarter of last year. The effect of this drop is that far more empty trucks are crossing the English Channel from the UK to the EU – 60% compared to a more usual 30% (the UK’s trade deficit in goods being the reason for that usual disparity). Many French and German logistics companies have stopped serving the market into the UK, fearing that their drivers may be held up on their way back.
The Trade and Cooperation Agreement (TCA) signed by the UK and EU on Christmas Eve ensures tariff-free movement of goods between the two, but this applies only to goods made in the UK or made in the EU. This means that all goods exported must be accompanied by a certificate of origin, stating that the products have the necessary amount of content by value-added coming from the UK or from the EU – or from a third-party that has a free-trade agreement with both sides, for example Canada or Japan. Rules of Origin are complex, goods have to be certified; without a country-of-origin certificate, full customs tariffs (as set out by the World Trade Association) have to be paid on entry to the destination market.
The TCA does not cover trade in services. Here, it is likely that the UK will continue to negotiate with the EU for decades, much as Switzerland has been doing since it voted not to join the European Economic Area in 1992. In the meantime, each EU member state is free to set its own rules on the import of UK services into its market. This means that many issues relating to services that were not mentioned in the TCA are still to be determined, to the detriment of firms trying to do business in both directions.
The full extent of the first month of Brexit on EU-UK trade will be seen when the Office of National Statistics publishes the January 2021 data on trade in goods on 12 March.
By sector, Polish exports to the UK are faring differently. Non-perishable goods such as furniture or building materials are generally getting through without major disruptions. Containers sent by sea are coping better than roll-on, roll-off freight on the short sea crossings. The automotive sector, traditionally the number one category of Polish exports to the UK, is hard hit by numerous issues such as Covid, the global shortage of computer chips, structural change caused by the long-term switch to electromobility, as well as Brexit. With new-car registrations in the UK down by 39% year-on-year in January, suppressed demand is clearly the bigger issue. Food and drink, Poland’s number two category of exports to the UK, has been hard hit by Covid and the near-total lockdown of the hotel, restaurant and catering sector. Supermarket shelves – including shelves of the 800 or so Polish shops across the UK – are still well stocked. The effect of full phytosanitary and veterinary checks will make themselves felt at the beginning of April.
One sector particularly hard-hit has been e-commerce – B2C sales from the UK to the EU and from the EU into the UK. Much of what UK e-commerce platforms have been selling into the EU, including Poland, is manufactured outside of the EU or UK (typically from the Far East). Without a Country of Origin Certificate, products with a value of €135 or over require a customs tariff to be applied, as well as the VAT. This suddenly makes such transactions unappealing to the consumer. Many UK firms have circumvented this by setting up e-commerce platforms and fulfilment centres within the EU from which to serve EU consumers. However, such businesses are now facing the prospect of having to find a local fiscal representative to sign off monthly VAT returns, although this requirement can be dropped at the discretion of individual member states.
Other new difficulties are arising, such as the requirement for British firms wishing to set up branches in Poland to have a ‘certificate of reciprocity of operation’ to show that the UK allows Polish firms to have branches in the UK.
Brexit coinciding with the pandemic has made matters far worse for everyone; finding a ‘new normal’ after the pandemic will be a parallel process running alongside the search for a ‘new normal’ after Brexit. The short-term impact of both is particularly painful for the UK economy, which is unlikely to return to pre-pandemic levels of output until 2022. For Polish exporters, particularly those whose main competitors on the UK market have been companies from Western European EU member states, Brexit can be seen as an opportunity, providing they can cope with all the new paperwork and logistics challenges.
* The UK is Poland’s third-largest export market (after Germany and Czechia), and in 2019 represented 7.5% of all of Poland’s exports (goods and services) and 3.7% of all of Poland’s imports.