Successful Pandemic E-Commerce: The UK

During the Covid pandemic, millions of consumers around the world have switched to shopping online, driving the development of e-commerce at an even more breakneck speed than before. The UK is the world’s third-largest e-commerce market and has been the transit station for e-commerce goods from Hong Kong entering the EU single market. To businesses engaged in cross-border e-commerce, therefore, it has always played an important role. After Brexit, however, the UK will develop and implement an independent set of market standards that are different from those of the EU that have been in place for years. The customs clearance procedures and other rules businesses have to follow if they want to import e-commerce goods into the UK and EU will inevitably become more complicated. Logistics costs are expected to rise as a result. With the operations of the EU’s e-commerce market entering a “trying out” phase, industry players need to take note and observe the changes that are taking place.

In the “UK’s Post-Brexit E-Commerce Market” webinar hosted recently by HKTDC Research, experts looked at the UK’s economic status before and after Brexit and the Covid pandemic, as well as changes in the UK and European e-commerce markets. The objective was to help Hong Kong companies understand the latest situation and adjust their strategies accordingly.

                       (Chinese)

UK Unveils New Tariff Regime

According to HKTDC Assistant Principal Economist (Global Research) Louis Chan, the UK’s economic growth had been stable in the period between the Brexit referendum in mid-2016 and the start of the Covid outbreak last year. But the pandemic has seriously disrupted the UK’s – and the whole European - economy, and the devastation it has inflicted on the UK labour market and retail consumption became apparent in the middle of last year. The new lockdown measures imposed by the British government in response to the spread of Covid virus mutations have caused a near standstill in real economic activity.

Citing the latest economic growth data, Chan said that the UK last year experienced the biggest economic contraction since the Great Frost of 1709. Though the concept of gross domestic product (GDP) was non-existent at that time, historians estimate that the three-month climate event dragged down British GDP by 13% year-on-year. The pandemic led to a 9.9% contraction in GDP last year, the biggest shrinkage of the British economy in the last three centuries. With the British government implementing its mass vaccination programme at a fast pace, however, it is very likely that economic activity will recover gradually by the beginning of the second quarter of this year.

The pandemic has so far had a greater impact on the British economy than Brexit - the fall in GDP, a decline in trade, the shelving or adjustment of investment projects, and so on. Brexit, meanwhile, has made trade and services related operations (e.g. the mutual recognition of professional qualifications and the implementation of the regulatory framework for financial services) more complicated, and final decisions in these areas will depend on further negotiations between the UK and EU.

Chan mentioned that the UK and EU signed the UK-EU Trade and Co-operation Agreement (TCA) before the expiration of the Brexit transition period at the end of last year. This is the first time the EU has entered into a no-tariff, no-quota agreement with a third-party trade partner in a bid to maintain good bilateral relations. Nevertheless, there are already changes in the regulations concerning the inward and outward movement of goods and personnel as well as technical standards and certification requirements. The 1,246-page agreement came into effect on a provisional basis on 1 Jan and is applicable on this basis until 30 April.

The UK is the world’s third-largest e-commerce market, closely behind the US and China. Chan pointed out that the UK has already started implementing the new post-Brexit UK Global Tariff in a bid to maintain and strengthen its role as the gateway through which overseas businesses can enter the EU market. The aim is to raise its status and appeal with those involved in international trade. Under the new tariff regime, the proportion of tariff-free imported goods is as high as 47%, while the average tariff is as low as 5.7%. These compare favourably to the equivalent figures for the EU (27% and 7.2% respectively). However, after Brexit, carrying out cross-border e-commerce in Europe through the UK will become more complicated. For example, from 1 Jan 2021, all UK businesses located in Great Britain (i.e. England, Scotland and Wales, but not Northern Ireland) wanting to import or export from or to the EU must have an Economic Operators Registration and Identification (EORI) number. To ship goods from the UK to EU countries, the regulations dictate that a commercial invoice, a CN22 or CN23 customs declaration form for international shipping, and a certificate of origin are all required.

Furthermore, the EU’s product-related rules are no longer applicable to the UK market from the start of 2021. These rules involve many of the product categories engaged in by Hong Kong exporters. For products to be sold in the UK, the new UK Conformity Assessed (UKCA) marking will replace the CE marking. Chan said that, except for those products which are required to switch immediately to the new UKCA marking from 1 Jan 2021 onwards, CE markings obtained through a manufacturer’s self-declaration of conformity will still be applicable in the UK market until 31 Dec 2021, while the CE markings for medical devices will be valid until 30 June 2023. But the CE marking is only valid in the UK market for areas in which UK and EU rules remain the same. If the EU changes its rules and a product obtains its CE marking based on those new rules, the CE marking so obtained cannot be used for products sold in the UK market.

Logistics Costs Surge

E-commerce Association of Hong Kong president Stanley Lee remarked that, previously, Hong Kong companies mostly saw Europe as a single market. Before Brexit, the majority of e-commerce goods would be air-freighted to the UK and then rerouted to other markets in Europe after customs clearance. Because of the user-friendliness of the procedures involved, the UK was considered by e-commerce companies as a strategic location. Lee also pointed out that most major international e-commerce platforms, such as Amazon and eBay, used to keep e-commerce goods destined for Europe in the UK.

Lee said that, because of the large shipment volumes involved, the average logistics costs in the UK had been more competitive than in other European countries. Now industry practitioners are discussing which European country can replace the UK as the gateway and transit station for European e-commerce. They are also studying how best to smooth out actual practices in customs declaration and clearance so that the challenges posed by increases in logistics costs can be solved.

Lee also pointed out that, previously, goods could go anywhere in the EU as long as they had an EORI number. Now there are two procedures involved: goods entering the UK and EU need to have two separate EORI numbers. There are also now changes in product regulations: the UK and EU are adopting different standards for products such as toys, personal protection equipment, medical devices and low-voltage electrical appliances. He reminded industry players in e-commerce that these changes will inevitably add to their inconvenience and will lead to rises in operating costs.

The UK has put in place tax reforms for e-commerce that are effective from 1 Jan 2021. Lee said that, last year, goods imported into the UK on the basis of individual customs clearance with a value not exceeding £15 were not subject to VAT. This policy has now been abolished. Presently, for goods from overseas under £135 in value shipped into the UK via e-commerce platforms, VAT will be collected in proxy by the e-commerce platform. For goods exceeding £135 in value, the VAT will be paid by the importer at customs clearance.

Lee stressed that the tax reform has made actual practices more complicated, so much so that there are differences in the way sales tax is handled depending on whether the goods or the buyer is already inside the UK at the time of sale. Industry practitioners should learn more about the implementation procedures and details of the tax reform from logistics suppliers.

The way Lee described it, Brexit has had a serious impact on e-commerce that focuses on the European markets, because e-commerce goods can no longer be exported to the EU from the UK as before. As declaration and clearance of customs are getting more complicated and the regulations on and standards for goods are no longer the same, logistics costs cannot help but increase. Describing how the new system has affected the companies involved, Lee said: “Presently, many players engaging in logistics and e-commerce are feeling their way, doing things like trying out keeping goods in different European countries. This is a “letting a hundred flowers bloom” approach, but it takes time to identify the right path or paths, and the actual effects have yet to be seen.”