UK Food Exporters Warn of Dangers of a Rules of Origin Based ‘Hidden Hard Brexit’

epamonitoring

Summary
Rules of origin issues arising from the UK’s withdrawal from the EU could potentially give rise to a ‘hidden hard Brexit’ in the agro-food sector, unless specific new arrangements are set in place. Depending in how EU27/UK rules of origin issues are addressed this could reduce the adverse effects of Brexit on existing ACP exports where processing takes place in the UK prior to onward sale. In addition it could create opportunities for ACP governments to reopen rules of origin issues which have inhibited movement up agro-food sector value chains in trade with the EU. However with these rules of origin issues coming to ahead in March 2019 swift and targeted consultations are needed to identify the specific ‘asks’ which ACP governments should be putting forward to advance the interests of value added food product manufacturers.

The UK Food and Drink Federation (FDF) and the National Association of British and Irish Flour Millers (NABIM) have issued a joint paper on the rules of origin issues arising in the food and drink sector as a consequence of the UK’s decision to leave the EU. The paper describes the issues faced as potentially giving rise to a ‘hidden hard Brexit’ in the agro-food sector (1).

While acknowledging the nature of the challenge faced is multifaceted, affecting both UK exports of food and drink products to EU27 markets and UK supply relationships to EU27 exporters seeking to export under preferential EU trade agreements, the paper focusses on rules of origin issuing arising in bilateral UK/EU27 trade.

These rules of origin issues are seen as ‘hugely important issue for food and drink manufacturers’, since  ingredients in UK products ‘are a rich mix of goods from the UK and around the world, many of which are not produced in the UK or not in sufficient quantity throughout the year’ (1).

It notes how ‘the levels at which global content will be allowed in such food and drink products will be set during negotiations’ with the EU. This could see some products being ‘shut out of preferential trade between the EU and the UK’ on the basis of the origin of the inputs used.  It is this dimension which the report describes as a ‘hidden hard Brexit’.

According to the FDF/NABIM report a critical element of the forthcoming UK/EU27negotiations will be reaching an agreement which ‘avoids disruption to supply chains that are central to the economy and to food security’ (1). This will involve difficult choices between the interests of UK agricultural producers and the interests of competitive UK food and drink product exporters.

The most vulnerable supply chains identified include grains, cereals, sugar, certain meats and dairy, and goods containing these inputs in large proportions (1).

In terms of UK/EU trade the report notes how currently the imported content included in a UK product ‘has no bearing on the product’s right to be traded freely’ across the EU28. However once the UK has left the EU the origin of inputs used and the extent of ‘non-originating’ content included in a product will define which UK products can benefit from any free trade agreement concluded with the EU27.

To explore the complexities of the rules of origin issues faced the joint paper examines the implications for different products of two different models for determining the origin of products to be exported between the UK and EU:

  • the pan-Euro-Mediterranean Convention origin protocol (PEM);
  • the EU-Canada Comprehensive Economic and Trade Agreement (CETA)

The report then reviews the impact of different types of rules of origin on different food products currently traded from the UK into the EU (see table annexed for examples).

The overall conclusion is that special rules of origin will be needed if current supply chains are not to be disrupted. In this context the report proposes a number of specific steps in regard to the future rules of origin to be applied to UK food and drink exports to EU27 markets, if existing trade relationships are not to be disrupted.  This includes:

  • the establishment of a basic ‘basic de minimis allowance for non-local content in all goods, set at 10% by value in addition to any other product-specific allowances’;
  • ensuring ‘goods originating in either market are treated as originating in both for the purposes of meeting origin requirements’ (e.g. ‘French wheat used in a UK biscuit, should be treated as local content in the free trade zone created by an EU-UK FTA and vice versa’);
  • full bilateral cumulation should be allowed, with this ensuring ‘UK foodstuff exports (e.g. milk chocolate bars) produced from EU-originating inputs which, as a general rule, must wholly originate in the market of export – such as milk – would nevertheless qualify for preferential tariff treatment in EU-UK trade’;
  • full diagonal cumulation with EU FTA, with this ensuring ‘UK and EU food and drink exports (e.g. bread or frozen pizza), produced from originating inputs from EU FTA partners which must wholly originate in the export market – such as wheat from Canada – would nevertheless qualify for preferential tariff treatment in EU-UK trade’;
  • product specific exemptions of inputs from origin cumulation, with this allowing ‘UK exporters of food and drink goods, with supply chains and production processes that would otherwise automatically fail to meet standard origin requirements, to exclude certain inputs subject to the same EU and UK MFN tariffs from origin calculations’;
  • transitional foodstuff tariff preference level, allowing all inputs originating in EU FTA partners to be exempt from origin calculations for a ‘predetermined quantum of specific products traded between the EU and the UK’ while ‘diagonal cumulation’ arrangements are under discussion;
  • a joint EU-UK exemption of all originating imports from Least Developed Countries (LDCs), with this allowing imports from LDCs to be counted as if they originated in the UK or EU for the purposes of mutual trade.
  • recognition of premium production and brand equity in value calculation, which would allow these dimensions to be captured in the final value of the product and be counted towards originating content.
  • simplified origin determination documentation and processes, designed to accommodate the needs of small sale enterprises (1).

The report acknowledges ‘The administrative process of proving origin is an often-underestimated aspect of maximising the benefits of preferential trade agreements’. It highlights how ‘origin declarations must be attached to the documentation of any consignment seeking preferential tariff treatment’, and that furthermore if required by customs officials, this documentation ‘must be substantiated with detailed evidence of origin’ (1).

Against this background the report sets out some of the practical steps the UK will needs to take, including:

  • establishing an online portal with all relevant rules of origin information and guidance for manufacturers and exporters;
  • allowing ‘the calculation of origin determination to be done at the level of a producing factory or consignment(s) and averaged across a year’;
  • allowing ‘statements of origin attached to invoices or other documentation to be used in lieu of formal certificates of origin’;
  • allowing up to two years for exporter/importers to document origin when detailed substantiation is required;
  • ‘providing rules or origin exemptions for low value shipments’;
  • making allowance for ‘Authorised Economic Operators importers to benefit from expedited treatment such as self-assessment for origin designation’;
  • seeking ‘to minimise the time required for advance rulings on origin designations from the UK’s trading partners though ambitious advance ruling commitments in UK FTAs’;
  • ensuring ‘designations can cover multiple shipments over a period of at least two years and retain their validity for up to two years’.
Comment and Analysis

A number of the FDF/NAMIB rules of origin proposals would appear to be relevant to the interests of for ACP exporters. For example the proposal that there should be an  exemption of all  originating imports  from Least Developed  Countries could usefully be extended to all developing country suppliers who export to both the UK and the EU27 on the basis of full duty free-quota free access.  This would then include all ACP countries which currently have economic partnership agreements in place with the EU.

This could be particularly beneficial in the sugar sector, where fully 85% of sugar consumed in the UK goes into value added food and drink products and where the EU is likely to be particularly sensitive in the post-Brexit period to any efforts by UK exporters to gain a competitive advantage by securing access to duty free world market priced sugar from currently non-preferred suppliers.

However on the basis of the examples cited in the FDF/NAMIB report, it could also be of value in the value added rice product sector, where Suriname and Guyana both currently have a trade in rice into the EU.

Similarly the proposals advanced in the FDF/NAMIB report for the establishment of simplified origin determination documentation and processes, designed to accommodate the needs of small sale enterprises, could usefully be taken up to ensure the administrative burden and costs imposed by Brexit are minimized along triangular supply chains involving ACP exporters.

More broadly the proposed introduction of diagonal cumulation would appear to allow ACP exporters to reopen discussions on pan-African and pan-ACP cumulation arrangements, which have been made increasingly difficult under regionally based EPA trading arrangements. This would appear particularly relevant in an African context, given the moves underway to create an African Continental Free Trade Area (AfCFTA).

Similarly the proposed discussion of a ‘de minimis allowance for non-local content in all goods, set at 10% by value in addition to any other product-specific allowances’, would appear to open up opportunities for the ACP exporters to request higher value tolerance thresholds for the non-originating content of value added food products destined for export to the EU27 under current trade arrangements and to UK markets under any future bilateral trade arrangements with the UK.

A systematic exploitation of these opportunities could open up new possibilities for value added food product exports from ACP countries within a narrow production base, but a distinct culinary heritage, most notably in the Caribbean and Indian Ocean.

However there is only a small window of opportunity for ACP exporters and governments to get to grips with these rules of origin issues.  Indeed, these rules of origin issues in EU27/UK trade are likely to come to a head as early as 30th March 2019.

Source:
(1) 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

 

Annex: Rules of Origin Case Studies

1.        Wholemeal Bread:
Manufactured in UK using Canadian, US or UK grains milled in the UKPEM Rules of Origin
The use of non UK grains would automatically disqualify the bread loaf from preferential import tariff treatment into the EU single marketCETA Rules of Origin
The use of non UK grains would automatically disqualify the bread loaf from preferential import tariff treatment into the EU single market if non-UK grains breached breaching the 20% cap on non-originating flour.Would require negotiation of diagonal cumulation provisions for UK to enjoy preferential access to EU27 markets.Non-Preferential Import Levies
9% plus agricultural levy : levy based on how much of each regulated products is included in the final product
2.        Rice and Corn Cakes
Manufactured in UK using Italian, Spanish, Indian or Pakistani rice and US cornPEM Rules of Origin
Requirements that all the cereals (including rice) are wholly obtained in the export market (the UK) would automatically disqualify rice and corn cakes produced with Pakistani or Indian rice from preferential import tariff treatment into the EU single market.CETA Rules of Origin
Rice and corn cakes containing over 20% non-originating cereals – rice from India or Pakistan and corn from the US – would fail to qualify for preferential import tariffs into the EU single market.Bilateral cumulation provisions if rice was sourced from Italy or Spain would allow UK products to enjoy preferential access to EU27 markets.Non-Preferential Import Levies
5.1% duty plus agricultural levy €46/100 kg
3.        Milk Chocolate Bar
Manufactured in the UK using UK French or Irish dairy products, cocoa solids and butter sourced primarily from West African suppliers in Cote d’Ivoire and Ghana and sugar is procured from a mix of UK-refined sugarcane (from Brazilian and Central American raw sugar) and UK and EU beet-sugar.PEM Rules of Origin
A milk chocolate bar produced exclusively from UK-refined sugar from Brazilian or Central American brown sugar could fail to meet origin requirements for preferential tariff treatment if a rise in global sugar prices pushed the value of non-originating sugar beyond the 30% threshold of the final product. Products made from EU-sourced sugar would only qualify for preferential import tariff treatment into the EU if full bilateral cumulation provisions are included in a future EU-UK FTA.CETA Rules of Origin
A milk chocolate bar produced exclusively from UK-refined sugar from Brazilian or Central American brown sugar could fail to meet origin requirementsfor preferential tariff treatment if a rise in global sugar prices pushed the value of non-originating sugar beyond the 30% threshold of the final product. Products made from EU-sourced sugar would only qualify for preferential import tariff treatment into the EU if full bilateral cumulation provisions are included in a future EU-UK FTA.Additionally simple transformation requirements and/or weight ratios of a CETA-style origin framework for dairy content means UK-made milk chocolate bars could fail to meet origin requirements for preferential tariff treatment into the EU single market absent full bilateral cumulation provisions.Non-Preferential Import Levies
8.3% plus agricultural levy of a maximum of 18.7% plus additional sugar duty
4.        Chicken Curry Ready Meal
Manufactured in the UK using frozen chicken meat sourced from low-cost suppliers in Thailand, while basmati rice from India or Pakistan is usedPEM Rules of Origin
Do not accommodate cost minimization sourcing strategies for chicken meat form non-UK suppliers. Sourcing of chicken from South East Asia suppliers would automatically disqualify the product from preferential import tariffs into the EU single market regardless of whether bilateral and diagonal cumulation provisions were agreed.CETA Rules of Origin
Do not accommodate cost minimization sourcing strategies for chicken meat form non-UK suppliers. Sourcing of chicken from South East Asia suppliers would automatically disqualify the product from preferential import tariffs into the EU single market regardless of whether bilateral and diagonal cumulation provisions were agreed.Non-Preferential Import Levies
Inside Tariff Rate Quota : 10.9%
Outside tariff Rate Quota : €2,765 /tonne
5.        Frozen Pizza Margherita
Manufactured in the Republic of Ireland using wheat flour imported from UK willed from US, Canadian, Argentinean  and UK grains and dairy ingredients sourced in the Republic of Ireland and Northern Ireland (UK)PEM Rules of Origin
UK-milled flour from wheat grown outside the EU would not qualify for preferential tariff treatment into Ireland, as the milling of that wheat is not considered as a sufficient transformation process for conferring UK origin.Any use of UK-milled flour from Argentinian and Canadian grown wheat in the manufacturing process would automatically disqualify the product from preferential import tariff treatment into the UK.CETA Rules of Origin
UK-milled flour from wheat grown outside the EU would not qualify for preferential tariff treatment into Ireland, as the milling of that wheat is not considered as a sufficient transformation process for conferring UK origin.A frozen pizza produced exclusively from UK-milled flour from premium grade Argentinian or Canadian wheat would fail to meet origin requirements by breaching the 20% cap on non-originating wheat in the final product’s net weight, thus not qualifying for preferential import tariffs into the UK. Absent the inclusion of full bilateral cumulation provisions, a sourcing strategy for cheese that takes exclusively from UK producers would also disqualify the frozen pizza from preferential import tariffs into the UK.Non-Preferential Import Levies
7.6% plus agricultural levy