When passed, the European Union (EU) Goods Package, as the legislation is called, will have ramifications to e-commerce that are at least as significant than the move by some countries to reduce or eliminate de minimis thresholds. Small and Medium Enterprises (SMEs) who sell online into the EU will be the most severely affected. The added administration and compliance requirements could cost businesses as much as €2,500 annually. This amount could equal the annual margins of some smaller firms that sell online today. Firms from Asia are especially at risk.
An almost unknown compliance and enforcement legislation called the EU Goods Package is working its way through the EU system. The premise behind this legislation is to strengthen control of national authorities and customs officers to prevent sale of unsafe products to European consumers. But when passed, it will significantly limit product variety in the EU goods market by increasing the compliance costs for third country manufacturers selling goods into the EU.
What is the EU Goods Package?
The EU Goods Package is a program advanced by the European Commission comprising two legislative proposals intended to strengthen the EU’s single market for goods by reducing the number of non- compliant products sold to EU consumers.
This package increases the non-compliance costs of businesses and necessitates the appointment of a “person responsible for compliance information established within the Union,” whose task is to hold product compliance documentation and cooperate with market surveillance authorities to remove non-compliant products.
Rationale Behind the Compliance and Enforcement Legislation
Current control systems and enforcement tools possess inadequacies in tracking and deterring the circulation of non-compliant goods which could expose EU consumers and the environment to greater risk. Most issues, as the EU claims, arise from non-compliant products from outside the EU—especially small consignments sold through e-commerce.
The initiative, if passed, will take effect on 1 January 2020 with its main objective to increase compliance with EU product harmonization and reduce instances of non-compliance.
How is it going to affect businesses?
The key drawback of this new legislation is the need to appoint a EU based representative to be responsible for compliance information.
This diagram shows how this requirement affects different product manufacturers selling in the EU.
Under the first scenario (A), when the manufacturer is in the EU, a person responsible for compliance is not required.
Under the second and third scenarios (B and C), when there is an importer, distributor or an authorized representative in the EU, a responsible person is also unnecessary.
Under scenario D, when a manufacturer does not have an importer or distributor or has not appointed an authorized representative and uses a EU based fulfilment centre[1] that purchases the products, a responsible person is also unnecessary. The legislation also does not clearly specify conditions whereby this type of fulfilment centre can be held liable for non-compliant products they offer or ship.
Asian companies are mostly affected in the last scenario. Under the final scenario (E), when a manufacturer (i) uses a EU based fulfilment centre that has not purchased the products or (ii) sells directly to EU consumers, the manufacturer has to appoint a responsible person for compliance information. Most SMEs who sell from outside Europe fall under this scenario and are predominantly affected.
The EU’s assessment estimates the cost of appointing a responsible person at between €360 and €1500 per year per business, the same assessment estimates that the costs of demonstrating compliance under the EU regulations at €1,807.41 per company per year on average.
The EU Goods Package increases compliance costs for SMEs selling online, especially those who do not design their products to meet EU safety and regulatory standards. Such costs could deter sales to the EU; most Asia based manufacturers face difficulties complying with high EU standards for products like toys, textiles and footwear.
Implications for other stakeholders?
This legislation is also likely to affect operation costs and the volume of products sold by EU-based fulfilment centres. Fulfilment centres that purchase and distribute small consignments from third country manufacturers will face higher compliance costs. Under the legislation, they will be liable for any instances of non-compliance. Fulfilment centres that do not purchase their inventory will also likely see a significant drop in the number of third country goods that can be sold in the EU.
Compliance costs could be reduced if businesses capitalize on emerging commercial opportunities such as large logistics service providers offering compliance and responsible person services to third country manufacturers at a lower cost.
Are businesses ready for the new legislation?
When we conducted a straw poll on the EU Goods Package in December, only a few companies had any knowledge of what might be coming. The responses from leaders of large companies suggest that little attention has been paid to impending legislation which could mean that smaller companies with fewer resources are certainly less prepared to deal with the changes.
What’s next?
With the legislation likely to be passed soon, it is pressing for companies to engage with regulators in the EU to ensure whatever finally evolves will be least disruptive and allow SMEs especially, to continue selling into the EU.
Please contact us at the Asian Trade Centre for more details on how you can become involved at info@asiantradecentre.org
***This Talking Trade was written by Dr. Raymon Krishnan, Head of Corporate Advisory Services, Asian Trade Centre, Singapore***
[1] Fulfilment centres are warehouses that provide ecommerce merchants with inventory storage before their products are shipped.