Insights

The Magna Brexit? Potential Implications on Trade & Export Compliance

by: Olga Torres and Sandy Aziz

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The United Kingdom’s (“UK”) 40-year relationship with the European Union (“EU”) is ending due to the historic British vote to leave the EU on June 23, 2016. Given the UK’s decision to leave, any company doing business in the UK or with the UK must monitor potential trade issues that will arise as a result of Britain’s exit, now commonly referred to as Brexit. This article briefly outlines the Brexit’s potential implications on trade.

Notably, under Article 50 of the Treaty on the European Union, a member state must first give a formal two-year notice if it intends to leave the EU. The UK has not yet submitted this formal notice, and, as a result, it technically still remains in the EU for now, and must abide by all obligations under EU treaties.

Trade

Currently, EU member states participate in more than 53 Preferential Trade Agreements (“PTAs”) that have been negotiated by the EU, which eliminate customs duties for member states when trading with each other. The EU also establishes export policies, sanctions, and trade remedies for its member states. Upon exiting the EU, the UK will no longer benefit from the EU’s 53 PTAs, and will have to negotiate these deals independently. Brexit critics have predicted the UK will have less leverage in its future negotiations with the EU, and that its exit will place the UK as a lower priority in trade negotiations worldwide.

Further, future trade between the EU and UK would likely require certain taxes and additional declarations on exports and imports. As previously mentioned, as a member of the EU, the UK has access to the EU’s single market, which means the UK enjoys no tariffs on imports and exports between member states. About 50% of the UK’s exports are to the EU. Additionally, Brexit will also impact the EU’s supply chain as businesses in EU member states also benefit if their production chain involves other member states, even if they do not export to those member states. After Brexit, some companies may be incentivized to move operations from the UK to other EU member states.

Customs

In addition to potentially higher customs duties, Britain’s exit could also lead to cross-border trade complications (i.e., increased border checks, burdensome customs declarations, etc.).  The UK would also need a new customs union arrangement with the EU. Currently, the EU’s Union Customs Code regulates the EU’s member states import transactions.

Customs decisions would also likely be affected by Brexit. Brexit would impact customs decisions issued by the UK’s customs authorities, and thus tariff classification and other customs decisions regulating imports may no longer be valid. At this juncture is its unclear whether customs decisions issued by the UK’s customs authorities would be valid after Brexit.

Export Compliance

Council Regulation No. 428/2009, and associated amendments, govern the EU’s legal framework for export controls. This regulation permits each of the 28 member states to impose their own controls in accordance with certain principles set out in the regulation. Britain’s export regulations are outlined in the Export Control Order of 2008 (“the Order”). Many experts believe the Order will continue to be valid even though the Council Regulation will no longer apply. Regardless of Brexit, the UK will likely maintain its current export compliance infrastructure due to its membership in international agreements such as the Wassenaar Arrangement, the Missile Technology Control Regime, and more.

In the future, the transfer of “dual-use” or military items from the UK to the remaining 27 member states could require additional export authorizations and more stringent licensing reviews. Currently, “dual-use” items can be transferred between EU member states with general export licenses.[1]

Brexit’s impact on exports of dual-use and defense items involving non-EU countries would likely be less significant. For example, the United States views each of the member states of the EU as separate, sovereign nations. Accordingly, the United States will continue to ensure that the UK, regardless of EU membership, has the required authorizations for re-exports of items and technical data controlled by the US export regulations. Regardless of its exit from the EU, Britain would still be a top trading partner for the US and one of its closest allies.

In terms of sanctions regulations imposed against certain proscribed countries or individuals, historically, the UK has always been more aggressive in recommending these measures and it is unlikely that Brexit would change that. The UK will be free to impose sanctions without limitations imposed by the other 27 member states. Notably, since the UK will remain a member of the United Nations (“UN”) post-Brexit, it must continue to follow the UN Security Council sanctions and supplemental sanctions in the same manner as the EU.

Conclusion

Overall, it is suggested that the EU will deal harshly with the UK leaving. The opposing argument is that a tariff-driven trade war would be mutually destructive for both the UK and the EU. Now is the time for companies engaged in business with the UK to examine the potential implications on trade and export compliance, and to begin developing strategies to deal with any potential issues.  Companies should be monitoring the Brexit negotiations closely to determine if potential higher customs duties or other restrictions on exports would put their businesses at a competitive disadvantage.

 

[1] “Dual-use” items (i.e., items that have both military and commercial applications) are currently governed by Council Regulation No. 428/2009, and they are a significant portion of EU trade.

 

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