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Brexit Dictionary

Below is our Brexit dictionary which explains many of the key topics such as Single Markets, Customs Union, Free Movement of People and WTO Rules. 

What is Free Movement of People?

Free movement of people is one of the four founding principles of the EU (the others being free movement of capital, goods and services). It gives EU citizens the right to work in and travel to other EU states. Many companies benefit from free movement of people by being able to recruit EU citizens to fill roles ranging from low skilled to technical specialists. Industries such as manufacturing, food production, agriculture, care and hotel & catering currently employ notably high proportions of EU citizens.

Recruiting from outside of the EU and European Economic Area (EEA) can incur additional costs and administration such as needing sponsor licenses, meeting visa requirements and in some cases, paying an immigration skills charge.

Free movement of people, and its impact on overall immigration numbers in the UK, has been a very high profile topic during the Brexit discussions. The UK Government has issued reassurances that EU citizens already in the UK will be able to stay post-Brexit. However, they also see ending free movement of people as one of their Brexit “red lines” meaning that some form of visa system is likely to be put in place for EEA citizens wanting to work in the UK post-Brexit.

What are World Trade Organisation Rules?

The World Trade Organization (WTO) is a global international organization dealing with the rules of trade between nations. The majority of the world’s trading nations are members. WTO members agree to shared principles and approaches to trade with other WTO member nations. Members that do not have separate trade agreements with each other trade under WTO Rules.

WTO rules has become known as the “no deal” option for trade with the EU post-Brexit because under the rules each member must grant the same ‘most favoured nation’ (MFN) market access, to all other WTO members (i.e. the EU are unlikely to be able to charge higher tariffs or impose additional customs barriers). This means that, in the absence of a new trade deal, it is most likely that UK exports to the EU would be subject to the same tariffs and barriers as they are currently with other non-EU nations that do not have a trade deal with the EU – like, for instance, the USA.

You can find out more about WTO rules and the EU here.

What is the Customs Union?

The Customs Union is an area in which the 28 EU countries have agreed to apply a uniform set of rules for handling the import, export and transit of goods. In practice, this means that all members must conform and operate common external tariffs to goods entering from outside the EU. However, once goods have entered a member country, they are not subject to any further tariffs/checks and are able to move seamlessly across the borders of member states. In essence, the EU Customs Union is enforced by the individual 28 national customs services.

The EU also has customs arrangements with non EU countries such as Turkey. The EU and Turkey are connected by a Customs Union agreement, which covers all industrial goods but does not include agriculture, services or public procurement. 

If the UK was to leave the Customs Union, this would more than likely involve customs checks at EU borders, including at the border between Northern Ireland & the Republic of Ireland. The UK would also have to renegotiate the terms of its membership with the WTO, which is currently subject to its membership of the EU Customs Union. However, the UK will only be able to negotiate its own bilateral trade deals with other countries if it leaves the Customs Union.                    

You can find out more about the EU Customs Union here.

What is the EU VAT Area?

The EU VAT area consists of EU member nations and certain other nations who follow the EU’s rules of Value Added Tax (VAT).  Goods sold within the area are not considered to be imports. As a result, businesses importing goods from the EU have no import duty or VAT to pay.

Post-Brexit, it is expected that the UK will no longer be part of the EU VAT area. This will mean that businesses will most likely pay VAT on imports from the EU upfront and need to claim them back via their next VAT return (as they do currently on goods imported for business purposes from outside of the EU VAT area). This is the model currently proposed in the UK Government’s Taxation (Cross-Border Trade) Bill. This may present substantial cash flow challenges for businesses who import heavily from the EU and have not had to do this previously.

What are the EU’s Free Trade Agreements?

The EU’s free trade agreements are preferential trading arrangements between the EU and third countries (i.e. non EU countries). According to a 2013 European Commission memo, the EU has preferential trading agreements with 50 partners. These agreements differ in content and are not all full free trade agreements. They are split into Association Agreements, Free Trade Agreements and Economic Partnership Agreements.      

The EU has recently implemented the CETA agreement with Canada which will remove 99% of the duties European companies will have to pay at Canadian customs. The EU is also currently negotiating free trade agreements with Japan, Australia and New Zealand, as well as updating/ forming new Association Agreements with Chile and MERCOSUR (Argentina, Brazil, Paraguay and Uruguay).

The European Commission claims that if the UK were to leave the EU, it would no longer have access to these beneficial trading arrangements and would fall back on to WTO rules. This would result in UK exporters facing higher tariffs and other trade barriers in these markets.

You can find out more about current EU Trade Agreements here.

What are fluctuations in the value of the pound?

The fluctuations in the value of the pound refer to the constant change in the UK exchange rate since the Brexit referendum. This has occurred due to the political instability caused by the Brexit vote. In the weeks following the EU referendum, the pound dipped by 10.4% against the Euro from €1.3017 on 23 June to €1.1663 on 6 July 2016.[1] Any time a country is at risk of undergoing substantial political change, it makes it less attractive to investors and as a result they may be less likely to demand its currency.

The fluctuation in the value of the pound means that UK exports are cheaper and more competitive on the international market, but it also leads to imports from abroad becoming more expensive. With the political uncertainty over Brexit set to continue over the next few years, pound sterling is likely to experience more fluctuations.   

 

[1] https://www.finder.com/uk/brexit-pound

What does “third country” status mean?

The term ‘third country’ status is used in treaties to refer to a country that is not a member of the European Union.  Once Britain leaves the EU, it will no longer enjoy access to the rights and privileges it enjoyed as a member of the EU. This means Britain will be given the same status as any other country outside the EU.

What is the Single Market?

The European Single Market is a wide reaching trade agreement which permits the free movement of goods, people, services and capital (four freedoms), from one member to another. The purpose of the single market is to remove barriers to trade, which it achieves by developing a single set of rules, as opposed to having numerous individual national rules. By unifying rules in areas such as packaging, health & safety and food standards, this ensures a level playing field as all products within the single market must meet a minimum standard. The European Commission monitors the application of EU law and can launch infringement proceedings against EU countries that do not comply.      

It is possible to be a member of the single market, without being a member of the European Union. Norway for instance, is not a member of the EU, but it does have full access to the single market. It achieves full access by contributing to the EU budget, but it has to accept free movement of people and has no say over the creation of the rules. However, it is exempt from EU rules on agriculture, fisheries, and justice and home affairs.      

What is the “transition” or “implementation” period?

The ‘transition deal’ also referred to as ‘implementation period’ is a period of time between when Britain leaves the EU in March 2019 at the end of the 2 year Article 50 process, and when the new trade agreement with the EU is implemented. The transition period is seen as a necessary measure which will avoid a ‘cliff edge’ scenario and give the negotiating team more time to finalise a deal, should they require it. It will also act as an implementation phase to allow the UK and the remaining EU27 time to put the required changes in place, and give businesses more time to adapt their processes/models to the new arrangement.

On the 19th March 2018, the UK and the EU announced that they had agreed a transition deal. The transition will last from the 29th March 2019 to 31st December 2020, with the UK remaining a de facto member of the single market & customs union for the duration. During the transition period, the UK will be able to ratify new trade deals that will come into force in 2021, and will still have access to existing EU Trade agreements with ‘third countries’. EU citizens in the UK and UK citizens arriving in the EU between those two dates will have the same rights and guarantees as those arriving before Brexit. The transition agreement will be conditional on both sides agreeing a withdrawal treaty.

What is ‘passporting’?

‘Passporting’ rights allow UK businesses to provide a range of financial services throughout the EU and the wider European Economic Area (EEA), while being based in the UK and regulated by UK authorities. A business can do this in two ways, either by setting up branches in EEA countries under an ‘establishment’ passport, or by operating remotely and offering their services under a ‘services’ passport.  Having access to ‘passporting’ rights is quite a cost effective way of operating as businesses no longer have to set up headquarters in every country across the EU, they don’t even need to have an office in the country.

The terms of the UK’s exit from the EU will determine whether or not UK businesses will continue to have access to ‘passporting’ rights after Brexit. If the UK decides to remain in the EEA, or re-join it then it will not face any restrictions on the rights of UK companies to operate across the EU. However, Theresa May set out in her Lancaster House speech that the UK will be leaving the Single Market, which means that businesses will most likely have restrictions imposed.

One possible model for the UK is Switzerland, which has a series of bilateral trade agreements with the EU that allows it to provide limited financial services across the EEA. However, to gain this limited access, the Swiss agreement requires establishment passports, which means Swiss businesses have to set up offices within the EU.     

What impact will Brexit have on the rights of EU Citizens to work in the UK?

On the 8th of December 2017, the UK Government and the EU announced that they had reached an agreement on citizens’ rights after the UK leaves the EU. This agreement covers EU citizens who have been exercising free movement rights in the UK up until the 29th March 2019, as well as their family members who have been living in the UK.

The UK Government has confirmed that they are setting up a new ‘settled status’ scheme that EU Citizens, who are currently living and working in the UK, will be able to apply for from late 2018. Achieving ‘settled status’ will prove to potential employers and public service providers that the individual has the right to continue living and working in the UK. EU Citizens who have been residing in the UK for five continuous years will be eligible to apply for settled status, while those who haven’t will be allowed to remain in the UK to build-up five years continuous residence. An individual can be absent from the UK for up to five years without losing their right to settled status. The Withdrawal Agreement also ensures that EU citizens, who have paid into the UK system, will continue to have access to pensions, healthcare and other benefits.

On Friday 23rd March, the UK and the EU announced that this agreement would also cover EU citizens who arrive in the UK during the implementation period, which will end on the 1 January 2021. Once the agreement has been signed and ratified, this would mean that there are no changes expected to employers’ ability to hire EU workers until at least the 1st January 2021.

What are rules of origin?

The Rules of Origin are used to identify the source of a product i.e. in which country the goods were manufactured in. They are divided into two categories: rules relating to preferential trade and those relating to non-preferential trade. This is important for establishing what duties and restrictions are placed on a product. There is no universal set of rules to determine country of origin, with different national governments using various different practices. In regards to EU preferential trade, there are two main categories of origin in the rules. The first is; goods wholly obtained or produced in a single country and goods whose production involved materials from more than one country. The second category is far harder to define as there are several criteria to consider including the origins of the materials, the country in which the final substantial production phase took place and the value the working and processing in each country has added. Once the origins of the goods has been defined, you can then classify your goods and determine whether they qualify for preferential trading arrangements with the country you wish to trade with.

 

When the UK leaves the EU it will no longer be a member of the Customs Union and therefore is unlikely to apply its common external tariff. This means that even if the UK secures a post-Brexit free trade agreement with the EU, companies will still need to prove that their goods originate from the UK to be able to access preferential trading arrangements. This is because the EU will want to ensure that third countries are not able to gain preferential access to the single market via the UK. So for instance, if the EU places higher tariffs on imports from India than imports from the UK, they are not going to let the UK import Indian goods, change the packaging and then sell them on to the EU as if they originate in the UK. 

 

In addition, many businesses import a significant volume of components for their finished products. While the UK is part of the EU, they are able to incorporate EU manufactured components without it affecting the nation of origin (as the final product is also an EU product). Post-Brexit, it is expected that what was once European value-added will have to be separated into UK and EU value-added. That will make it harder to reach the threshold to export to the EU without tariffs.

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