Leaving the Single Market - Product Rules

In my previous posts, I looked at the issues associated with leaving the EU's Custom Union. These issues are not related to leaving the Single Market and so are not mitigated by the EFTA EEA option:

• Trade policy will be repatriated from Brussels, requiring new WTO Schedules and new third country trade agreements.
• EU external tariffs / Rules of Origin processes will apply to UK-EU trade
• A new Customs border will be exist between the EU and UK.
• A comprehensive Customs agreement will be required to minimise friction associated with this new Customs border.

As a third country, UK exports will also face potential regulatory barriers at the border, as set out in the EU Blue Guide "on the implementation of EU product rules", notably in sections 2.4 (products imported from countries outside the EU) and 7.3 (Control of products from third countries by customs).

Definition of  Third Country

Note that the Blue Guide refers to the “Union market”. However, section 2.8.2.1 of the Blue Guide states:

"For the purpose of the EEA Agreement references to the Community (now Union) or the common market in the EU/EEA acts are understood to be references to the territories of the Contracting Parties. Accordingly, a product is not only placed on the Union market, but on the EEA market (i.e. the national markets of the Member States and Iceland, Liechtenstein and Norway)"

In other words, the EEA agreement extends the "internal market" of the EU-28 to the three EFTA EEA states. With regards to EU product rules (as defined in the Blue Guide), EFTA EEA states are not treated as third countries. Hence, we are now looking at regulatory barriers that arise from leaving the Single Market, rather than leaving the Customs Union.


Presumption of conformity

The Blue Guide states that compliance with European harmonised standards is the basis for lawfully placing products on the market, whether they are EU products or third-country products:

"The basic principle of EU product rules is that irrespective of the origins of the products, they need to be compliant with the applicable Union harmonisation legislation if they are made available on the Union market. Products manufactured in the EU and products from non-EU countries are treated alike."  (Section 2.4, page 20)

“products manufactured in compliance with harmonised standards benefit from a presumption of conformity with the corresponding essential requirements of the applicable legislation” (Section 1.1.3, page 8)

Products from third countries benefit from “presumption of conformity” if they are manufactured in compliance with European harmonised standards (as produced by CEN, CENELEC or ETSI). There is no requirement for third countries to implement the EEA acquis or even adopt European harmonised standards (EN standards) as their national standards. This is highlighted in the US Trade Department Report for 2016 (page 140):

"Products sold in the EU must comply with the essential requirements of relevant European legislation ... conformity with European regional standards (called European harmonized standards or ENs) provide the method by which such requirements can be fulfilled. If a manufacturer uses the ENs referenced in the Official Journal of the European Union under the relevant legislation, its products are presumed to be in compliance with the requirements. The CE mark is applied ... and ... is a key indicator that the product complies with EU legislation, enabling the free movement of products within the European market."

In theory, it is possible to show compliance with the essential requirements of European legislation bu using other recognised international standards (in line with Article 2.4 of the WTO TBT Agreement).  In practice, as the US Trade Department Report for 2016 also highlights, the EU imposes barriers to use of alternative standards:

"..if a manufacturer chooses not to use an EN, it needs to assemble a technical file through a costly and arduous process indicating how the product meets the essential requirements ... there is no predictability that EU or Member State authorities will treat the product as conforming with essential requirements on the basis of that file. As a result, U.S. producers often feel compelled to use the relevant EN for products they seek to sell on the EU market, even if the U.S. products are produced according to relevant international standards providing similar or even higher safety levels."

By virtue of membership of the EU and CENELEC, the UK already has harmonised EN standards as national standards. Even after leaving the Single Market, UK manufacturers will continue to benefit from presumption of conformity from continued use of EN standards.

Declaration of Conformity

The topic of conformity assessment and EU product rules is covered in great detail in a series of excellent posts by @andrewchapman50 on his "Door To Freedom" blog.

Chapman's post "conformity assessment and the wto option (part 1)" describes how EU product Directives and Regulations all use the 8 basic Modules (A – H), defined in Framework Decision 768/2008/EC.  The great majority of products (possibly as high as 95%) are covered by Module A, where the manufacturer performs conformity assessment, self-certifies and attaches the CE mark. The remaining modules (covering the small minority of remaining products) require the involvement of a Notified Body in the assessment procedure.

Chapman's second post on WTO option & conformity assessment demonstrates that for the great majority of products (i.e. covered by Module A), UK manufacturers will still be able to self-certify, attach the CE Mark and issue a Declaration of Conformity after leaving the Single Market, just as they do today. 

Chapman's third post on WTO option and conformity assessment addresses the small minority of products which require the involvement of a Notified Body. The manufacturer still attaches the CE marks and issues a Declaration of Conformity, but must also declare the details of Certificates issued by Notified Bodies. 

Chapman points out that on leaving the Single Market, UK Notified Bodies will no longer be recognised by the EU, but suggests it is highly unlikely that existing certificates will suddenly lose their validity at Brexit (re-confirmed in Chapman’s response to Richard North’s blog).  Chapman also points out that UK Notified Bodies could still continue to assess products for the EU market, provided they have a subsidiary or sub-contract relationship with a Notified Body located inside EU territory (which most already have). This is of course assuming the EU will not enter into a Mutual Recognition Agreement (MRA) on conformity assessment, which means UK notified bodies and their certificates would continue to be recognised in the EU (and vice versa).

On leaving the Single Market, conformity assessment activities within the UK for manufactured products exported to the EU will remain essentially unchanged.

Role of Importer

A key difference for manufactured products from third countries is the requirement to use an EU-based importer : 

"For products imported from countries outside the EU, Union harmonisation legislation envisages a special role for the importer. The latter assumes certain obligations which to some extent mirror the obligations of manufacturers based within the EU" (Blue Guide section 2.4, page 20)

"The importer is a natural or legal person established in the Union who places a product from a third country on the EU market" (Blue Guide section 3.3, page 33)

The importer ensures that the third country manufacturer has: (i) undertaken appropriate conformity assessment procedure; (ii) provided relevant technical documentation; (iii) affixed CE marking including product & serial numbers; (iv) provided instructions and safety information.

The importer must also: (i) ensure his own name, trade name/mark & address is on the product, packaging or documentation; (ii) retain a copy of the manufacturer’s Declaration of Conformity (typically for up to 10 years); (iii) provide the manufacturer's technical documentation upon request.

The Blue Guide (page 33) states that importer obligations do not imply importers undertake physical control/testing of the products themselves.  In a few cases, EU harmonised regulations require sample testing of products already placed on the market - this is normally an obligation on the manufacturer, but in the case of third country imports, sample testing is arranged by the importer, or if necessary, can be undertaken by the importer.

These points are also covered in detail in Chapman's blog posts on conformity assessment.  On leaving the Single Market, UK exporters will need to use an EU-based importer. But the obligations of an importer (described in Article R4 of Framework Decision 768/2008/EC), do not seem onerous and could be fulfilled by an import agent, a freightforwarder, an EU-based office or subsidiary of the manufacturer, or even the purchaser himself.

Control of products from third countries

Manufactured goods from third countries are subject to controls at the border under EU product rules: 

Customs authorities and market surveillance authorities have the obligation and the power, based on risk analyses, to check products arriving from third countries and intervene as appropriate before their release for free circulation. (Blue Guide Section 2.4 page 20)

Market surveillance ensures products placed on the market are compliant with product rules. Whereas EU/EEA manufactured goods are subject to market surveillance by the relevant national market surveillance authority when first placed on a national market, manufactured goods imported from a third country are subject to market surveillance at the border, as set out in Regulation (EC) No 765/2008 (requirements for accreditation and market surveillance) :

• Article 19(1) requires market surveillance authorities in member states to undertake checks on products placed on the market - taking account of established principles of risk assessment, complaints and other information.
• Article 27 “Controls of products entering the Community market”. Article 27 (1) requires customs authorities to undertake checks on products from third countries entering the EU in accordance with Article 19(1).
• Article 27 (3) requires customs authorities to suspend the release of products imported from third countries when:
• they suspect a serious risk to health, safety, environment or other public interest;
• and/or products do not fulfil documentation and marking requirements;
• and/or the CE marking has been affixed in a false or misleading manner.

The important point to note here is that customs inspections are intelligence led - consignments are selected for inspection based on risk assessment. Even EU origin consignments may be subject to inspection based on a risk assessment of fraud and criminal activities. Consignments from outside the Single Market are also assessed for the risk of non-compliance with product rules.

Current non-EU imports to the UK provide a useful measure: Customs Declarations are 99% electronic with 96% cleared in seconds; 4% are subject to checks, with clearance standards of 2-3 hours (maximum); the vast majority of checks are documentary checks rather than physical inspections (See HMRC evidence to the House of Commons Treasury Committee). At Dover today, Lorries carrying goods from outside the EU that are subjected to checks are cleared within 45 minutes on average (see Oxera report on Brexit impact on ports).

Non-EU imports come from a range of countries with differing national product standards and enforcement regimes. It should be emphasised that EU member state national authorities administer their own customs regime and make their own decisions regarding risk assessments and frequency of checks - this is not dictated by EU regulations. Under the current risk assessment process, customs and market surveillance authorities focus their attention on consumer goods from the Far East and Africa, considered to be high risk for illegal and non-compliant products.

So will UK & EU member state authorities decide that a high rate of consignment checking for each other's manufactured goods is required the day after Brexit ? When both parties remain harmonised on EN standards ? When manufacturers / traders have an established track record of product compliance ? Will goods that were acceptable the day before suddenly be deemed high-risk, requiring diversion of customs/market surveillance resources away from "high-risk" prducts from Asia/Africa at the same time impacting on supply chains your own country relies upon ? It seems unlikely to me that existing UK-EU trade in manufactured goods will face a sudden cliff-edge of increased consignment checking at the border.

Market Surveillance co-operation

Co-operation is promoted within the Single Market to strengthen Market Surveillance. Regulation (EC) No 765/2008 requires "efficient cooperation and exchange of information" between member states and also with the Commission and relevant agencies (Article 24); between customs and market surveillance authorities within a member state (Article 27). Better information will allow better targeting of "high-risk" consignments from third countries.

Interestingly, Article 26 provides for national authorities to cooperate and exchange information with authorities of third countries to promote and facilitate "access to European systems" and "activities relating to conformity assessment, market surveillance and accreditation". 

The EU views ”compatibility of market surveillance measures and supervision practices” as a condition for open international trade. For example, the Canada-EU Trade Agreement (CETA) Ch 6 Article 3 states “The Parties shall strengthen their co-operation in the areas of technical regulations, standards, metrology, conformity assessment procedures, market surveillance or monitoring and enforcement activities in order to facilitate the conduct of trade between the Parties, as laid down in Chapter XXX (Regulatory Co-operation).”

By virtue of current EU membership, the UK already has close co-operation with other national authorities and is aligned in conformity assessment procedures, market surveillance,  monitoring / enforcement activities. Continued co-operation post-Brexit would aid in risk-analysis targeting and maintaining mutual trust - assuming the EU is willing to reach agreement.

Exceptions

While the Blue Guide applies to most products covered by EU regulations, there are some exceptions: "The Guide does not attempt to cover ... Union legislation on motor vehicles, construction products, REACH, and chemicals" (section 1.5).

Similarly, Regulation (EC) No 765/2008 (requirements for accreditation and market surveillance) applies only where EU regulations do not contain specific provisions, for example: "drug precursors, medical devices, medicinal products for human and veterinary use, motor vehicles and aviation." (para (5) of preamble).

In these exceptional cases, typically product registration is required with an EU agency or a notified UK authority recognised by the EU. Outside the Single Market (and assuming EU do not agree to mutual recognition of registrations), UK exporters will need to use an EU-based operator/representative to register products  (not dissimilar to the role of importer described above). 

Conclusions

In summary, navigating the EU's product rules from outside the Single Market is relatively straightforward: continue using EN standards; use an EU-based importer; UK Notified Bodies should establish sub-contractor or subsidiary relationships with EU-based bodies. Agreements with the EU for continued co-operation on market surveillance and an MRA on conformity assessment would be beneficial to both parties - but the lack of them does not provide an insurmountable barrier. There is no reason to expect UK-EU manufactured products to be classified as "high-risk" for non-compliance, hence no reason to expect an upsurge in consignment checking for manufactured products on Brexit day one.

While there are some exceptions to the general approach laid out in the Blue Guide, similar mitigation is available for these cases. The details of navigating these exceptions from outside the Single Market will be the topic of my next post.

Leaving the Customs Union (part 4) - A Comprehensive Customs agreement

It is perhaps surprising that so much attention has been given to the Single Market, yet so little attention has been paid to the EU Customs Union. Particularly as leaving the EU Customs Union has potentially greater impacts on UK trade than leaving the Single Market.

In my previous posts, I looked at how leaving the Customs Union results in:

• A repatriated trade policy requiring new WTO Schedules and new third country trade agreements.
• Imposition of Tariffs / Rules of Origin processing on UK-EU trade
• Imposition of a new Customs Border on UK-EU trade

In this post, I will look at need for a comprehensive customs agreement to mitigate the impact of a new customs border.

What agreements are needed ?

The UK will need to continue a number of European agreements / arrangements as a third country outside the EU. I've listed those I know of to date below:

• Economic Operator Registration and Identification numbersEconomic Operator Registration and Identification numbers (“EORI”) Continued recognition of these registrations by both EU & UK.
• EU Security Area. Switzerland and Norway have bi-lateral customs security agreements with the EU where they agree to take similar protective measures on imports as the EU - effectively forming an “EU Security Area” with the EU28 – relieving traders of the obligation to lodge an ENS declaration at the customs office of first entry.
• Authorised Economic Operator (AEO)  The EU’s AEO programme (based upon the WCO SAFE Framework of Standards) allows authorised operators to benefit from simplified customs procedures and “fast-track” through customs controls. The current EU AEO scheme administered by UK Govt will need to be converted into an independent UK AEO scheme and an AEO mutual recognition agreement secured with the EU.
  • WCO recommend members enter into AEO mutual recognition as part of its SAFE Framework (see page 28 of WCO SAFE Framework 2012 and section 5.5 on page 54 of WCO SAFE Framework 2007).
  • UCC Article 39 states AEO status can be granted to any economic operator meeting the criteria. UCC Article 38(7) states AEO status can be granted to operators “ outside the customs territory of the Union” where the EU recognises the third country customs legislation as equivalent.
  • The EU has agreed Mutual Recognition of AEO with a number of countries including bi-lateral agreements with Norway & Switzerland.

• Common Transit Convention The EFTA states, EU-28, Turkey, Macedonia & Serbia are signatories to this convention, which allows the movement of goods though these states with customs formalities (payment of duties and VAT) suspended until the goods either reach their destination or are exported outside the territories of the signatories, avoiding stops / checks at every frontier crossed en-route. Note that UK will remain a signatory to TIR (Transports Internationaux Routiers, International Road Transport), a United Nations Economic Commission for Europe (UNECE) initiative pre-dating the EU, covering over 50 countries (including the EU-28) which also allows transit with suspension of customs formalities. TIR cannot be used for movements within the EU, but is used for movements involving third countries and the EU
• Road Haulage Under the current EU Community Licensing scheme, truck drivers are licensed to drive throughout Europe without the need for permits at every border. The Road Haulage Association (RHA) have proposed a Land Transport Agreement to allow continued unfettered international road haulage for licenced UK and EU operators. The proposal excludes cabotage as the RHA does not believe the EU will allow UK haulage operators to compete for domestic haulage business within EU member states.
• Continued Customs Co-operation will be a crucial element of maintaining trade.
  • Jim Harra's (HMRC) evidence to the Treasury Committee highlighted the desire to “replicate the kind of information flows that we have now between EU member states”. As the report by Charlie Elphicke MP “Ready on Day One” says, “Maintaining common customs machinery is key” and suggests that UK-EU movements continue to be recorded on the New Community Transit System (NCTS) and the Excise Movement Control System (EMCS).” Conveniently, the EU has just launched a public consultation on the exchange of customs related information with third countries.
  • The “Ready on Day One” report includes a foreword by Xavier Bertrand (President of the Hauts-de-France Region), in which he speaks warmly of a new Entente Cordiale in the context of a positive trading relationship, recommends that Calais & Dover work together and emphasises that however Brexit pans out “local and regional partners of the past will remain neighbours and partners in the future”. He also suggests extending the Le Touquet Treaty to cover customs & goods in each other's territories.

There are other areas where agreements could minimise the impact of introducing customs formalities, especially for the Irish border & SME's, including :

• Expand the AEO scheme to a trusted trader scheme and extend the benefits to SMEs, combined with common technology for identification and reserved/fast-track lanes at customs borders.
• Agreement between HMRC and EU tax authorities to continue current arrangements to collect VAT and excise away form the border and reconcile in arrears. Potentially, continue to allow VAT registered companies to trade with vat registered counterparts on other side of border without need for VAT payment and subsequent refund.
• Special origin status for certified trusted traders each side of the Irish border where goods are of origin within either of the UK/RoI jurisdictions. Allow fast-track of these consignments across the border and avoid Rules of Origin paperwork.
• Special transit status for freight movements within the island of Ireland.

Staying in the Customs Union ?

There has also been much discussion of the UK remaining in the customs union in order to avoid the impact of a new customs border. But is this realistic? Peter Holmes (University of Sussex) argues that Article 28 of the Treaty of the Functioning of the European Union means the EU customs union is the same as the EU itself in terms of the definition of membership. Countries like Turkey, San Marino and Andorra have customs union agreements with the EU, but they are not in the EU's customs union.

Holmes also points out that to remove a customs border requires more than just the adoption of the EU's Common External Tariff: “Any customs union agreement with the EU would firstly have to be totally comprehensive to avoid the need for customs checks. The UK would have to follow all EU trade policies, at the WTO, in bilateral deals and in anti-dumping.” The UK would have no independent trade policy.

Clearly, this would not be a suitable long term arrangement. But, as discussed in my previous post, we might need an interim Customs Union arrangement to provide time for implementation of Technology, IT, Infrastructure and Trade Facilitation measures to mitigate the impact of customs formalities – March 2019 is not far away for such a significant logistical challenge.

This would also be dependent on EU agreement – we cannot simply shadow the EU's trade policy and demand the EU suspend customs formalities and rules of origin (as at least one commentator has suggested). Essentially the EU would be trusting the UK to maintain its customs border in line with EU policy. The EU would likely demand continued oversight via OLAF (EU's anti-fraud body) and European Court of Auditors (ECA) and may also demand we continue to send the bulk of import duty collected to Brussels. Any interim customs union arrangement should be strictly limited to the minimum time possible.

Does EFTA EEA help with customs ?

While many promote the benefits of EFTA EEA, this option does not remove the need for routine custom controls & formalities:

• EFTA's EEA Factsheet on Free Movement of Goods: “..whereas in the EU Customs Union, the EU Member States have abolished customs borders and procedures between each other, these are still in place in trade between the EEA EFTA States and the EU, as well as in trade between the three EEA EFTA States.”
• CBI's case study of the Norway option: “Not being part of the customs union, EEA EFTA exporters and foreign companies exporting to them have to go through customs procedures such as import/export declarations, including rules of origin for all goods exports and payments of VAT.”
• Swedish National Board of Trade Brexit Analysis comments on the EEA option: “Customs formalities would need to be completed though, in connection with border passage of goods and proof of origin of goods has to be presented for exemption from customs duty or reduced customs duty. “

Nor does EFTA EEA provide a comprehensive customs agreement. As EFTA's web page on Customs Matters states: “The EEA is not a customs union, thus most of the activities in the customs field are not relevant to the EEA Agreement …. Norway and Switzerland were able to find simplified solutions through bilateral negotiations”.

The EEA agreement does include 2 protocols on customs matters, which are similar to the many EU customs co-operation agreements with 3rd countries in providing a framework for co-operation and mutual assistance :

• EFTA EEA Protocol 10 - simplified inspections and formalities for carriage of goods. Over 15 of the 24 pages of this protocol are dedicated to Norway's bi-lateral agreements on customs security measures, covering AEO recognition and Entry/Exit summary declarations. But Article 2.1 also limits the scope of these customs security measures to EU-Norway – other EFTA EEA states do not benefit from this.
• EFTA EEA Protocol 11 - mutual assistance in customs matters. Seven pages - essentially a replica of other EU third country agreements on this topic.

Access to the Common Transit Convention and the EU Community Licensing scheme would probably come courtesy of joining EFTA, but would not require rejoining EEA (Switzerland also have access to these schemes). However EFTA EEA does not provide a comprehensive customs agreement. As the Norway example shows, a UK-EU customs agreement could be added as specific protocols in the EEA agreement – requiring unanimous consent from EFTA EEA states and the EU Commission. But why choose this route when a standalone UK-EU customs agreement can be agreed via Qualified Majority voting in the EU council ? Moreover, leaving EFTA EEA would mean losing access to protocols in the EEA agreement, including those holding the UK-EU customs agreement. Which rather neatly proves the theory that those promoting the idea of EFTA EEA option never actually intend the UK to leave.

Should the UK wish to pursue a transitional customs union arrangement, there is another problem as pointed out in Peter Holmes article – Article 56/3 of the EFTA Convention requires EFTA members to harmonise their third country FTAs – which clashes with the need to align with EU third country FTAs while in a customs union. After leaving the EU, the UK can have a transitional customs union arrangement – or it can join EFTA EEA – but not both.

Conclusion

There is a wide range of agreements needed in forming a comprehensive customs agreement with the EU that will minimise the impact of customs formalities. The UK could enter into a customs union agreement with the EU (assuming the EU agree) but that would mean no independent trade policy - this might just be needed as a short-term interim agreement, but should be limited to the minimum time possible.

The EFTA EEA option does not avoid the need for a customs border with customs formalities. Nor does EFTA EEA provide a comprehensive customs agreement – and embedding a UK-EU customs agreement into the EEA agreement means that agreement would be lost when we left EFTA EEA. Furthermore, an interim customs union agreement is not compatible with EFTA membership.

The primary feature of EFTA EEA is regulatory harmonisation with the EU. EFTA EEA imports to the EU are still subject to routine customs controls and checks based on risk assessment (fraud, criminal, security etc), but EFTA EEA imports are essentially regarded as being zero-risk of regulatory non-compliance in the risk assessment calculation. Food safety regulations are also harmonised, meaning EFTA EEA imports are not subject to border inspections (although other third countries such as Switzerland, Chile, New Zealand have equivalence agreements which remove or reduce the need for border inspections for food safety).

Regulatory harmonisation is the point at which we move away from discussing the impact of leaving the Customs Union to discussing the impact of leaving the Single Market – which will be the topic of my next post.