- January 28, 2021
- Posted by: Florence
- Category: Brexit
At a Glance…
Although the EU-UK Trade and Cooperation Agreement (TCA), which was published on December 24, 2020 and entered into force on January 1, 2021, has provided a degree of certainty, the reality is that it has redefined nearly half a century of common regulatory efforts and created a less streamlined and more complex landscape in times of unprecedented economic uncertainty caused by the global COVID-19 pandemic.
In this short update, we highlight the key changes affecting aviation, shipping, and road transportation.
Authors: Sally-Ann Underhill, Adam Świerczewski, Richard Hakes, Ashleigh Standen, Peter Ferrigno, Yves Melin
Aviation
The TCA confirms that UK airlines can continue to fly to the EU, with intermediate stops on the way to a non-EU ultimate destination. However, rights to pick up member state passengers, baggage, cargo or mail for compensation or to fly a route segment entirely within the EU no longer exist (although note that certain code-share and blocked space arrangements are permitted).
EU air carriers must be majority-owned and effectively controlled by EU member states, EEA member states, Switzerland, or nationals of such states (and so no longer including UK nationals), meaning that some carriers have amended their voting rights to meet these requirements. However, the TCA also acknowledges the benefits of the “continued liberalisation of ownership and control” of air carriers, and notes that the Specialised Committee on Air Transport will examine options for further liberalization over the next 12 months, which may result in amendments.
Shipping
Section 6 of the Trade In Goods part of the TCA regulates what has been defined as “international maritime transport services.” These include “transportation of passengers or cargo by sea-going vessels…including the direct contracting with providers of other transport services, with a view to covering door-to-door or multimodal transport operations under a single transport document.”
Access to ports, the use of port infrastructure and associated services are preserved on a “commercial and non-discriminatory basis” by article 5.46.
Accordingly, the TCA largely maintains the pre-Brexit arrangements and is likely to result in relatively little regulatory impact on ship operators trading between the UK and the EU. However, there may be consequential issues to address contractually and we comment on those further below.
Road transport
Road transport of goods is permitted under the TCA, including full transit rights through other EU member states Operators require a license, and drivers require a certificate of professional competence.
Cabotage rights for UK carriers are restricted to two trips between EU member states, or one trip within a member state with a seven-day time limit, and can only be conducted following a permitted journey from the UK. EU carriers also have a two-journey restriction in the UK.
Issues for transportation companies and their customers
Trade frictions
In the UK, much was made of the TCA giving tariff-free and quota-free access to each other’s markets. In the EU, the Commission spoke in more somber terms: because of the UK’s red lines (unwillingness to remain in the customs union and the single market), the introduction of significant trade frictions was unavoidable. The TCA was designed with the purpose of reintroducing barriers.
The UK has left the EU’s single market and customs union, and that means the introduction of major frictions that will slow down trade. This will decrease cross-channel trade flows over time, and immediately create significant new risks.
The declarative burden
Although some temporary facilitations exist, every single consignment needs to be declared to the customs authorities and accompanied by regulatory certificates demonstrating compliance, and may also sometimes be subject to systematic regulatory checks. Fulfilling those requirements is in itself time consuming. But fulfilling the requirements is not sufficient: they must be fulfilled without making any mistakes, which requires skills and new risk assessments, for which traders are ill prepared.
The consequences of the increased administrative burden are likely to be felt by all participants, from manufacturers, through logistics providers, to traders. At least temporarily, as systems mature, the increased checks and documentary requirements are likely to result in delays at ports and other points of entry. Depending on the nature of the goods, this may affect the manufacturers’ delivery obligations and is also likely to affect charterers and ship operators as delayed berth allocations leave ships on demurrage or hire, which may limit receivers’ ability to manage stock and fulfill their own obligations towards their clients.
In the very short term, the problem is likely to be further exacerbated by the current backlog at ports (as well exemplified by the ongoing shortage of containers) and the phasing in of the new requirements in additional stages on April 1 and July 1, 2021, after which all goods will be subject to declarations.
Tariff-free might not mean free from tariffs
By default, products will be covered by the EU’s and the UK’s regular customs duties. It is only for products acquiring preferential origin, under painfully complex rules, that a zero duty will be applied upon import. Products that do not “originate” under the TCA (and there will be many) will be subject to duties. The same is true for all products for which no preferential origin is claimed (out of negligence or an inability to comply with the documentation rules).
This can have tricky and unexpected consequences. For instance, products made in the EU and imported into the UK will be subject to customs duties upon re-importation into the EU, unless they are subject to stringent – and pre-authorized – customs controls upon exportation and re-importation.
From domestic to international trade
Finally, and more critically, as of January 1, 2021 “domestic” cross-channel trade between two EU member states is considered international trade where it involves shipments between Ireland and fellow member states passing through the UK. International trade is risky business, and an entirely different ball game.
For the lucky, non-compliance with any of the new rules will lead to duties and penalties being levied upon importation, and goods being destroyed or sent back.
More often, though, non-compliance will be found only years after the import, through post-release investigations by customs authorities. These investigations will often result in very significant debts and penalties.
While these risks will rest primarily with traders themselves, the transport industry risks being caught in these investigations anytime it assumes a share of the declaratory and documentary burden.
In a sense, EU-UK trade is today much closer to EU-China or EU-U.S. trade: worth doing, but a lot riskier.
Potential solutions
Familiar customs solutions such as bonded warehousing, inward or outward processing relief and temporary clearances may form part of the suite of solutions.
However, these solutions are not simple, and will often require reconfiguration of supply chains and the securing of authorizations.
From an aviation perspective, it is reassuring that the TCA includes an agreement to “cooperate in removing obstacles to doing business for air carriers” and the Specialised Committee on Air Transport is to monitor progress in addressing such obstacles, so there is potential for changes to be made to better accommodate the needs of air carriers on both sides as they work within this new framework.
In the context of marine transport, although shipping has not been as affected by the TCA directly, there are practical considerations which will likely result in operational issues and may turn into contractual disputes.
More generally, we recommend that logistics providers give consideration to how delays are addressed under the provisions of their services agreements and to the impact such delays may have on their risks and profitability.
Conclusion
“There’s no workaround. There’s no set of easements or light-touch regulations that get around that [Britain’s withdrawal from the EU single market and customs union]. This is something that transport companies, retailers, wholesale operators all need to embrace the reality of.”
Leo Varadkar, deputy prime minister of Ireland, Financial Times, January 15, 2021
If you have questions or would like additional information on the material covered in this Alert, please contact one of the authors – listed above.
This note was initially published by Reed Smith LLP, here.