March 7, 2021

Customs Union, Frictionless Trade & Trade Automation

Dr Peter Mowforth


There has been much talk recently about the UKs arrangements with Europe through the European Customs Union. A Customs Union is where there are no tariffs (taxes on trade) between members.At national borders within a customs union, other things get checked such as product quality, regulation standards and country of origin.Frictionless trade is where products move freely across borders as a result of BOTH common tariffs AND common regulations.

This free movement of products makes for convenience as well as ease and speed of delivery.

Problems and Anomalies within Europe

While the general rules of operation for both a customs union and for frictionless trade sound straight-forward, their practice and implementation is far from easy.Let’s start with VAT. Every European country has different VAT rates. These vary between 17% and 27%. The assumption is that goods coming into Europe are business-to-business and that VAT is applied at a flat 15% across Europe. Businesses then reselling to end-user-customers add further tax depending on the country-level for VAT. The problem is what happens when an individual consumer within the European customs union buys a product via ecommerce? According to the rule book, they should be charged a different level of VAT depending on their delivery address within Europe.The delivery address also affects what you are allowed to deliver. There are thousands of different rules and regulations within Europe that lay out what products are allowed in different countries. One INDEZ client that operates in the health and fitness area has to use different formulations in their products in order to fit in with the different national rules that apply in different European countries. Marketplace feeds for platforms such as eBay and Amazon require filters to be applied to ensure product compatibility between different countries.A further complication involves Intellectual Property. European regulations mean that what might be an acceptable Registered Trademark in one country may not be allowed in another European country. This means that product packaging that is allowed in one part of Europe may be non-compliant or even illegal in another.Country of origin introduces another set of problems. Specific products from specific countries have specific taxes (e.g. beef from Argentina) along with quotas. Particular problems occur when single products are made out of multiple items sourced in different countries. A BMW Mini made in the UK will probably contain items from dozens of different countries each with their own rules and regulations.Another important factor is the difference between business-to-business trade and trade that is directly to end-user customers. When you have a container of just one type of product then managing the paperwork is relatively straightforward. The size of the trade makes the management effort worthwhile. But consider what happens when a container with over 100,000 different B2C online-purchased parcels arrives at a UK border. Each parcel may well have come from a different supplier and is almost certainly going to a different end-user. Each package will have a different value and a customs code. Every day many hundreds of thousands of such packages arrive at national borders. In practice, a very small number are checked at random by a customs official.

In 2017, Austrian Journal OEVZ, provided evidence that “560 million parcels a year reach Europe without import VAT”. Given industry growth since then, today, this will be over 1 billion parcels. It was estimated that over 97% of goods into Europe bought through some online marketplaces avoid VAT. One way that businesses exporting into Europe are able to do this is to claim that the value of the package is below the threshold for VAT (22 Euros or £15 Pounds).  Several sources have pointed out that this usually happens in conjunction with incorrectly applied customs duty codes.What appears to be happening with some categories of ecommerce goods entering the European market is that sellers have made a calculation. The chances of a parcel being stopped because of incorrect tariffs or product descriptions are relatively small compared to the profit margins made. They expect a certain proportion to them be written off. The calculation is that this costs less than paying full tariffs.A similar type of calculation happens within the Scottish spirits industry for returns. All the whisky businesses we work with routinely write off products where the end-user customer requests that they be returned. Unwinding the taxes and duties are so complicated that, in most circumstances, it’s not worth the management effort.The administration for tariff and regulatory compliance is often more of a hurdle for trade than the tariffs and rules themselves. It’s the bureaucratic manual management that provides the handbrake to trade. Recent stockpiling of certain goods by companies fearful of lost business is not an issue of cost or regulation but rather their clunky implementation when crossing through a border. The same is true with the Northern Ireland border or the talk of turning the South East of England into a lorry park. The problems have arisen because of the bureaucratic complexity in administering a massively complex set of rules. Given the year-on-year rise in international parcel delivery, the problem can only get worse. At some point, someone should recognise that an alternative approach is needed.

The opportunity

In the world of ecommerce, the technology needed for the automation of clearance authorisation already exists. Ecommerce fulfilment depots are increasingly automated by ensuring that every single package label contains:

  1. Sender address & details
  2. End-user delivery address & details
  3. Package value
  4. Country of Origin details
  5. Customs code
  6. Precise product description e.g. via GTIN, EAN along with number of each

If electronic systems at border control points have the correct technology in place then automation solves the problem. A few simple calculations by an electronic system will ensure that the product details tally with the package size and weight and that the package value and customs code are as expected. Any parcel whose details do not appear to fit within these expected values could then be taken to one side for manual checking. By making the manual checking extremely slow, a positive impetus would be provided to traders to ensure that their packaging details were correct. Market forces would then sort-out any industry laggards.If a country was prepared to legislate for this then it would not only help lead towards the holy grail of truly automated trade but would also provide a boost to an indiginous ecommerce-automation industry. A byproduct would be that all ecommerce businesses would have accurate and up-to-date product codes which would help with their product marketing and promotion. For example, GTIN or EAN numbers are needed for marketing channels such as Google Shopping. If they are needed anyway then there is no additional burden for customs regulation.An ambitious Scotland could set automated trade as a national objective.  This would help us take a lead in developing a joined-up strategy for our future as a modern trading nation. Such ambition would also help develop an ever-more proficient local ecommerce community. A key bi-product would be a clamping-down on those not paying the correct level of import taxes. If Scotland has a serious intention to take a lead in optimising our international trade then customs automation should play a key role. The major beneficiary would be a boost for those involved in selling online to international customers while the public sector costs could be significantly offset by the more effective collection of tariffs.Put simply, automating customs is a win-win for everyone.

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