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Report from
Europe
Major implications for timber trade as Brexit endgame
nears
The long drawn-out process of the UK breaking ties with
the EU, which started with the referendum of July 2016, is
finally in the endgame. Since formally leaving the bloc on
31 January 2020, the UK's relationship with the EU has
been governed by the Withdrawal Agreement. This has
allowed the UK to continue on the same terms it had with
the EU prior to departure during a so-called `transition
period'.
This transition period will come to an end on 31st
December and it is only then that the full impact of the
UK¡¯s departure from the EU, which so far has been muted
by the transition arrangements, not to mention the pressing
effects of the COVID-19 pandemic during 2020, will
become apparent.
The effects will be particularly dramatic if the EU and UK
fail to reach agreement on a deal to govern trade relations
from 1st January.
At the start of December, there much optimism that a deal
could be finalised before the end of the month.
On 6th December, the Guardian, a UK newspaper,
reported ¡°a major breakthrough in negotiations on the
rights of European fleets to fish in UK waters¡±, one of the
very few remaining hurdles in the text of a trade
agreement extending to over 600 pages which, according
to the Irish government is ¡°97% done¡±.
However, the most challenging hurdle was left till last.
This is the ¡°level playing field¡± with the EU demanding
wide-ranging powers to unilaterally impose so-called
¡°lightening tariffs¡± when it judges that the UK government
is failing to keep up with future EU rules and regulations.
The UK government has rejected this ¡°ratcheting clause¡±
as a threat to sovereignty and instead argues that the EU
should be empowered to implement more limited and
specifically targeted tariffs after a process of independent
arbitration has determined a real threat of material injury
to EU trade and industry.
Speaking to EU leaders late on the evening of Thursday
10th December, Ursula von der Leyen, President of the
European Commission, said that Britain exiting the
transition period without a trade and security deal is now
the most likely outcome.
On Sunday 13th December, the EU and UK subsequently
agreed that talks towards a possible trade agreement
should continue until the very last minute on 31st
December. However, at the same time, Boris Johnson, the
UK Prime Minister, reaffirmed his view that the UK and
the EU will be unable to finalise a trade agreement in that
time and that a ¡°no deal¡± Brexit is ¡°the most likely thing
now¡±.
Irrespective of whether a trade deal is agreed, the UK will
be leaving the EU single market from 1st January. This
means that there will no longer be ¡°frictionless¡± trade
between the UK and EU. New customs controls and
procedures will lead to longer lead times and higher
transaction costs, even under the most favourable
scenarios for a trade relationship.
This combined with the high levels of uncertainty, made
worse by decisions having been delayed until the very last
minute, are already contributing to significant trade
disruption between the EU and the UK. This is also likely
to feed through into slower economic growth in the short
and medium term.
The effects of the economic disruption will fall much more
heavily on the UK than the EU. However some individual
EU countries, such as Ireland, Belgium and the
Netherlands, are likely to suffer more than others. For the
timber trade, the additional economic shock of Brexit,
coming on top of the very severe and on-going disruption
created by the COVID-19 pandemic, will likely lead to a
decline, or at least much slower growth, in the overall size
of market.
Taking a more positive view, there is some expectation
that large government stimulus measures in both the EU
and the UK, combined with commitment on both sides to
¡°build back better¡± with a strong focus on enhanced
environmental performance, may mitigate some of the
worst effects of the combined COVID-Brexit downturn.
For tropical suppliers, new opportunities may arise in the
UK market from a ¡°no deal¡± outcome.
This would lead to UK imports of timber products from
EU countries, which dominate UK trade, being treated on
the same terms as imports from other countries with no
trade agreement with the UK. The relative competitiveness
of EU-based hardwood suppliers that currently benefit
from completely frictionless trade with the UK may be
reduced in the UK market.
The potential opportunities are more significant in the
hardwood sector because the UK, unlike the EU, does not
have a large domestic hardwood resource. Manufacturing
capacity for a large range of wood products - such as kiln
dried lumber, panels, joinery, and furniture - is also much
more restricted in the UK than in the EU.
There may also be some significant disruption of the trade
between UK distributors and large hardwood traders in
continental Europe ¨C notably in Belgium and the
Netherlands - with potential to encourage once again more
direct imports of tropical woods into the UK.
Worst year for UK economy in more than 300 years
While there may be new opportunities created for some
wood products suppliers to the UK at the end of the
transition period, it seems very unlikely that these
opportunities will be enough to offset the severe disruption
to the wider market and implied reduction in overall
consumption, at least in the short to medium term.
The end of the transition period comes at a time when the
UK economy already shows signs of extreme fragility.
Britain experienced its steepest recession on record earlier
this year as coronavirus restrictions crushed economic
activity. The latest data from the Office for National
Statistics (ONS) shows that UK GDP grew for the sixth
month in a row in October, but by only 0.4%, down from
1.1% in September.
The total size of the UK economy was still 7.9% below its
February pre-pandemic level in October. The slowing
recovery came before lockdown rules were tightened once
again in November in an effort to forestall a second wave
of the virus. The UK may well be in recession in the fourth
quarter of this year, pulling the economy into a double-dip
downturn.
The Confederation of British Industry forecasts a 1.7% fall
in UK GDP in the fourth quarter, meaning a total
contraction of 11.1% for the whole of 2020, the worst year
for the UK economy since 1709.
The UK Treasury¡¯s independent spending watchdog, the
Office for Budget Responsibility (OBR), said in its latest
report, released in November, that a failure to reach a free
trade deal with the EU would knock 2% points off UK
GDP growth in 2021. That would reduce growth next year
from 5.5% to 3.5%, significantly hampering the UK¡¯s
recovery from the massive shock of this year¡¯s pandemic.
The OBR main forecast, which assumes an EU deal is
agreed and that vaccines against the pandemic are
effective by summer 2021, sees the UK economy returning
to its pre-crisis level by the end of 2022. However, a nodeal
Brexit would push that back until the end of 2023.
According to OBR, the short-term impact of no-deal is due
to various temporary disruptions to cross-border trade,
while there would be lasting damage from higher
structural unemployment, lower investment and harm to
productivity growth.
EU economy likely more resistant than UK to COVIDBrexit
downturn
The economic effects of both the pandemic and Brexit on
the EU, while significant, are muted compared to the UK.
The EU¡¯s Autumn 2020 Economic Forecast released on 5
November projects that the euro area economy will
contract by 7.8% in 2020 before growing 4.2% in 2021
and 3% in 2022.
This projection already factors in the potential for a ¡°no
deal¡± Brexit. According to the EU, one ¡°technical
assumption¡± in making the forecast was that ¡°given the
lack of clarity on future trade relations, there will be no
deal between the EU and UK and the two will trade on
WTO Most Favoured Nation (MFN) rules from 1 January
2021 onwards¡±.
Another technical assumption, that public health measures
will remain in force to some degree throughout 2021 and
2022, may be too pessimistic. The signs that several
vaccines are effective and will soon be approved for use in
some European countries imply there is scope for a better
outcome.
The direct effects of a no deal Brexit on total EU-UK trade
were assessed in research published in November by
Allianz, one of the world¡¯s largest insurance and asset
management companies. For the UK, Alliance estimates
an immediate 15% fall in the total value of exports. At
present, 47% of all UK exports are destined for the EU,
making it the UK¡¯s single largest market.
On the EU side, the damage is much less both
proportionally and in absolute terms. Only 4% of all of the
EU¡¯s exported goods and services ended up in the UK last
year. Nevertheless, the impact is still significant.
According to Allianz, a no deal could cost around
EUR33bn in annual EU exports, with Germany
(EUR8.2bn), the Netherlands (EUR4.8bn) and France
(EUR3.6bn) hit the hardest in absolute terms.
The Halle Institute for Economic Research has forecast
that EU companies exporting to Britain could lose more
than 700,000 jobs if no trade deal is agreed.
Border checks on UK wood imports from EU will
disrupt just-in-time trade
Until the end of this year, trucks can just roll into the UK
from the European continent with no checks. This changes
from 1st January 2021. Irrespective of whether or not there
is a deal as any goods arriving into the UK from the EU
will be treated as an import and traders will have more
work to do.
New controls at the UK border with the EU are expected
to add delays to the supply chain, as product origins are
checked and relevant duties applied. This is likely to have
a significant impact on `just-in-time' procurement which in
turn will slow down progress and add to costs of
manufacturing and on projects across numerous sectors.
In the UK construction sector, the major driver of UK
timber demand, the turnaround time for delivery to
building sites in Central London was previously only two
days. Already there is considerable congestion at UK ports
as distributors of all commodities and products are rushing
to build stocks before the end of the year. This, combined
with COVID related supply problems, has greatly
increased lead times which now extend to weeks instead of
days.
Due to tightening operating conditions and sawmill
shutdowns throughout the pandemic, combined with a
surge in demand for timber for DIY and garden projects
during the lockdown period, timber stockholdings in the
UK builders¡¯ merchant sector are already much lower than
usual at this time of year.
The UK Timber Trade Federation issued a warning early
in December that the overall tight timber supply
conditions in the country will continue ¡°certainly into Q2
2021, if not longer¡±. It was also noted that ¡°companies can
no longer expect to get what they need through just-intime
buying¡±.
UK timber companies that used to rely on frictionless
trade with the EU are now having to adjust to the need for
customs checks. The UK hardwood sector, which is
already sourcing globally, is generally better prepared than
the softwood sector where there is huge reliance on EU
suppliers.
However, there are now many UK trading companies
having to apply for the first time for a so-called Economic
Operators Registration and Identification (EORI) number
which identifies businesses or operators that export or
import to the EU. They are having to familiarise
themselves with the customs codes and duties applied to
traded products and with new VAT procedures. They are
being advised by both UK government and the TTF to hire
customs agents and logistics specialists.
Implications of UK post-Brexit Tariff Schedule on wood
products
From 1st January the UK will implement a new ¡°Global
Tariff¡± regime which closely mirrors the existing EU tariff
regime. The tariff codes exactly match those used in the
EU¡¯s ¡°Combined Nomenclature¡±. The UK General System
of Preferences (GSP) will provide trade preferences to the
same developing countries as the EU GSP.
The main point of difference between the UK and EU
schedule, at least initially, is that it reduces tariffs on UK
imports of a range of products, including some wood
products. The UK is either reducing or totally removing
tariffs for certain industries which are important in the EU,
and therefore partially protected through EU tariffs, but
which have little presence in the UK.
For wood products, the UK has a very long tradition of
fulfilling its wider wood needs through imports, much
more so than elsewhere in the EU, and is therefore more
inclined to reduce wood import tariffs.
This is of no account for quite a few wood products. The
EU already imposes zero-tariffs on all logs and rough
sawn timber, together with all finished wood furniture, as
well as for all types of wood fuel, including chips, pellets,
charcoal, sleepers, tools, shuttering, shingles and shakes,
posts and beams, glulam, tableware and kitchenware.
However, the UK is reducing tariffs for many wood
products where these are imposed including:
The EU tariff of 2.5% that applies to all ¡°sanded¡±
sawnwood to be reduced to zero in the UK.
The EU tariff of 2% specific to tropical hardwood that is
¡°planed¡± to be reduced to zero in the UK.
The EU tariff on veneers, which ranges between 3% to 6%
depending on degree of processing and species, to be
reduced to zero in the UK.
The EU 7% tariff on some plywood, including with outer
ply of some (but not all) tropical hardwoods
(4412110/44123190), other hardwood
(44123300/4412400), and softwood (44123900), to be
reduced to 6% in the UK.
The EU 7% tariff on MDF and other fibreboard, OSB and
other particle board to be reduced to 6% in the UK.
The EU 2.5% tariff on picture frames and similar products
made of tropical wood, to be reduced to 2% in the UK.
windows and window frames, parquet flooring panels,
which applies to all wood species including tropical wood,
to be reduced to 2% in the UK.
The EU¡¯s 3% tariff on statuettes and jewelry and cutlery
boxes made specifically of tropical wood, to be reduced to
2% in the UK.
The EU 4% tariff on wood packing cases, boxes, crates,
box pallets and similar, to be reduced to zero in the UK.
The EU 5.6% tariff on bamboo and rattan furniture to be
reduced to 4% in the UK.
The EU 2.7% tariff on wooden furniture components to be
reduced to 2% in the UK.
The UK is retaining the existing 10% EU tariff on tropical
hardwood plywood defined under 44123110 (that is faced
with dark red meranti, light red meranti, white lauan, sipo,
limba, obeche, okoum¨¦, acajou d'Afrique, sapelli, virola,
mahogany "Swietenia spp.", palissandre de Rio,
palissandre de Para or palissandre de rose).
Other wood products where the UK will retain the existing
EU tariff are: laminates and veneered panels under 441294
and 441299, for which there is a tariff of 6% or 10%
depending on the exact specification; bamboo plywood
which will continue to be subject to a 10% tariff; and
wood marquetry, subject to a 4% tariff.
The EU applies a quota system to just one wood product,
allowing up to 650,000m3 of coniferous plywood to be
imported duty-free each year after which 7% duty is
applied. The UK will also apply a quota to this product in
2021, allowing the first 170,000 m3 of coniferous
plywood to be imported duty free, after which 6% duty
will be applied.
A key issue to be resolved through the on-going
negotiations between the EU and UK is whether suppliers
in the EU and UK will be subject to tariffs when trading
with each other. In the event of ¡°no deal¡± trade between
the EU and UK will be on World Trade Organisation
(WTO) Most Favoured Nation (MFN) rules.
Under these rules both partners would be obliged to apply
the same tariffs on trade with each other as they do on
trade with other WTO members where there is no
comprehensive trade agreement.
Under a no-deal Brexit, UK imports from the EU will be
subject to the same tariffs (and a quota system in the case
of softwood plywood) as UK imports from countries
outside the EU. Even if the UK simply adopts the EU¡¯s
existing tariff schedule, non-EU suppliers would now be
trading on a level playing field with EU suppliers.
The exception to this would be suppliers in countries that
have signed a Free Trade Agreement (FTA) with the EU
but not subsequently with the UK. Like EU suppliers, they
would now face tariffs that were previously not applicable
for their trade with the UK. In practice this problem is
mitigated by the UK¡¯s ambitions to sign its own FTA¡¯s
with non-EU countries as soon as possible.
Amongst tropical countries, the EU has signed FTAs with
Singapore (in 2019) and Vietnam (in August this year).
There is also an "Association Agreement" with Central
American countries (Honduras, Nicaragua, Panama, Costa
Rica, El Salvador, Guatemala) and ¡°Stepping-Stone
Economic Partnership Agreements¡± with Ghana and Cote
d¡¯Ivoire, in place for several years offering lower tariffs.
The EU has also negotiated an FTA with the Mercosur
countries (of which Brazil and Paraguay are tropical wood
suppliers), but there has been resistance to ratification on
the EU side, particularly from the French government. An
EU-Mexico FTA is under negotiation.
The UK is trying to replicate these deals as soon as
possible. The UK agreed to replicate the ¡°Association
Agreement¡± with Central American countries in August
2019. The ¡°Stepping Stone Agreement¡± with Côte d¡¯Ivoire
was replicated in November this year providing immediate
duty-free, quota-free access to all goods exported from the
Côte d¡¯Ivoire into the UK.
The UK signed an FTA with Singapore on 10th December
and another with Vietnam on the next day, 11th
December. The latter will see 99% of tariffs between the
two countries eliminated after seven years.
Cash flow: another potential obstacle in UK-EU trade
Irrespective of decisions taken with regard to duties on UK
trade with the EU from 1st January, the UK timber trade
has expressed concern about the implications of the UK¡¯s
departure from the EU single market for cash flow. For all
internal EU transactions, VAT is not charged on the
supply of goods between businesses from another EU
country by the supplier. Instead, a business recipient is
required to charge itself VAT, known as acquisition VAT,
which is typically an accounting transaction on the VAT
return.
When the UK leaves the EU VAT area on 1st January, it
becomes a third country in relation to EU trade. This
means that while the EU exporter will still not charge
VAT, the UK importer is obliged to pay VAT to UK tax
authorities at the point of import alongside any applicable
customs duties. Given the huge volumes of timber
involved, this has raised concerns amongst UK importers
over the cash flow implications.
The UK government has sought to mitigate this concern
with the introduction of ¡°postponed accounting¡± for
import VAT. This will shift the VAT accounting and
payment away from the border and back to the VAT
return.
To further reduce concerns about cash flow and other
procedural delays immediately after the UK leaves the
single market on 1st January, the UK government has also
stated that for the first 6 months (until 30 June 2021) there
will be no need to make immediate import declarations for
goods imported from the EU at the UK border.
However importers wishing to benefit from this system of
delayed declarations will need to be pre-approved by the
UK tax authorities.
Looking longer term, with the UK government keen to
facilitate more global trade, it is possible these procedures
for delayed accounting of VAT and duties for imports
from the EU for pre-approved traders may be applied to
imports from all countries.
In October, the UK government also published plans for
the creation of a number of Free-ports which, it is claimed,
¡°will improve upon both the UK¡¯s existing customs
arrangements¡±. Firms will be able to import goods into a
UK Freeport without paying tariffs, process them into a
final good and then either pay a tariff on goods sold into
the domestic market, or export the final goods without
paying UK tariffs.
The Freeport plans include a package of tax reliefs on
investment by businesses within Freeport tax sites and
measures to speed up planning processes to accelerate
development in and around Free-ports.
Phytosanitary controls extended to UK imports from
EU countries
Another significant impact of the UK¡¯s exit from the EU
single market on 1st January will be the requirement for
phytosanitary certificates, which currently apply to a range
of wood products imported into the EU, to be extended to
UK¡¯s imports from other EU countries (and vice versa).
The direct effect of this on tropical wood products is
limited by the fact that existing EU phytosanitary controls
on commercial timber products apply almost exclusively
to temperate woods since these give rise to by far the
greatest risk to the health of European forests.
However, the indirect effects of phytosanitary certification
on trade flows can be significant since requirements for
certification, which may include specific treatments and in
some cases limit trade to wood from narrowly defined
regions, can greatly increase costs and limit access to raw
material.
The phytosanitary rules are often complex, subject to
change in response to ongoing monitoring of pest
outbreaks, and frequently lead to temperate hardwood
products from outside the EU being held up at ports for
additional inspections or returned to the seller for
compliance failures.
Notable commercial wood species requiring phytosanitary
certificates for EU imports include: oak from the United
States; maple, birch, aspen, ash and walnut from North
America, Russia and Asia; cherry from Asia; and
coniferous wood with bark from all locations.
The UK is mirroring the EU plant health regulations in its
own plant health legislation with the result that, from 1st
January, specific requirements for phytosanitary
certification will be extended to UK imports from EU
countries as well as from non-EU countries.
UK wood products imports from the EU to be subject to
phytosanitary certification for the first time from 1st
January include walnut from all EU countries, and all
wood products of a range of hardwood species including
maple, alder, birch, beech, ash, plane, poplar, willow, lime
and elm from Austria, France, Finland, Germany and Italy.
All coniferous wood product imports into the UK from
Spain and Portugal will also be controlled to prevent
spread of pine wood nematode.
Another change relates to wood packaging material
(WPM) moving between the UK and the EU, including
Switzerland and Liechtenstein, which moves freely
without checks and controls in the EU single market. From
1st January 2021 all WPM moving between the UK and
the EU must meet ISPM15 international standards by
undergoing heat treatment and marking.
All WPM may be subject to official checks either upon or
after entry to the EU or UK. This requirement is already in
place for WPM moving into the EU and UK from the rest
of the world.
It is noteworthy that there are no new phytosanitary
controls on UK imports of EU oak products and UK trade
of softwood products will continue largely as now, as
woods with bark will face plant health controls, while
processed woods fully debarked, except from Portugal and
Spain, may be imported unheeded without certificates.
UK-EU timber products trade subject to due diligence
From 1st January, the EUTR will be replaced in the UK by
the UK Timber Regulation (UKTR). The scope of UKTR,
in terms of regulated ¡®timber and timber products¡¯ is the
same as EUTR.
The requirements established for an ¡°Operator¡± in the
EUTR, defined as the first placer of the timber and timber
product on the EU market, will apply to the first placer on
the UK market in UKTR. UKTR obligations are identical
to EUTR, requiring operators to exercise due diligence to
ensure negligible risk of illegal harvest when placing
products on the UK market.
The ¡°Green Lane¡± for products covered by FLEGT
licenses and CITES certificates imported directly into the
UK apply equally to UKTR. However, if a product is
imported into the EU with a FLEGT license or a CITES
certificate and then subsequently shipped to the UK, the
UK operator would be required to undertake due diligence
with respect to that timber.
This highlights that the most significant change with
respect to the scope of the UKTR relative to EUTR is that
it imposes due diligence requirements on all UK timber
and timber product imports, including those from inside
the EU. The same of course applies to (much more
modest) EU imports from the UK.
As the representative of one large UK hardwood importer
noted when discussing the new UKTR at the online
London Hardwood Club (LHC) meeting on 9th September
¡°it will be interesting to see how well due diligence is
being carried out in other EU countries.
It is possible that UK regulators will conclude that some
products accepted as compliant to EUTR due diligence
requirements do not meet UKTR requirements. A concern
in relation to EUTR is that enforcement is not uniform
across the EU and UK importers will now have to take that
into account in their due diligence¡±.
Another issue raised at the LHC meeting related to
commercial confidentiality. It was suggested that the need
to identify the source of wood products to mitigate risk
under UKTR may present another obstacle to UK
hardwood importers buying from EU distributors. EU
operators may be reluctant to identify their overseas
suppliers to their customers in the UK. The same applies
to UK distributors selling into the EU.
To support UK importers implement the UKTR, the
Timber Trade Federation has developed a free interactive
toolkit. The toolkit runs through the due diligence process
step by step, providing guidance on information gathering
(what questions to ask and data sources to use) and on risk
identification. It generates a pdf report of the due diligence
steps undertaken with respect to individual products that
can be used for compliance purposes.
The TTF is continuously updating the toolkit in response
to feedback and as new guidance and due diligence tools
and information sources are made available.
The toolkit can be downloaded at
https://ttf.co.uk/download/ttfdue-diligence-toolkit/
Potential for duplication of standards and testing
regimes
Until the end of 2020, the quality of construction goods,
materials and products are controlled by EU regulations,
specifically the CE mark. To avoid any short term
uncertainty, the UK government has indicated that CE
marked products will continue to be recognised in the UK
market until 31st December 2021.
However, from 1st January 2022, manufacturers wanting
to supply the UK construction sector will have to use a
new UKCA (UK Conformity Assessment) mark in place
of the CE mark.
It is still uncertain at this stage, in the absence of a trade
deal, the extent to which the UKCA will harmonise to the
CE to allow goods to pass the equivalent CE standard
without any need for further testing.
Without harmonisation of standards and mutual
recognition of Notified Bodies (NB), manufacturers will
have to duplicate testing of construction products for the
UK and EU markets, adding significant cost and delays.
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