Summary
Once the UK leaves the EU, the use of UK inputs in products produced in the EU27 and exported under preferential trade arrangements could create problems given UK inputs will no longer count as ‘originating’ under the preferential rules of origin applicable under EU trade agreements. The EC is advising EU manufacturers who export under preferential trade arrangements to review whether the UK’s changed status will impact on the eligibility of their products for preferential treatment under EU trade agreements. Given the highly integrated nature of EU28 supply chains this could pose challenges to both EU exporters under existing EPAs and UK exporters under any subsequent bilateral UK trade arrangements.
This potentially provides an opportunity for ACP governments to argue for a comprehensive overhaul of existing rules of origin applied to ACP exports to the EU. This could potentially assist ACP agro-food exporters in moving up the value chain where non-originating materials are required in composite food products and packaging materials need to be imported. It also suggests issues of regional cumulation could also be revisited given the potential pressures to allow a special dispensation for UK inputs under EU trade agreements while new origin certification arrangements or alternate supply chains are being set in place.
On 4th June 2018 the EC issued a notification to stakeholders setting out the implications of the UK’s withdrawal from the EU for the rules or origin applied to EU27 exports to third countries under EU preferential trade agreements (1).
All preferential trade agreements require rules of origin, which define which products can benefit from the tariff preferences granted under the trade agreement. The aim of rules of origin is to prevent countries which are not a party to the agreement from benefitting from the tariff preferences granted simply by routing exports through a party to the agreement with minimal local processing taking place prior to re-export.
Under EU trade agreements any inputs sourced from any EU member states is seen as originating in the EU for purposes of exports under the terms and conditions of preferential trade agreements concluded by the EU with 3rd countries. However the notification highlights how as of the date of the UK’s Withdrawal from the EU, currently scheduled for 29th March 2019 the UK will no longer be a part of the EU. As such ‘EU preferential trade arrangements with 3rd countries’ will ‘no longer apply to the United Kingdom’ (1).
The non-application of trade agreement provisions extends to the rules of origin used to define whether a product is an EU product and hence should benefit from tariff preferences granted under each of the EU’s individual trade agreements. This is likely to be the primary concern for the EU given rules of origin administrative problems could be disruptive of existing EU27 exports.
This rules of origin issue poses no problems for products which are ‘wholly obtained’ in an EU27 member states (e.g. all basic agricultural products grown in an EU27 member state) or products which include non-originating content but which have undergone sufficient processing in an EU27 member state to grant the product ‘originating’ status. However from 30th March 2019 inputs sourced from the UK will no longer count as ‘originating’ in the EU and will form part of the non-originating’ content the precise value or volume of which is subject to restrictions if the final product is still to benefit from tariff preferences agreed under trade agreements. The use of inputs from the UK in EU27 manufactured products will in future therefore need to be subject to rigorous certification procedures which can be subject to verification checks by the importing party (1).
According to the EC notification the ‘origin of the goods is certified either by government authorities (certificates of origin) or by the exporters themselves (subject to prior authorization or registration) through ‘declarations’ or ‘statements’ on origin made out on commercial documents’. The EC notification goes on ‘to provide evidence of compliance with origin requirements, the exporter obtains from its suppliers supporting documentation (such as ‘supplier’s declarations’) that allow for the traceability within the EU of the production processes and supplies of materials until the export of the final product’ (1).
This creates a situation where from the date of the UK’s withdrawal from the EU ‘an EU FTA partner country may consider that goods having an EU preferential origin before the withdrawal date no longer qualify at the moment of their importation in that third country, due to United Kingdom inputs not being considered as EU content’ (1).
Against this background EU exporters would then ‘have to prove the EU origin of the goods taking into account that United Kingdom inputs no longer account as EU content’ (1).
These rules or origin considerations also apply to 3rd country exporters who may use UK inputs in the goods they export to the EU27 (1).
Against this background the EC advisors EU27 manufacturers and exporters which take advantage of preferential tariffs under EU trade agreements to:
- ‘treat any United Kingdom inputs as ‘non-originating’ when determining the EU preferential origin of their goods; and
- take appropriate steps to be able to prove the EU preferential origin of their goods, in case of subsequent verification, without taking account of any United Kingdom inputs as ‘EU content’ (1).
The EC further advises importers to ensure the exporter seeking to make use of tariff preferences under EU trade agreements can verify the originating status of the product entering into the EU ‘taking account of the consequences of the withdrawal of the United Kingdom’ (1).
An information note sent out by the Dutch government confirms the dry explanation provided by the EC in more vivid terms explaining ‘if a large part of your product consists of parts from the UK’ domestic exporters may lose free trade access under existing EU preferential trade agreements with 3rd countries (2). This issue has been acknowledged by the head of Her Majesty’s Revenue and Customs service who told Parliamentarians ‘as of withdrawal date, the UK becomes a third country. UK inputs are considered originating’ (2).
The Independent newspaper interprets the EC notice to stakeholders as a de facto advice to ‘EU businesses to think twice before using parts and components made in Britain’ (3). This is seen as potentially carrying serious implications for UK industries; particularly the car industry where one car industry executive told Sky News it would be ‘catastrophic’ for the British industry (2). UK component manufacturers has an ‘oh my god moment’ in August 2017 when the companies customers began to ask for origin certificates, in a context where many suppliers ‘don’t have the infrastructure to manage UK certificates of origin’ (2).
UK government spokespersons however dismissed the concerns being expressed as alarmist arguing these disruptions would arise only under a ‘no deal’ scenario. The UK government it was maintained was busy discussing the future partnership arrangements in order to avoid such a ‘no deal’ scenario and ensure UK market access could continue on current terms.
The UK government also accords a high priority to maintaining continuity of UK trade relations with 3rd countries with which the EU has preferential trade agreements. In this context it is highlighted how the EU has agreed to ‘notify the other parties to international agreements that, during the implementation period, the United Kingdom is to be treated as a member state for the purposes of these agreements’ (3).
| Comment and Analysis The rules of origin dimensions of Brexit could potentially create a real opportunity to revisit and address rules of origin issues which have inhibited ACP agro-food exporters from moving up the value chain in exports to EU markets. Too often restrictive rules of origin have prevented ACP exporters from combining locally produced agricultural materials with imported ‘non-originating’ inputs and imported packaging materials, since the cumulative value of these other inputs and packaging materials can exceed the value of the local content. In an era of global sourcing these restrictive rules of origin can be seen as an anomaly.The Brexit process could create a real opportunity to revisit these issues, since the current reality is EU28 supply chains are so integrated and the infrastructure for origin certification along intra-EU supply chains is so under-developed, that proving the originating status of EU exports in the absence of the UK from cumulation arrangements could be quite difficult. This is particularly the case for sophisticated manufactured products. It is this concern over a possible rules of origin based disruption of EU27 exports under existing EU preferential trade agreements which appears to have encouraged the EU to agree to a footnote to article 124 in the March 2018 draft Withdrawal Agreement involving a commitment from the EU to ‘notify the other parties to these agreements that during the transition period the United Kingdom is to be treated as a Member State for the purposes of these agreements’ (more details on this issue are available in the Brexit Subscription Service Briefing “Emerging Consensus on Treatment of EU Trade Agreement Obligations under the Withdrawal Agreement: Although Uncertainties Remain’, 28 March 2018”). Against this background there is mounting domestic pressure on the UK government to secure ‘full bilateral cumulation arrangements’ and ‘full diagonal cumulation arrangements’ in future trade relations with the EU and existing EU partners so as to prevent disruption of existing supply chains (4) (for more details see companion epamonitoring.net article ‘UK Food Exporters Warn of Dangers of a Rules of Origin Based ‘Hidden Hard Brexit’). However if this proposal gains traction in the EU27/UK discussions ,then in acceding to this request ACP governments could legitimately request parallel rules of origin concessions including on agro-food sector and fisheries product exports to the EU. This can be seen as a particularly important issue in Africa where the multiplicity of EU economic partnership agreements has complicated the process of sourcing regional inputs across the boundaries of individual EPA configurations. Given moves towards the creation of an African Continental Free Trade Area, this issue of pan-African cumulation in the rules of origin applied under EU trade agreements is one which should be addressed in parallel with any rules of origin concessions to the EU27 and UK as a result of the Brexit process. However for ACP governments getting to grips with these rules of origin issues will require a detailed engagement with producers and exporters across ACP regions to see where precisely rules of origin can be improved to allow the rapid development of higher value products for EU27 markets. Addressing these rules of origin issues could usefully benefit from a common ACP-wide approach to this issue so as to maximize the utilization of available ACP expertise in this complex area. |
Sources:
(1) EC, ‘Notice to Stakeholders: Withdrawal of the United Kingdom and EU rules in the field of customs and external trade – Preferential Origin of Goods, 4 June 2018
https://ec.europa.eu/taxation_customs/sites/taxation/files/notice-to-stakeholders-brexit-preferential-origin-final_en.pdf
(2) Sky News, ‘European businesses advised to avoid using British parts ahead of Brexit’, 6 June 2018
https://news.sky.com/story/european-businesses-advised-to-avoid-using-british-parts-ahead-of-brexit-11395908
(3) Independent, ‘EU advises businesses not to use British components because of Theresa May’s plan to leave customs union’, 6 June 2018
https://www.independent.co.uk/news/uk/politics/brexit-eu-businesses-british-components-theresa-may-customs-union-plan-latest-a8385466.html
(4) Food and Drink Federation/National Association of British and Irish Flour Millers, ‘Rules of origin in an EU-UK FTA: A ‘hidden hard Brexit’ for food and drink exporters?’ April 2018
https://www.fdf.org.uk/corporate_pubs/FDF-Rules-of-origin-report.pdf