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UK Government Publishes Brexit Policy Paper on Trade and Customs Arrangements

On 9 October 2017, the UK government published a policy paper on its trade and customs arrangements leading up to and after Brexit. Notably, the government announced that it will develop its own trade defence expertise and carry over current EU measures during a transition period.

The paper has also sought to clarify its future trade relationships and membership of the WTO. Yet, many of the pressing issues which may impact on Hong Kong exporters remain unanswered, and any transitional arrangements could be subject to challenge at the WTO. The government stated that it would welcome stakeholder input on its trade remedy proposals, as well as general comments on its future trade and customs legislation, before 6 November 2017.

It was further reported, on 20 October 2017, that EU leaders have agreed to commence internal discussions on guidelines for EU negotiators regarding the bloc’s future trading relationship with the UK, which could be presented in December.

New independent trade defence body: The policy paper notes the Commission’s estimates that only about 0.5% of European imports are subject to trade defence measures, but that, nevertheless, these measures are vital for the industries concerned. In the UK, the steel, ceramics and chemicals industries are especially vulnerable. The government therefore aims to create a new independent trade remedies body to conduct safeguard, anti-subsidy and anti-dumping investigations after Brexit. This confirmed previous information which had been leaked via a government job advertisement in August.

The policy paper emphasises clear economic criteria and is expected to follow WTO guidelines. However, in order to filter cases and petitions, the government will implement its own “economic interest test” as well as a UK-specific market share requirement for domestic industry wishing to bring an investigation. This requirement might go beyond the mandatory minimum in the WTO’s Anti-dumping Agreement, which demands explicit support from producers accounting for at least 25% of domestic production. The UK will also continue to accept specific undertakings in lieu of imposing duties, as under current EU regulations.

Lesser duty rule: Unfortunately, there was no indication as to whether the UK will keep or abolish the “lesser duty rule” (LDR) in dumping and subsidy cases. The European Commission looks at both the “dumping margin” and the “injury margin” when determining what level of anti-dumping duties should be imposed, and the LDR forces EU investigators to impose the lesser of the two. This is not required by the WTO and can often lead to drastically lower duties than those imposed by other importing countries, such as the United States. Abolition of the LDR could therefore have a significant impact on future investigations affecting, e.g., Chinese-origin products that become subject to future UK anti-dumping duties.

It has to be said that the UK has been a leading proponent of keeping the rule at EU level and has blocked attempts by the Commission to amend the rule, first proposed in 2013. However, despite the UK policy paper’s emphasis on liberal trade, the rhetoric of Mrs May’s government has appeared more protectionist than that of her predecessor Mr Cameron. Post-Brexit, the UK may wish for the additional flexibility that abolition of the LDR would entail.

Roll over of current EU trade defence measures: As an interim measure, the UK government also proposes to continue to apply EU trade remedy measures “which matter to UK business, and which meet WTO requirements around the level of domestic production”, to minimize any disruption. However, the UK faces two problems. First, if the UK merely prolongs the EU’s tariffs, these would have been assessed on an EU-wide basis and hence not correspond to the UK market, in violation of WTO rules. The UK could ask the Commission to conduct an interim review targeting the UK market prior to Brexit, but the second difficulty is that the WTO requires duty determinations to be made by the “authorities of the importing member.” Moreover, the Commission will be busy preparing or conducting its own interim reviews at that stage.

However, if a WTO complaint against the UK is raised, the lengthiness of the procedure likely means that the UK will have time to readjust its duties based on its own investigations. As an alternative, the UK might be able to gain dispensation to start conducting its own reviews prior to the Brexit date. Neither of these contingencies are addressed in the policy paper. The government is however aiming to publish a call for evidence to identify existing measures in the near future.

WTO engagement: Furthermore, the UK government announced that it aims to develop the capacity to bring and participate in trade disputes at the WTO immediately after Brexit. It also confirmed that it will continue to be part of the WTO’s Government Procurement Agreement, and affirmed its support for the ongoing negotiations on the Environmental Goods Agreement and the Trade in Services Agreement, in line with current EU policy.

Future trade deals: Finally, the UK government also stated it was “committed to seeking continuity” regarding current free trade arrangements. However, third countries may demand renegotiations to account for the fact that the UK market is significantly smaller than the EU market. Other countries have already criticised a preliminary agreement reached between the Commission and the UK on how to divide the EU’s current WTO tariff-rate quotas between the two parties after Brexit. Any third country which feels it is receiving less than what it bargained for is likely to raise objections.

Customs Arrangements: The government included a reference to the three “strategic objectives” it had set forth in a previous policy paper titled “Future Customs Arrangements” published on 15 August 2017: “ensuring UK-EU trade is as frictionless as possible”; “avoiding a ‘hard border’ between Ireland and Northern Ireland”; and “establishing an independent international trade policy”.

EU Brexit Trade Negotiation Guidelines: In a concession reportedly granted over Theresa May’s promise that the UK’s financial obligations would be settled in the coming weeks, as well as the constructive atmosphere created by the British Prime Minister’s speech in Florence in September, EU leaders announced on 20 October 2017 that they would start discussing EU guidelines for future trade talks with the UK. These could be announced in December if EU leaders deem the current “Phase 1” talks to have yielded, by then, “sufficient progress” on the three issues of the UK’s financial obligations, the rights of UK and European citizens, and the Northern Irish border and peace process.

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