The Return Of Customs Duty After Brexit: How Will It Affect Trade Efficiency?

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Introduction

Being a part of the European Union, it’s easy to forget that we may be subjects to customs duty. Free trade zones allowed us to lose the concern about any additional cost of importing from the EU, but unfortunately not anymore. Now, as Great Britain exits the agreement, the state of the matter is very uncertain. In this essay we will try our best to provide answers to mind-boggling questions concerning the futures of trade of both remaining countries, and the United Kingdom itself.

Importance of Customs

First, to get the gist of the problem, let’s focus on what customs duty precisely is. Customs duty is a tax charge on imported (and sometimes also exported) goods introduced by authorities in order to increase revenue and protect state industries from competition from across the border. There are various criteria on which the value of duty is based, the main two are: weight and dimensions.

Although it may seem like a new concept, in fact first written evidence of customs tarriff is traced back to 167 A.D. to a city called Palmyra (today’s Syria). Back then, fees were given voluntarily by merchants in exchange for considerate treatment, but over time they became mandatory contribution to kingdoms’ revenue. The idea of customs flourished in the time of Industrial Revolution, when international trade was seen as key source of wealth, thus implementing certain policies to regulate it was necessary.

Efficiency in Trade

It’s a case of common sense to say that it’s efficient to trade if the offer from a foreign supplier surpasses the domestic one. The rule of efficiency states that one should specialize in production of goods that can be manufactured most efficiently. Under circumstances of introducing customs duties, in order to maintain the levels of current GDP, governments of GB and EU will be compelled to intervene and reduce imbalances by the use of economic policies that compensate the flaws of the system. In such case it’s believed that Law of Demand and Supply is not sufficient to assure stabilization of the economy, therefore various fiscal and monetary policies are bound to be introduced by the government instruments.

Current UK-EU Situation

Great Britain is scheduled to formally leave the European Union on 31 March 2019. This transition will have a drastic impact not only on the UK but it will affect all European countries in numerous ways. Governments on both sides will have to mind the good of the people and arrange settlements to minimize the risk of any possible inconveniences. Unfortunately, this is not an easy job since the “Judgement Date” is very close up, and the conversation can only last so long.

But before we get into what is coming after Brexit, let’s talk about how different trade regulating agreements work within the EU, and how customs duties are currently executed.

European Customs Union

The European Customs Union is an important organization which operates in all EU countries. It provides a uniform method of controlling all imports, exports, and transits of goods by implementing a set of rules also known as Union Customs Code.

Nowadays, these rules state that there are no customs duties on imports from outside the EU and at the borders between the EU countries. Duty has to be charged only when goods first enter the EU but later on they can move freely within its territory. Due to eliminated customs delays smooth flow of goods is ensured. This agreement gives businesses that depend on imported components huge advantage when it comes to fast production – for example, one of the largest pharmaceutical companies originated in the UK AstraZeneca plc hugely relies on international trade; industry statistics show that it exports around 45 million medical packs to EU countries every month, while 37 million are exported to Britain from the EU. In the future, possible transit delays may cause huge revenue cuts or even put the firm out of the picture.

More generally, according to data presented in Figure 1 from, in 2017 the EU countries added up for 53% of UK imports and 44% exports, which only proves the scale of mutual dependence on both ends.

“Statistics on UK-EU trade” by By Matthew Ward, House of Commons Library

Trade Facilitation in the European Union

Trade facilitation is another important tool that helps governments enhance the speed and efficiency of border procedures, as they can become quite complex and costly for certain business. Trade Facilitation Agreement (TFA) was initiated by World Trade Organization (WTO) and came into force on 22 February 2017. The act is one of the key measures that enable easy movement, clearance, and release of goods, it also allows for effective collaboration between countries’ authorities all around the world.

The aim of trade facilitation is to reduce both variable and fixed costs of trade and, therefore, accelerate and increase output gains. In 2015 WTO presented a report on world trade, which, among other things, included the information on implementing TFA could speed it up. The report compared the effect of trade facilitation to an iceberg, which melts as it swims across the ocean just like the value of goods decreases as importers and exporters face trade costs. The inefficiency of trade is reduced to zero under implementation of TFO. It is certain that trade facilitation increases the welfare on both sides of the spectrum, importers benefit from lower prices and exporters may receive higher revenues for traded goods. The report also provides and estimate that the complete implementation of Trade Facilitation Agreement is able to reduce trade costs by average 14.3%, import time by 47% (over a day and a half), and export time by 91% (almost two days).

BIBLIOGRAPHY

WORLD TRADE REPORT 2015: Speeding up trade: benefits and challenges of implementing the WTO Trade Facilitation Agreement https://www.wto.org/english/res_e/booksp_e/world_trade_report15_e.pdf

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