The Direct Approach

Jul 02, 2018

Sunday Business Post, 1 July 2018

American business has a directness of approach which many of us in Europe would do well to copy.

President Trump imposes tariffs on steel and aluminium imports.  The EU retaliates by applying tariffs on a range of All-American products – sweetcorn, cranberry juice, bourbon whiskey, cotton goods, motor bikes and (bizarrely) playing cards.  If Mom’s apple pie had a separate customs classification, it would surely have been included.  American business immediately responds.  This week Harley-Davidson states that they may have to ramp up their production levels outside of the US to sidestep the imposition of the tariffs.  Rapid change, direct response.

Does European business do direct?  We’re just past the second anniversary of the Brexit referendum.  European industry found out these days two years ago that the introduction of tariff barriers (which are a strong possibility) and VAT barriers (which seem inevitable) between trading partners in the UK were imminent.  Given that the UK is Europe’s second largest economy the business response from either side of the Channel has been strangely muted.  

 A few major companies have finally started voicing very strong concerns about their position post Brexit.  I don't think it's a coincidence that it is automotive manufacturers who are leading the charge against Trump, EU and Brexit inspired tariffs.  It’s BMW in Europe, Airbus in the UK, Harley Davidson in the US.

 The cost of tariffs, both in terms of cost and delays, spirals rapidly out of control when applied to factory-made goods.  Complex products like cars, aeroplanes and motorbikes are made from commodities or have components which in their “raw” state are often subject to individual tariffs on import. 

The American penchant for directness was also evident when comparing government responses to industry concerns.  In a tweet, President Trump accused Harley-Davidson of hoisting the white flag.  The response from Westminster ranged from dismay, that British industry might be making threats (via UK cabinet minister Jeremy Hunt), to conciliatory noises about listening to concerns (via Downing Street), to the fit of invective apparently directed at business generally by the Foreign Secretary Boris Johnson. 

But what did either government expect from their industry leaders?  Tax is a cost to business.  Customs duties and tariffs are taxes.  Like any other business cost, business will try to manage their exposure to taxes.  It is inevitable that businesses will take steps to minimise their exposure to customs, just as it is inevitable that businesses will try to cut the best deals with their suppliers, contain their wage costs and seek customers in the most lucrative markets. 

The response of government to industry concerns may also be informed by very real and pragmatic concerns over border enforcement.  The Trump and EU tariffs can have immediate effect because they are layered on top of a customs infrastructure that already exists.  There is no free trade between the US and the EU in the same sense as there is free trade between EU member countries – our trade with the US does not enjoy the liberties of the EU customs union.  There is a checking and charging system in place at the ports and airports.  New or additional tariffs can be imposed quite readily by the authorities on both sides; by the US directly, and by Brussels through having the customs authorities of the 28 EU member states act as its customs agents.  

If Britain leaves the EU without a customs deal there won’t be that same ease of application of new tariffs.  A whole new set of customs controls will have to be introduced at EU ports, airports and most significantly for Ireland, at land borders.  No matter how clever or well resourced, the new customs inspections and checks between the UK and the EU will take time to bed down.  It will surely follow that the evasion of customs, better known as smuggling, will be a significant problem for both the UK and the EU in the aftermath of a British departure from the customs union.  

Some of the smuggling will be unwitting as businesses, unfamiliar with the new obligations, will misdeclare the goods being imported or exported.  Some of it will be intentional.  EU Commission President Juncker’s expression of solidarity with the Irish position on Brexit, when he visited Dublin last week, was undoubtedly sincere.  But it is no harm either that such EU solidarity is informed by pragmatism, as Ireland will have a major part to play in enforcing the EU Customs border with the UK. 

Enforcement is just one aspect of a properly functioning customs compliance environment.  Businesses tend to be better disposed to tax compliance when their futures are not at stake.  Any introduction of customs tariffs between Britain and the EU will drive many businesses against the wire.  Further, while business leaders who flout the law rightly face a loss of reputation and standing as well as civil or criminal penalties, I suspect there won’t be the same level of public opprobrium towards business leaders who fall foul of any new Brexit tariffs.  Many people might be sympathetic to shortcuts being taken.

We can expect to see a lot more businesses across Europe express concern and criticism over the direction their political leaders are taking in pursuit of Brexit.  National solidarity has its limits.  As commercial concerns grow, more European companies will react like their American counterparts do and vocally point out the errors in the policy of their governments.  On recent experience the Europeans will just be a bit slower about it.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland