Ending of Transitional Arrangements for ‘Origin’ Declarations Could Pose Serious Challenges to Certain ACP Triangular Supply Chains

To date the mutually agreed EU/UK transitional arrangements, have meant the new EU/UK rules of origin requirements have not been rigorously enforced. Indeed, the tone of the UK notification suggests to all intents and purposes, HMRC is effectively giving up on collecting import duties on products for which traders may have falsely claimed originating status during 2021, given the sheer enormity of the task involved in following up on these claims.

The notification suggests this situation will change dramatically from 1 January 2022, with traders needing to get to grips with the new TCA rules of origin realities underpinning EU/UK trade relationship if duty free access is to be maintained.

Understanding the rules of origin applicable under the EU/UK TCA is far from straight forward (5). The rules of origin applicable under the EU/UK FTA take a number of forms, notably:

· The product must be ‘wholly obtained’ (i.e., produced) in the EU or UK.

· A Chapter Change requirement (at the 2-digit tariff classification level).

·  Change of Tariff Heading (CTH) requirement (at the4-digit tariff classification level).

· A Change of Tariff Sub-Heading (CTSH) requirement (at the 6-digit tariff
classification level).

· A specific value tolerance threshold for non-originating inputs.

· A specific volume tolerance threshold for non-originating inputs.

· A combination of CTH requirements and value and/or volume tolerance
requirements.

· Specific processing activities requirements (mainly for textiles and clothing).

While at a general level the non-originating volume tolerance threshold for products in tariff chapters 2 and 4 to 24 are 15% of the weight of the final product and 10% of the value of the final product, these weight and value tolerance thresholds vary across different food and drink products and invariably exclude simple operations such as breaking down consignments into smaller volumes, repackaging, labelling, or ‘simple’ processing (which is generally taken to refer to simple manual or unskilled operations), all of which are deemed insufficient for EU or UK originating status to be granted to 3^rd country inputs.

It had been assumed that since most ACP governments had in place trade agreements with the EU and ‘rolled over’ trade arrangements with the UK which allowed full duty-free/quota-free access, this would not pose a problem for triangularly trade goods, since they would retain their duty-free access to the UK or EU market regardless of the route to market used. However, this is not the case.

Where goods enter the customs territory of the EU (i.e., do not remain under customs supervision under the provisions of the Common Transit Convention), prior to onward trade to the UK (or the customs territory of the UK prior to onward trade to an EU27 country) these products lose their initial ‘originating status’ and hence are subject to standard MFN import tariffs when traded across and EU/UK border. This is unless they undergo sufficient processing to gain EU or UK originating status, under one of the elements of the mutually agreed EU/UK rules of origin (which in some instances are sector and product specific), which thereby allows duty-free access under the EU/UK TCA.

There are a number of ACP export supply chains where these rules of origin dimensions are a particular source of concern. The most obviously affected sectors are those where products are simply onward shipped across an EU/GB customs border, without any processing, outside of customs supervision.

This affects a wide range of ACP exports. Along ACP-to-GB-to-EU supply chains this primarily affects trade with the Republic of Ireland given the traditional high level of integration of Irish wholesalers and retailers with GB based supply chains. However, it also impacts on ACP exports of fresh and chilled fruit, vegetables, and cut flowers which have been developed based on specialist distribution operations largely based on initial landings in the Netherlands or Belgium. Onward trading operations to the UK along these routes are being greatly complicated by the Brexit process, particularly as the effective operational implementation of the new trading realities becomes an ever-present reality.

The importance of this onward trade is most clearly visible to the cut flowers sector. Whereas prior to Brexit 75% of UK imports were sourced from the Netherlands, in the first months of 2021 this fell to a 60% share, as UK imports directly from Colombia and Kenya were expanded (6). This occurred before the effective implementation of full UK border controls, which are now scheduled to be introduced at the level of customs controls on 1 January 2022, and at the level of SPS controls from 1 July 2022.

This could see further disruptions of ‘re-exports’ of cut flowers from the Netherlands and Belgium to the UK. A range of ACP fruit and vegetable exporters who have traditionally shipped to the UK via EU27 member states (notably via the Netherlands and Belgium) will be similarly affected.

Illustrative Example of Cut Flower Exports (0603) to the EU28 by Country of Customs Clearance (EU27/UK) – 2019 MFN Tariff and Value (€)

Source: EC Market Access Data Base: https://trade.ec.europa.eu/access-to-markets/en/statistics?includeUK=true

However, there are also other ACP supply chains which have traditionally shipped products to the UK via EU27 member states, notably fisheries and clothing exports (although the structure of exports varies from country to country and product line to product).

Some exporters are virtually exclusively dependent on shipping via EU27 member states (e.g., Solomon Island canned tuna exporters and Ethiopian exporters of knit wear), while other have a balance between the EU and GB markets (e.g., Seychelles and Ghanaian tuna fish exporters and Mauritian clothing exporters) and hence are better placed to adjust their routes to market.

In the seven countries used as illustrative examples below a total trade of nearly €1.4 billion was involved in 2019 in just these 3 product categories. Adding in the seven illustrative cut flower exporters and we have a total trade approaching €2.1 billion. If only 5% of this trade would be affected by Brexit related trade disruptions this would affect over €100 million in exports from these countries.

From 1 January 2021 only if such products are onward shipped across an EU/GB border under customs supervision will duty free access be enjoyed. Simple ‘re-exports’ outside of customs supervision, will be much more likely to attract the applicable high MFN tariffs than has been the case throughout 2021, when, on the UK side, customs control have been only partially enforced.

Illustrative Example of Fisheries Exports (Prepared Tuna – 160414) to the EU28 by Country of Customs Clearance (EU27/UK) – 2019 MFN Tariff and Value (€)

Source: EC Market Access Data Base: https://trade.ec.europa.eu/access-to-markets/en/statistics?includeUK=true

Illustrative Example of Clothing Exports to the EU28 by Country of Customs Clearance (EU27/UK) – 2019 (€)

Source: EC Market Access Data Base: https://trade.ec.europa.eu/access-to-markets/en/statistics?includeUK=true

These are just the most obvious examples, where the more vigorous enforcement of rules of origin requirements will make themselves felt from 1 January 2022.

Other sectors of concern relate to value added products (e.g., value added cocoa products) exported to the UK via the EU and raw materials used in final products, such as sugar, which will now be subject to complex rules of origin requirements. In the sugar sector this could well see EU and UK manufacturers of high sugar context food and drink products abandoning the use of imported sugar in favour of EU or UK sourced beet sugar.

Thus, the scale of the potential impact on ACP exports while unclear, could be substantial in some sectors. In this regard two issues arise for ACP exporters, namely:

· Identifying the volume and value of trade ‘re-exported across EU/GB customs borders.

· Adjusting current shipping operations to accommodate the new rules of origin
complications faced along triangular supply chains.

This accommodation can take one of two forms:

· Recourse to the use of Common Transit Convention procedures for the shipment of
cargoes from initial despatch to delivery across the final EU/GB customs border.

· Re-routing cargoes to avoid the need to cross an EU/GB customs border.

Which of these options is most appropriate will vary from supply chain to supply chain.

However, it needs to be recognised that for smaller scale exporters neither of these options may be commercially viable. In such cases, smaller scale ACP exporters may be pushed out of markets currently served along triangular supply chains. For larger scale exporters, with a foot in both the EU27 and UK market (e.g., Kenyan cut flower exporters), new market opportunities could emerge as traditional triangular supply chains face disruptions.

For smaller scale exporters in particular, policy change is required to allow automatic cumulation for products which enjoy duty-free/quota-free access to both the EU and UK markets, with simplified procedures for verification of country of origin also needing to be introduced.

This simplification of verification requirements should be based on the use of routine country specific official trade documentation, such as phytosanitary certificates or organic certification, or alternatively, reputable private certification schemes such as Fairtrade certification or sustainable fisheries certification. Where none of these options are possible then the use of other forms of standard trade documentation should be explored.

In the case of the EU, there would appear to be scope for building customs recognition of country of origin into the traceability requirements to be established as part of the EU’s new Forestry Due Diligence regulation.

While nominally the rules of origin/MFN tariff issue has been faced along triangular supply chains since 1 January 2021, the transitional arrangements established by mutual agreement between the EU and UK served to disguise the effects of this requirement. What is more, in the case of the UK, capacity constraints may well have meant the import duties due as a result of invalid originating status claims, have simply not been collected and never will be. This situation is set to change dramatically from 1 January 2022, if the UK authorities implement border controls on goods crossing from the EU in line with the procedures set out in the HMRC notification of 1 December 2021.