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The UK's customs proposals: do they pass the garlic smuggling test?

Tuesday, 11 December 2018

Wednesday, 16 August 2017

The UK government has set out its proposals  for future customs arrangements with the EU after Brexit. But will they be acceptable to Brussels?  Increasing concern in the EU over customs fraud and smuggling (including, bizarrely, millions of euros' worth of garlic) suggests that British negotiators will not face an easy task.

The proposals:  interim arrangements

Many commentators (including ourselves) have expressed serious concern that the UK will not be ready for the introduction of full customs controls by the end of March 2019, with the potential for major congestion at ports such as Dover or Holyhead, which handle very significant volumes of EU-UK trade. Widespread reliance on just-in-time distribution systems means that shortages of goods could arise within a relatively short period, as occurred during the fuel protests of 2000.

In a welcome move, the UK's latest position paper implicitly acknowledges these risks by proposing that, for an interim period, customs arrangements with the EU should remain largely unchanged.  This would allow time for both the UK and the EU to design and implement new, longer term arrangements.  The interim deal would take the form of a time-limited customs union with the EU, similar in some respects to that between the EU and Turkey (but probably significantly more comprehensive).  As such, Ministers could truthfully say that the UK had left the EU Customs Union in March 2019  – although in practice, businesses would not notice any real difference.

The EU may well be prepared to agree to some form of interim arrangement which effectively replicates full participation in the EU Customs Union – not least because customs administrations and ports in EU member states will also need time to adapt to any new arrangements.  However, in our view, the EU would be very unlikely to agree to allow the UK to conclude new trade agreements during any such interim period (see further below).

The proposals:  longer term arrangements

One option being proposed involves a variety of measures designed to reduce border red tape, including technological solutions such as number-plate recognition (so as to allow HGVs to roll off ferries without having to stop, provided they have declared their cargo to customs electronically and in advance).  Many of these measures are discussed in our Q&A on Customs Arrangements (see in particular Qs 9 and 10).

The other, much more ambitious option would involve the UK agreeing that its customs treatment of goods entering the UK but intended for the EU will mirror that of the EU, thus removing the need for customs controls between the UK and the EU.  This would be a better solution for UK businesses which are part of EU-wide supply chains, as it would minimise disruption to their current arrangements.  In particular, it would avoid the problems caused by "rules of origin", which are explained at Qs 8 and 9 of our Q&A on Customs Arrangements.  However, for reasons explained below, the EU may well have serious reservations about this approach.

Where does garlic smuggling fit in?

In order to achieve the "freest and most frictionless" customs arrangements with the EU, the UK will need to persuade it that adequate measures are in place to detect and/or deter smuggling and other forms of customs fraud.  Garlic smuggling is a good example because it has taken place on the land border between Norway and Sweden – so it highlights the issues that will arise in relation to Northern Ireland and the Republic of Ireland and also, arguably, at  ports such as Dover or Holyhead where the majority of goods traffic consists of HGVs.  In neither case is it practical to inspect all consignments manually.

Garlic became popular with smugglers after a 9.6% tariff was imposed on garlic imports from outside the EU.   Being outside the EU and not having any garlic growers of its own to protect, Norway does not impose any tariffs on garlic – making it an attractive point of entry for smugglers.  The garlic was then loaded onto a lorry and sent across the border with Sweden without being declared, in the hope that it would not be checked and would avoid the 9.6% tariff.  Unfortunately for the smugglers, they were caught – but not before an estimated 100 tonnes of Chinese garlic had been smuggled into the EU via Sweden, avoiding around €13.1 million in customs duties.  The Swedish authorities believed the scam was coordinated from the UK.

Likely EU concerns

The concern for the EU is that once the UK is free to conclude its own trade deals, it will lower the tariffs it imposes on many goods – including, quite possibly, garlic (like Norway, the UK does not have many garlic growers to protect).  Any product where the UK tariff is substantially lower than the EU tariff will potentially attract smuggling of this kind. 

More recently, OLAF, the EU's anti-fraud agency, has claimed that the UK failed to act on warnings about a customs fraud relating to Chinese textiles and footwear being declared to UK customs at well below their actual value – allegedly because the goods were ultimately destined for other EU countries, so the UK would not stand to suffer any loss of VAT on the sales (although it would have benefited economically because of the use of UK ports, rather than other destinations such as Rotterdam).  According to OLAF, the EU lost almost €2 billion in customs revenue and Member States lost over €3 billion in VAT.

A customs deal is doable – but at a cost

These issues - particularly the allegations of lax UK enforcement where non-UK goods entering the UK are destined for non-UK markets - are likely to make the EU cautious about accepting UK proposals for "light touch" customs arrangements (although it will face pressure from its own exporters to reach a deal with the UK which ensures that bureaucracy is kept to a minimum).   One possibility is that the EU might demand a compensation mechanism for Member States which can show that they have suffered loss due to lax customs enforcement in the UK. 

But whatever the outcome, as the UK's paper admits, "there will [be] an increase in administration compared with being inside the EU Customs Union" - and this in turn will mean extra costs for businesses trading with the EU after Brexit.

For more detail, see our Q&A on Customs Arrangements.