Brexit and the ecsn

23rd October 2017
Joe Bush

As Brexit negotiations grind on, it is perhaps an opportune time to ponder how the electronic components supply network might be affected when the UK eventually exits the single market. In this article ecsn Chairman, Adam Fletcher reviews the key points and the likely impact but points out that ecsn remains apolitical and neutral in its stance to the entire process. Any perceived bias is therefore merely that of the writer and should not be viewed as representing the opinion of the association.

What is a Single Market (Customs Union)?
A Single Market (Customs Union) system seeks to establish a common set of rules relating to how goods enter its member countries from countries outside the organisation. These rules are established and maintained by all members and all members must adhere to them if the union is to operate successfully. There are procedures in place to ensure that no individual, organisation or country is able to circumnavigate the rules to gain a commercial advantage. Large global economies have been notably reticent about setting up Customs Unions, in fact the EU system is unique in both its number of members and scale.

The EU Customs Union agrees tariff levels (import duty) and from time to time, agrees quotas (quantity restrictions) for goods entering the EU. The EU Commission monitors all the individual member states to ensure compliance within their area of jurisdiction and also sets and monitors specific standards that goods must meet prior to being placed on the market, which some consider to be a form of protectionism. Once within the EU Customs Union goods may be freely transferred between member countries without further controls or tariffs. The Treaty of Rome conferred ‘exclusive competence’ on the European Commission to negotiate external trade agreements. An additional obligation for EU Customs Union member countries determines that individual trade agreements cannot be negotiated with non-member countries. Any disputes that arise are referred to the European Court of Justice for resolution binding on all members.

At the point of entry within the Customs Union VAT is nominally collected, but in practice is often deferred as Onward Supply Relief or Inward Processing Relief for Authorised Economic Operators i.e. large organisations, freight forwarders etc. The tax is held within a common fund because the final destination member state is often still to be determined, so the applicable tariff and local VAT rate the consumer will ultimately pay is unknown.

How does a Customs Union differ from a Free Trade Area (FTA)?
A Free Trade Area (FTA) also achieves reduced or zero tariffs between member countries but members are able to operate with different external tariffs on imports from non-member countries. FTA agreements apply tariff relief to goods which originate within a member state but are destined to simply transition through the ports of another member. All FTA members check the ‘Point of Origin’ and only levy tariffs if they originate outside the FTA. The European Free Trade Agreement (EFTA) covers Switzerland, Norway, Iceland and Lichtenstein.

What happens in the EU?
The EU's Single Market (Customs Union) is in effect a hybrid model. Its members also enjoy FTA status with almost all other European states who are not themselves single market members, For instance Turkey - a non-EU member - has a ‘light’ or ‘basic’ version of a Customs Union with the EU that primarily covers manufactured goods but excludes agriculture. It is however a very one-sided agreement where Turkey is mandated to adopt and reflect current EU Single Market tariffs as they are set, must harmonise with EFTA and must not negotiate a parallel trade agreement with any non-member states. Turkey is highly reliant on the export of manufactured goods, particularly ‘white and brown’ electrical consumer products (TVs, washing machines, fridges etc.) and industrial products to Europe, so membership of the European Economic Area even via a one-sided FTA has significant benefits to the country's economy.

Next steps…
The UK Government's stated aim is to leave the European Single Market - probably in a two-year phased transition - but has also said that it wants to remain a trading partner with all EU member states post Brexit, which implies a transition to a European Free Trade Agreement. However, the UK also wants to establish trade agreements with countries that do not have an EU trade agreement, principally the US and India. We must expect this to be very difficult to achieve as other EU countries are unlikely to agree to UK membership of EFTA and then allow additional parallel trade agreements from which they do not benefit. There is also an implied risk that goods could enter the EU Customs Union with zero tariffs via the UK.

Why tariffs (import duties)?
Tariffs are imposed primarily to protect industries in domestic markets and to encourage change, which itself can be politically motivated. Examples include increasing tariffs on certain steel products made outside the EU in an effort to protect the domestic producers, and the US imposing a tariff of 200% on specific Bombardier Aerospace aircraft in order to ‘level the playing field’ and protect their domestic manufacturing capacity. Bombardier may be able to circumnavigate this by manufacturing under licence in US local facilities but costs will inevitably increase.

What's the likely impact electronic components markets?
Currently the European Single Market (Customs Union) does not impose any tariff (import duty) on 99.9% of all imported electronic components. A few very specific modules (discrete assemblies of electronic components, often incorrectly regarded by some users as components) do however, attract a small tariff of 2.5%. This tariff situation is unlikely to change because of mutual dependency. The EU is predominantly an importer of electronic components but also has important local manufacturers who trade within the Customs Union and export outside of it.

Electronic components are a key enabling technology but remain relatively insignificant compared to the automotive or aerospace markets that would be negatively impacted by supply problems or price increases. That said, it is very unlikely that the UK government or the EU Commission will want to meddle with the tariffs for electronic components as UK domestic producers are not raising any objections with other European or international manufacturers about market access.

Future trade agreement negotiations between the UK and other states, electronic components could be caught in some ‘crossfire’, and problems that do arise are unlikely to centre around tariffs. Instead they are much more likely to be practical in nature and will probably relate to the ‘frictionless movement of goods. Today large Authorised Economic Operators are able to move all goods at will and are able to demonstrate full compliance to the relevant tax authorities so that they can track and charge taxes and repay them appropriately.

All the IT systems used by exporters, importers and regulators required to effect any agreed changes to document flows etc., will have to be updated if some daft change occurs, which may cause some short term glitches in supply. However, it is likely that there will be a reasonable period of introduction to enable these changes to be made and tested.

Concluding thoughts…
Extracting or transferring the UK from the European Single Market (Customs Union) to a form of Free Trade Agreement on terms that are acceptable to all parties looks to be anything but easy. The EU needs to discourage other states from following the UK and understandably needs the UK to be perceived as being in a slightly inferior position when it's outside the single market. Given that this is being politically led I suspect much depends on just how 'inferior’ the eventual agreement will leave the UK and if our economy can stand the inevitable wait while the EU reaches an outcome acceptable to all. Perhaps the UK will decide to transition to Word Trade Organisation terms and then work it out. For the electronic components supply network WTO terms would have no meaningful change but may negatively impact the wider economy.

In the meantime, my message for all in the electronic components supply network, where - let’s be honest - we are primarily spectators, is to continue to be remain focused on your customers’ needs and when appropriate be prepared to collaborate and engage, quickly and positively to manage any changes as they occur.”

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