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Brexit: What’s Next after 29 March?

The road to Brexit took another dizzying turn in the last week of March. The defeat of Prime Minister (PM) Theresa May’s withdrawal agreement (WA) for a third time on 29 March, saw the UK default to exiting the EU on 12 April. With further “indicative votes” scheduled in the UK House of Commons in early April, the PM is expected to call for another Meaningful Vote (MV) shortly to “press the case for the orderly Brexit that the result of the referendum demands”.

Hong Kong companies wishing to continue trading in the UK with the least turbulence possible may be alarmed at this new turn of events, with uncertainty growing ever more apparent over the whole Brexit saga. Another MV, if held and won, would probably allow a transition period until 22 May for the UK to pass the necessary legislation for an orderly Brexit. After that a transition period would set in, while the EU and UK decide on their future long-term relationship.

If there is no further MV (or if it is voted on and defeated) then the UK must return to Brussels for an emergency European Council summit on 10 April and decide on the next steps or face the certainty of a hard Brexit by 12 April. It also came to light, on 29 March, that the Democratic Unionist Party (DUP), whose support Theresa May’s government relies upon, might not back another MV should one come to pass. It therefore now looks more unlikely than ever that May will be successful, adding a new layer of uncertainty to the already complex way-forward negotiations between the UK and the EU and introducing heightened risks for businesses.

Likely immediate impacts on Hong Kong's exports to the UK market

On 22 March 2019, the other 27 members of the EU responded to the UK’s request to extend the Brexit process, or the so-called Article 50 notification period, with two new deadlines, having agreed that the original Brexit date of 29 March was no longer feasible. As a newer dynamic, the new relevant dates were either 22 May or 12 April 2019.

Following the extension decision and the passing of the original 29 March 2019 deadline without an approved WA, Brexit day could only be delayed until 12 April 2019. In that event, all options – unilateral revocation of Article 50, a second referendum, another UK-EU deal, an agreement on establishing a customs union and a hard (no-deal) Brexit – are in principle still available. The burden would be on the UK to “indicate a way forward”.

While, at the time of writing, none of the Brexit options has won support from a majority in the House of Commons, Hong Kong traders should take heed of the different possible scenarios and their implications for future trade with the UK to avoid any unwelcome outcome in terms of lingering Brexit uncertainty.

Under an orderly Brexit

In the case of an orderly Brexit with a withdrawal agreement, EU law would, subject to a number of limited exceptions, continue to apply to and in the UK. This means that during the transition period (that is, until 31 December 2020 unless otherwise extended), which gives businesses time to adjust to the new situation and the British and EU governments further room to negotiate a new deal defining the future long-term UK-EU relationship, the UK would remain in the single market and in a customs union with the EU, while remaining bound by the international agreements the EU has concluded, including WTO agreements and bilateral trade agreements.

In sum, the status quo would be protected during the transition period. Exports from Hong Kong and other third countries destined for the UK market would continue to be subject to EU tariffs, EU trade defence measures such as anti-dumping and countervailing measures, and EU laws relating to product standards, import/export licensing and documentation requirements. Goods would continue to enter the market, comprising, after Brexit, the territories of the UK and the 27 EU Member States, under the terms agreed with the EU. Once they have entered the market, those goods would be able to circulate freely within it.

During the transition period, there would also be no impact on EU trade remedy measures as the UK would remain in a customs union with the EU27 and therefore remain bound by the common commercial policy, which includes trade defence measures. For the purposes of EU trade remedy measures, this would mean that the determination of increased imports and injury (serious injury in the case of safeguard measures and material injury in the case of anti-dumping and anti-subsidy measures) would continue to be based on a market corresponding in size with that of the EU (comprising 27 Member States) and the UK.

On the other hand, the backstop solution would enter into force after the transition period in case, in essence, there was no all-encompassing deal or technological solution to keep the open border on the island of Ireland as frictionless as it is today. In practice, the backstop solution would entail the establishment of a customs union between the UK and the EU27 without a single market. This is believed to be particularly conducive for “just-in-time” production and delivery, where shipments and fulfilments follow extremely tight schedules.

Imports from Hong Kong into the UK-EU27 customs territory would continue to be subject to, in essence, EU tariffs and customs treatment such as rules of origin and customs valuation. Yet while the backstop solution provides for some degree of regulatory co-ordination and co-operation, the fact that there is no single market means that the UK is not obliged to align its regulatory framework affecting trade in goods with EU law. Put differently, different non-tariff barriers such as packaging rules, product standards and safety requirements affecting market access may be applied by the UK and the EU27.

The situation, however, is more complex in case of trade to and from Northern Ireland. Northern Ireland would to some extent remain de facto part of the EU single market with respect to trade in goods. In order to achieve that result, it would be necessary for the UK to apply, in respect of Northern Ireland, a comprehensive list of EU legislation, so as to align the regulatory framework applicable to trade to and from Northern Ireland with that which applies, as a matter of EU law, in the single market.

As a result, placing goods originating in other parts of the UK on the Northern Ireland market would, in essence, need to comply with EU law (as to be implemented by UK law). Placing goods of EU origin on that market, on the other hand, would be directly subject to EU law. For other imports including those from Hong Kong, the UK would enjoy a degree of freedom to impose its own regulations for its own market. If, however, Hong Kong goods were to be placed on the Northern Irish market – whether directly through the Northern Irish ports or airports or through the rest of the UK – they would need to meet EU law requirements.

As for how goods would be checked for compliance with EU standards, consistent with risk, to protect consumers, economic traders and businesses in the single market, the EU and the UK have agreed to carry out these checks in the least intrusive way possible. For industrial goods based on risk assessment, checks could take place “in the market” or at traders’ premises and would always be carried out by UK authorities. Such checks would be conducted on any goods – including those that were originally from Hong Kong – destined for Northern Ireland from the UK.

Under a no-deal Brexit

On the contrary, in case of a hard or no-deal Brexit, Hong Kong exports destined for the UK market would be subject to UK laws (tariffs, customs, regulatory treatment, trade defence, etc.). Goods imported into the UK would no longer be in free circulation in the EU as the UK leaves not only the single market but also the customs union. Subsequent exports (or re-exports) to an EU Member State would thus be subject to EU import laws and other market access measures.

On 13 March 2019, the UK announced a temporary tariff regime (including a list of import tariffs that would apply in case of a hard Brexit). Under this regime, classification of goods would, in most cases, remain the same in order to provide continuity to companies currently interacting with the EU system so as to minimise disruption for traders, while 87% of total imports to the UK by value would be eligible for tariff-free access.

Indeed, the temporary tariff regime would not only apply to goods imported from the EU. Hong Kong companies might feel encouraged to benefit from the potentially lower import duties that equally apply to their exports to the UK, due to the Most Favoured Nation (MFN) principle [1] that applies under rules of the WTO, of which the UK remains a member.

In fact, the temporary tariff regime would set levies on about 95% of tariff lines to zero, which – according to HM Revenue and Customs (HMRC), the UK’s tax, payments and customs authority – amounts to some 87% of the UK’s imports by value on the basis of average trade flows in 2017 and 2018. For products such as certain finished vehicles, agricultural products and meat goods on which the import duty stays positive, the UK would allow for a reduced or zero rate of duty for a limited quota of goods over a given period.

While the measure seems favourable to Hong Kong’s exports, they would only apply for a temporary period of up to 12 months when the UK government would launch a formal consultation on a long-term tariff policy to get representation from interested parties. Hong Kong companies trading with the UK post-Brexit should keep in mind that the rather favourable import duties could apply for a period shorter than 12 months.

Under this scenario, in addition to tariffs and rules of origin, Hong Kong’s exports to the UK would be governed by UK laws imposing product standards, import/export licensing and documentation requirements, while EU laws would continue to apply to Hong Kong’s exports to the EU. Yet there is no guarantee of alignment between UK and EU laws in this case.

Also, under a no-deal Brexit, EU trade remedy measures would be imposed at a time when the relevant import market no longer comprises a customs territory consisting of 28 Member States (UK-EU customs territory) and the domestic industry would no longer include the UK’s industry. Furthermore, exports from the UK to the EU would be qualified as exports from a third country. It would therefore lead to a change in the circumstances in which the EU’s initial increase of imports and injury determinations would be calculated. As a result, a review of existing EU trade remedies may be required in order to ensure that those measures continue to comply with the EU’s WTO obligations. So far, the EU has not announced the initiation of any such reviews, nor any contingency measures for the specific purpose of making adjustments in light of a no-deal Brexit.

Once the UK has left the EU, UK businesses would no longer be able to request the European Commission to initiate a trade remedy investigation. To reconcile, the Trade Remedies Investigations Directorate of the UK (TRID) on 6 March 2019 clarified that if UK businesses consider that the domestic industry is being harmed due to subsidised or dumped imports or because of an unforeseen surge in imports of a certain product, they could request the TRID to initiate a trade remedy investigation. In order to provide certainty and continuity, the UK government would continue to apply a series of EU trade remedy measures that “matter” to the UK.

To ensure that the measures maintained post-Brexit could meet the needs of the UK economy and the WTO requirements, the TRID is seeking evidence from UK businesses while undergoing a transitional review to determine if: (i) dumping or subsidisation would continue to happen if the measures were terminated; (ii) harm to the UK industry would continue to occur if the measures were terminated; (iii) the level and form of the measures is appropriate; and (iv) the measures are in the economic interests of the UK on each of the trade defence measures kept by the UK that were put into place by the EU. As possible outcomes of the review, transitional measures that meet the above criteria, could be kept for up to five years at the same or adjusted levels, or otherwise terminated.

[1] MFN requires that all WTO members are charged the same import duties by the UK, except for countries that entered into a free trade agreement with the UK, other regional trading arrangements such as customs unions, or on the basis of special access for developing countries (i.e., Generalised Scheme of Preferences, GSP).

Content provided by Picture: Louis Chan
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