Front End I Electronic Components Supply Network
Brexit… Implications for the electronic components supply network…
Following Prime Minister Teresa May's recent guidance on the government's intended direction as the UK heads towards Brexit, with particular regard to leaving the EU Single Market (Customs Union), it is perhaps the appropriate time to share some thoughts and industry comments on how the electronic components supply network might be affected. In this article ecsn chairman, Adam Fletcher reviews some of the key points and considers the likely impact of exiting the single market
A Single Market (Customs Union)?
Single Market (Customs Union) system establishes a common set of rules relating to how goods enter
member countries from countries outside the organisation. These rules are agreed and maintained by all members and all members must adhere to them if the union is to operate successfully. Procedures are put in place to ensure that no individual or organisation is able to circumnavigate the rules to gain a commercial advantage. Surprisingly, large global economies have been notably reticent about setting up customs unions. In fact the EU system is unique in both number of members and scale. The EU customs union agrees tariff levels (import duty) and from time to time, agrees quotas (quantity restrictions) for goods entering the EU. It also agrees specific standards that goods have to meet and ensures compliance prior to the goods being placed on the market. The EU monitors all the individual member states to ensure compliance within their area of jurisdiction. Once within the EU customs union goods may be freely transferred between member countries and are not subject to any further controls or tariffs. The Treaty of Rome conferred “exclusive competence” on the European Commission to negotiate external trade agreements. So an additional obligation for EU customs union member countries is that they cannot negotiate individual trade agreements with non-member countries. Any disputes are referred to the European Court of Justice for binding resolution on all members.
At the point of entry within the customs union the tariff and VAT is nominally collected, but in practice the VAT is often deferred as Onward Supply Relief or Inward Processing Relief for Authorised Economic Operators i.e. large organisations, freight forwarders etc. The tax is held within a common fund because the final destination member state is often still to be determined, so the applicable tariff and local VAT rate the consumer will ultimately pay is unknown.
How does a Customs Union differ from a Free Trade Area? A Free Trade Area (FTA) also achieves
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reduced or zero tariffs between member countries but members are able to operate with different external tariffs on imports from non-member countries. FTA agreements apply tariff relief to goods which originate within a member state but not to goods which are simply imported into - and pass through - another member of the FTA. This ensures that tariffs imposed by a member state are not undermined by goods from outside that simply pass through the ports of another member. All FTA members check the “Point of Origin” and only levy tariffs if they originate outside the FTA. The European Free Trade Agreement (EFTA) covers Switzerland, Norway, Iceland and Lichtenstein.
What happens in the EU? The EU's Single Market (Customs Union) is in effect a hybrid model. We also enjoy FTA status with almost all other European states who are not themselves single market members. For instance, Turkey - a non-EU member - has a “light” or “basic” version of a Customs Union with the EU that primarily covers manufactured goods and excludes agriculture. It is however a very one sided agreement where Turkey is mandated to adopt and reflect current EU Single Market tariffs as they are set, must harmonise with EFTA and must not negotiate any parallel trade agreement with any non-member states. Turkey is highly reliant on the export of manufactured goods, particularly “white and brown” electronic consumer products (TVs, washing machines, fridges etc.) and industrial products to Europe, so membership of the European Economic Area even via a one sided FTA has significant benefits to the country's economy.
Next steps… The UK Government has stated that as part of the Brexit process it intends to leave the European Single Market - probably in a phased process over two years - but wants to remain a trading partner with EU member states. This implies a transition to a European Free Trade Agreement. However the UK also wishes to establish trade agreements with countries that do not have an EU trade agreement i.e. USA, India. This looks to be very difficult process
Components in Electronics
as other EU countries are unlikely to agree to UK membership of EFTA and then allow additional parallel trade agreements from which they do not benefit. There is also an implied risk that goods could enter the EU customs union with zero tariffs via the UK.
Why tariffs (import duties)? The reasons for introducing tariffs are primarily economic, to protect industries in domestic markets and to encourage change, which itself can be politically motivated. Examples include; increasing tariffs on certain steel products made outside the EU in an effort to protect the domestic producers, and India imposing a tariff of 25 per cent on imported electronic components to encourage domestic manufacturing capacity, with international organisations establishing local facilities.
How does this impact electronic components markets? At the current time in the European Single Market (Customs Union) 99.9 per cent of all imported electronic components do not attract any tariff (import duty). A few very specific modules (discrete assemblies of electronic components, often incorrectly regarded by some users as components) do however attract a small tariff of 2.5 per cent. This tariff situation is unlikely to change because of mutual dependency: The EU is predominantly an importer of electronic components but also has important local manufacturers who trade within the Customs Union and export outside of it.
It is very unlikely that the UK
government will want to meddle with the tariffs for electronic components. It's an important market but probably pales into insignificance when compared to the Automotive or Aerospace markets, and our domestic producers are not raising any objections with other European or international manufacturers. In future trade agreement negotiations between the UK and other states, electronic components
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could be caught in some “crossfire”, but this is unlikely to be on tariff issues. The likely problems are more practical in nature. All the IT systems used by exporters, importers and regulators required to effect any agreed changes to document flows etc., will have to updated, which may cause some short term glitches for the electronic components supply network. However it is likely that there will be a reasonable period of introduction to enable these changes to be made and tested.
Final thoughts…
Extracting or transferring the UK from the European Single Market (Customs Union) to a form of Free Trade Agreement on terms that are acceptable to all parties looks to be a very difficult task. The EU does not want to encourage other states to follow the UK and so understandably wants the UK to be seen as being in a slightly inferior position outside the single market. Given that this is being politically led I suspect much depends on just how 'inferior’ the eventual agreement actually is and if our economy can stand the wait required to achieve an acceptable outcome. Perhaps we'll even decide to transition to Word Trade Organisation Terms and then work it out. In the meantime, the message for all in the electronic components supply network, where we are primarily spectators, continues to be "remain focussed on your customers’ needs and when appropriate collaboratively engage to manage any changes as they occur…”
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