With the Covid news from the UK (good – vaccine rollout; and bad – high cases and deaths), the impact of the Brexit Deal has been somewhat masked. This note summarises some of the most noticeable of those impacts.

Red Tape & Border Delays

Cross-Channel trade was slower than normal in the first two weeks of January, due to pre-Brext stockpiling. As those stockpiles unwind, the consequences of the new customs arrangements will become clear.

Pressures on the new customs system are exacerbated by a number of factors:

  • A shortage of trained customs agents.
  • New and complicated bureaucratic processes (the FT estimates that there will be 215 million new customs declarations per year).
  • Companies lack the correct data and paperwork needed for new export protocols.
  • New sanitary and phytosanitary certification requirements for food products (including for Northern Ireland).
  • Limited availability of vets for pre-departure and arrival certification of animals and veterinary goods.
  • Increased Covid tests by French Customs officials on lorry drivers arriving from the UK.
  • A change in UK VAT rules. Foreign mail-order sellers must register UK VAT for all items sold to UK customers; collect the tax ;and pay the money to HMRC (who are now checking more than 1,000,000 parcels a day for VAT compliance).

The post-Brexit system has disrupted freight movements and the circular movement of trucks and lorries. Mixed loads (where goods from different companies for different customers are grouped together on one lorry) are particularly impacted. Irish companies are using direct sea routes for export to the EU, rather than crossing the UK (Stena’s newest ferry, originally intended for the Belfast-GB run has been sent to Ireland instead; cargo traffic is six times higher on the Rosslare-Cherbourg route; 26 % lower on the Belfast-Liverpool route; 70 % down on the Dublin-Holyhead route; and freight rates across the English Channel are 39% above the third quarter average price).

Despite the three month ‘grace period’ for export health certificates, the impact of the new system can be seen in empty fresh fruit, vegetables and chilled meat shelves in N Ireland. Asda, Iceland, Fortnum & Mason, Ocado, M & S, Sainsbury, Tesco and John Lewis have reported problems with their supply chains.  A number of other companies are no longer exporting to the UK or to the EU or have split their supply chains, treating the UK and EU as separate markets. Debenhams, for example, has suspended deliveries to Ireland.

Scottish seafood exporters are finding they can no longer export to the EU. Prices of some Scottish seafood are down between 40% – 80% since the fish cannot be transported to the EU market before rotting.  DFDS has stopped taking consignments of Scottish fish. A number of Scottish fishing boats are now landing their produce direct in Denmark – an arduous two day voyage – to avoid customs delays in UK ports.

N Ireland businesses may face tariffs on steel imports due to an oversight which omitted N Ireland from quota provisions when rolling over EU steel safeguards.

Parcel deliveries between the UK and the EU require additional customs information. DPD has suspended parcel deliveries to the EU (including Ireland). EU-based parcel couriers have warned of delays and increased costs linked with deliveries to the UK.

Rules of Origin

To qualify for zero tariffs, goods must contain a high percentage of parts or added-value that “originates” in the EU or the UK (including goods bought from UK websites).

Thus, if a product is made in the EU; then stored in the UK; and then sold into the EU, customs duties will be payable when it is exported. The fact that the good is shipped untransformed means it does not qualify for zero tariffs since it is not considered to be of UK origin. This effectively ends the viability of the UK as an EU distribution hub with severe consequences for deeply interdependent supply chains.

Rules of Origin will have a major impact on electric vehicles. The phase-in of EVs is vital to UK and EU Green recovery plans, but neither side has the capacity to make EV batteries, which are mainly produced in China, South Korea and Japan. The EU has big local car companies: the UK has assembly plants for EU and Asian carmakers. The EU has 15 battery plant or projects: the UK has one. So the UK will either have to negotiate new supply chains with EU manufacturers (which would require mutual recognition of standards) or build new battery factories to maintain Asian investment in the car manufacturing industry – a major employer in the UK.

Financial Services

The exclusion of financial services from the Deal has already resulted in the transfer of £1.2tn in assets and 7,500 jobs. The European Commission seeks to on-shore as much financial activity as possible, viewing the sector as crucial for the EU’s competitiveness and autonomy and its plan for a capital markets union, aimed at cutting dependence on London and other financial hubs for funding its businesses.

The UK is waiting for an EU equivalence decision on its regulatory and supervisory framework. There are 59 areas where such a decision is possible. Whilst the UK has granted the EU an equivalence decision in 28 of those areas, the EU has reciprocated in only two. This imbalance has tipped trading in euro-based shares and sovereign debt away from the UK into the EU.

The UK and the EU have a target date of March for their financial services MoU. However the MoU is unlikely to undo this market adjustment; may have little effect on market access; and will likely only outline mechanisms for further dialogue on regulation. Given the importance to both sides of financial services in the Covid-19 recovery, the negotiations in this area have the potential to be tense.

Medicines and Healthcare

New UK immigration laws are likely to affect the health and social care sectors. Although specific health-worker visas exist, care workers are not included in the scheme and there are concerns that the sector may face difficulties recruiting sufficient staff from within the UK.

Freight transport disruption may result in shortages of medicines, as may the absence of EU reciprocation of UK agreement to accept batch testing of medicines done in the EU.

Energy:

The Deal means the UK no longer has access to day-ahead or intraday trading tools that make exchanges quicker and cheaper. UK companies cannot trade on the ETS. Consumers’ bills are likely to increase between 2-5%. Energy traders will need new paperwork for each trade made.

Gibraltar

Gibraltar will be part of the Schengen passport-free area, meaning British citizens will need to go through a Schengen border post to enter Gibraltar at its airport and seaport. Gibraltar agreed to apply “substantially” the same duties and trade policy measures as the EU, including decisions on customs, excise and VAT legislation; to share reliable statistics on its imports with the EU; and to not undercut the EU’s environmental protections.

Transport:

The Deal stipulates that airlines have to be at least 50% controlled by EU nationals. This has led Ryanair, EasyJet and Wizz Air to make changes to their board structure and rules. EasyJet has canceled the voting rights of non-EU shareholders.

Chemicals

The European Chemicals Agency (ECHA) has revoked 2,900 registration dossiers held by UK companies (a fifth of all UK registrations) because participants registrants failed to initiate a transfer to EU-based bodies. This means that 268 substances will no longer be available in the EU because they were only registered in the database by a UK-based company.

The Deal removes UK companies’ access to the EU’s chemicals regulatory framework REACH and its related database. Since the UK has set up its own database, trading in the EU and UK will now require a double registration which may lead manufacturers to conclude that low-volume products are unviable, since registering a single chemical in the new UK REACH database could cost up to £300,000.

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Photo of Thomas Reilly Thomas Reilly

Ambassador Thomas Reilly, Covington’s Head of UK Public Policy and a key member of the firm’s Global Problem Solving Group and Brexit Task Force, draws on over 20 years of diplomatic and commercial roles to advise clients on their strategic business objectives.

Ambassador…

Ambassador Thomas Reilly, Covington’s Head of UK Public Policy and a key member of the firm’s Global Problem Solving Group and Brexit Task Force, draws on over 20 years of diplomatic and commercial roles to advise clients on their strategic business objectives.

Ambassador Reilly was most recently British Ambassador to Morocco between 2017 and 2020, and prior to this, the Senior Advisor on International Government Relations & Regulatory Affairs and Head of Government Relations at Royal Dutch Shell between 2012 and 2017. His former roles with the Foreign and Commonwealth Office included British Ambassador Morocco & Mauritania (2017-2018), Deputy Head of Mission at the British Embassy in Egypt (2010-2012), Deputy Head of the Climate Change & Energy Department (2007-2009), and Deputy Head of the Counter Terrorism Department (2005-2007). He has lived or worked in a number of countries including Jordan, Kuwait, Yemen, Libya, Iraq, Saudi Arabia, Bahrain, and Argentina.

At Covington, Ambassador Reilly works closely with our global team of lawyers and investigators as well as over 100 former diplomats and senior government officials, with significant depth of experience in dealing with the types of complex problems that involve both legal and governmental institutions.

Ambassador Reilly started his career as a solicitor specialising in EU and commercial law but no longer practices as a solicitor.