Rules of Origin and their importance in the UK-EU trade deal
27 Jan 2021
Much of this content is taken from a previous members bulletin by Chris Buxton
On 24 December 2020, the PM claimed to have secured a free trade deal with Europe by way of the UK-EU Trade and Cooperation Agreement (TCA) which would secure tariff-free trade for businesses trading between the UK and EU following the end of the transition period on 31 December 2020.
However, as businesses have now come to realise, in order to qualify for this tariff and quota-free trade, firms need to comply with strict Rules of Origin (RoO) as specified within the detail of the deal, and there resides the sticking point for many of our members who were led to believe that there would be blanket tariff-free trade for goods.
The agreement that there will be no tariffs or quotas on goods meeting Rules of Origin requirements, and the high degree of bilateral cumulation within RoO, are hugely welcome but still need further clarification.
Webinars from Institute of Exports
Members might like to take advantage of the various free webinars on RoO being offered by the Institute of Export by following the link below, on many matters linked to exporting, including RoO:
Calendar – The Institute of Export and International Trade
Explaining Cumulative Rules of Origin
(BFPA’s thanks go to Samuel Lowe – a Senior Research Fellow at Centre for European Reform – for allowing us to share his explanatory summary below)
In order to benefit from the advantages of a trade agreement the UK has with another country, a UK exporter must prove that the product it is selling is actually from, or has had sufficient work done on it in, the UK. (Subject to myriad terms and conditions)
Generally speaking these rules are quite logical.
In brief: because of long supply chains, it is often difficult (and expensive) for a UK exporter to prove that the product it is selling is actually from, or has had sufficient work done on it in, the UK.
However, approaches to rules of origin differ. For this discussion we now know that within the Brexit deal there are zero tariffs on all goods that we sell each other, so long as said goods abide by the agreed rules of origin requirements. (RoO).
There are three types of ‘Cumulation’.
1) Bilateral cumulation
The rules of origin requirements in the UK-EU FTA will almost certainly allow for bilateral cumulation. This means that any good originating in the EU can be treated as being from the UK, and vice versa, for trading purposes between the two.
Take a car, for example. If a UK company sourced all of the parts from across the EU and then put it all together in a factory in the UK, it could sell it back to a customer in the EU, taking advantage of the preferential zero tariff rate, as if all the bits of the car originated in the UK.
2) Diagonal cumulation
This is where it gets a little more complicated. Let’s say that as well as an FTA with the UK, the EU has another one with country ‘A’, and that the UK also has one with country ‘A’.
If the rules of origin requirements in the EU-UK FTA allow for diagonal cumulation explicitly with country ‘A’, a UK producer could import a good from country ‘A’ (that originates from that country), incorporate it into something else, alter it, do nothing with it, whatever; and then sell it to a customer in the EU and it would be treated as if it was of UK origin no matter how much value was added, or not, in the UK.
3) Full cumulation
This is the ‘big one.’ If rules of origin requirements allow for full cumulation then in a deal between the EU and a free trade zone consisting of multiple countries — let’s say the EFTA/EEA countries plus their new member, the UK— separate manufacturing work done in the different countries of the free trade zone on a non-originating good can be totted up so as to confer originating status.
Unlike diagonal cumulation, this approach allows for non-originating goods to be considered as input for cumulation purposes — all that matters is that the origin requirements are fulfilled within the preferential trade zone as a whole.
This can be confusing so let’s take a real example:-
Let’s say that for a good to qualify as being from the EFTA/EEA bloc — and therefore able to take advantage of the zero-tariff preferential rate when exporting to the EU — the total value of non-originating inputs must not be more than 50% of the final price.
So, Iceland imports some non-originating metal worth £40 from Peru. Someone in Iceland bangs it about a bit, and it is now is worth £50. The value of non-originating inputs is currently 80% of the final price. It therefore does not qualify under the rules of origin requirements for the preferential zero tariff rate for exports to the EU.
However, instead of going to an EU country, it gets sent to Norway — a fellow EFTA/EEA member — for more work. Someone here bangs the metal around some more. It is now worth £100.
Non originating input: £40
Manufacturing work in Iceland: +£10
Manufacturing work in Norway: +£50
Total value of non-originating inputs: 40% of final price.
It can now be exported to the EU, taking advantage of the preferential zero tariff rate.
A useful website on RoO is found below:
BEIS have drawn the following points to our attention:-
- For UK-EU trade, until 31 December 2021, businesses do not need suppliers’ declarations from business suppliers in place when the goods are exported. Businesses may be asked to retrospectively provide a supplier’s declaration after this date.
- A claim can alternatively be made after importation, provided it is made within three years of the date of importation and accompanied with a valid proof of origin. In those circumstances any duties would be repaid to the importer.
- A Statement on Origin may be made out before, at the same time as, or after the products to which it relates are exported. For imports to the UK it will be valid for two years from the date it was made out. For exports to the EU it will be valid for 12 months.
- The minimum of 50% of EU/UK content for most goods in our sector, and near-absence of diagonal cumulation, is worrying for firms that use components from outside Europe, albeit expected. Affected firms may view the deal as setting up a “palisade of tariffs” (to use the PM’s term).
- The absence of mutual conformity assessment recognition is disappointing, albeit expected. (Mutual recognition agreements lay down the conditions under which one Party (non-member country) will accept conformity assessment results (e.g. testing or certification) performed by the other’s Party (the EU) designated conformity assessment bodies (CABs) to show compliance with the first Party’s (non-member country) See https://ukandeu.ac.uk/explainers/mutual-recognition-agreements-mras-all-you-need-to-know/ to understand MRA’s.)
- The movement of people for business reasons (Mode 4) is welcome. This part of the agreement is based upon the EU-Japan deal’s terms – which, as an aside, is a bit less restrictive than the recent UK-Japan deal. (The movement of natural persons is one of the four ways through which services can be supplied internationally. Otherwise known as “Mode 4”, it covers natural persons who are either service suppliers (such as independent professionals) or who work for a service supplier and who are present in another WTO member to supply a service.)
- The situation around the Northern Irish protocol is complex and further understanding is required to assess the impact upon BFPA members. Members with a particular interest in this area will find the following link helpful. https://ukandeu.ac.uk/what-the-brexit-deal-means-for-northern-ireland/