Summary
The simple change of tariff heading rules of origin requirements for simple value-added cocoa products (1803, 1804 and 1805) included in the EU/UK trade agreement means the existing ACP cocoa supply chains within which the processing of ACP cocoa beans takes place in the EU prior to onward shipment to the UK will face no disruption as a result of the new EU/UK trade arrangements. However, more complicated rules of origin are faced for cocoa products containing sugar which fall under tariff heading 1806. In addition, the absence of ‘diagonal cumulation’ provisions in the EU/UK trade agreement, means ACP value added cocoa products shipped to the UK via the EU will in future need to remain under customs supervision prior to landing in the UK; with extensive use being made of the Common Transit Convention (CTC) in the handling of such cargoes. However, currently there are serious infrastructure and human capacity constraints on the UK’s efficient operation of CTC procedures. This will complicate the immediate use of such arrangements. Scope for moving over to direct shipments to the UK would also appear to face some transitional challenges given current UK port congestion. More serious problems would appear to be faced in regard to onward trade from the EU to the UK in high sugar content value added cocoa product supply chains (e.g., chocolate bars) where these have traditionally used ACP sourced sugar. The absence of ‘diagonal cumulation’ provisions means manufacturers will need to shift over to the use of ‘wholly obtained’ EU or UK sugar, if eligibility for duty free access for high sugar content value added cocoa products is to be retained.
On 24th December 2020, the EU and UK finally concluded the negotiations on the framework to govern future UK/EU trade relations (1). This is a multifaceted agreement covering a wide variety of areas. In terms of ACP cocoa supply chains, the dimensions of greatest significance are those relating to the extension of continued duty free-quota free (DFQF) access in trade between the EU and UK and the rules of origin applicable to this trade (2).
An additional, area of concern relates to the impact the EU/UK agreement on the potential for road haulage disruptions along EU/UK supply routes; specifically, the level of additional costs EU/UK border control processes will generate along triangular supply chains used for the delivery of value-added cocoa products to the UK from the territory of the EU.
In the medium-term differences in the EU and UK approach to phytosanitary import controls, food safety standards and production practices (in regard deforestation and the use of child labour) in the cocoa sector could begin to emerge. However, at this point the nature of any such potential divergence is purely a matter of speculation.
While the UK/EU trade agreement provides for continued duty free-quota free trade between the EU and UK in ‘originating goods’ a critical issue for certain ACP triangular supply chains involving processing prior to onward shipment is the rules of origin to be applied. A particular area of concern arises in regard to the EU’s rejection of UK proposals for the inclusion of ‘diagonal cumulation’ provisions.
‘Diagonal cumulation’ would have allowed inputs from third countries to which both the EU and UK grant duty free access, to be counted as ‘originating inputs’ when used in products subsequently exported between the EU and UK. This would then have allowed such products to more easily qualify for the duty-free access agreed between the EU and UK.
As a consequence of the EU’s rejection of ‘diagonal cumulation’ provisions, these 3rd country inputs will be subject either to a change of tariff heading or change of tariff sub-heading requirement or to various value and volume tolerance thresholds for the use of ‘non-originating’ inputs, in order for continued duty-free access to be allowed in UK/EU trade.
There is currently a certain degree of confusion over the implications of the absence of ‘diagonal cumulation’ arrangements in the 24th of December 2020 EU/UK trade agreement.
In the cocoa sector a preliminary review suggests the implications are varied, depending on the level of value-added processing being undertaken, the composition of the final product and customs procedures used to deliver valued added cocoa products to the UK via the EU.
For basic value-added cocoa products, the rules of origin require a change of tariff heading for EU ‘originating status’ to be granted and hence duty-free trade to take place between the EU and the UK. This covers the processing of products from Cocoa Beans (1801) to Cocoa Paste (1803) or Cocoa Butter (1804) or Cocoa Powder not containing sugar (1805) (1). This will mean the onward trade in cocoa paste, butter or powder not containing sugar produced in the EU27 from ACP cocoa beans will not face tariffs when traded into the UK market.
However, in the final stages of trade negotiations between Cameroon and the UK this issue of the ‘originating’ status of ACP products entering the customs territory of the EU prior to onward shipment to the UK reportedly arose. It was suggested that if goods entered the customs territory of the EU prior to onward export to the UK, then such goods would no longer be eligible for duty free access to the UK market. This needs to be seen in a context where if no change of tariff heading takes place in the EU on route to the UK then the concerned product would not be classified as originating in the EU and hence would not be eligible for duty free access to the UK market under the EU/UK trade agreement.
For cocoa powders containing sugar falling under tariff heading 180610 (Cocoa powder, containing added sugar or other sweetening matter), the rules of origin are more complicated. Not only is a change of tariff heading necessary but also all dairy products included have to be ‘wholly obtained’ in the EU or UK, while the use of non-originating sugars classified under heading 1701 and 1702 must ‘not exceed 40% by weight of the product’ (1).
For cocoa powders containing sugar falling under categories 180620 to 180690 all dairy products included have to be ‘wholly obtained’ in the EU or UK, use of non-originating sugars classified under heading 1701 and 1702 must ‘not exceed 40% by weight of the product’ and the value of the non-originating sugars must ‘not exceed 30% of the ex-works price of the product’. The product categories falling under 180620 to 180690 include:
- Other preparations of cocoa in ‘blocks, slabs or bars weighing more than 2 kg or in liquid, paste, powder, granular or other bulk form in containers or immediate packings, of a content exceeding 2 kg’ (180620).
- Other preparations of cocoa in ‘blocks slabs or bars’ filled (180631) or unfilled (180632).
- ‘Chocolate and chocolate products’ (18069011 and 1869031).
- Sugar confectionery and substitutes containing cocoa (18069050).
- ‘Spreads containing cocoa’ (18069060).
- ‘Preparations containing cocoa for making beverages’ (18069070).
- Other cocoa products ‘in immediate packings of a net content not exceeding 1 kg’ (18069090).
| Comment and Analysis The potential problems arising for the onward shipment of ACP produced cocoa paste, butter, and powder from the EU to the UK can be seen as one of the complications arising from the absence of ‘diagonal cumulation’. It suggests that ACP exporters routing cocoa paste, butter and powder exports to the UK via the EU will need to either: a) ensure all such products remain in transit under customs supervision, using the or b) move over to directly shipping such products to the UK so as to avoid the Both of these options potentially could pose challenges. In terms of the use of the Common Transit Convention procedures for the delivery of value-added cocoa products to the UK via the EU, the UK National Audit Office (NAO) has highlighted how ‘in deciding whether to use transit arrangements, traders need to balance the benefits of the relative ease of transporting goods, with the investment required’ to take advantage of these procedures (3). These investments relate to training of personnel, investment in IT systems and securing ‘authorised’ status on the export side of the supply chain and capital investment in transit sheds, training, IT systems and securing ‘authorised’ status on the UK import side. There are currently transitional problems in making use of the CTC procedures in trade with the UK. There is currently a major shortfall in the availability of qualified customs intermediaries capable of guiding exporters/importers through the new customs procedures which will need to be followed. It has been estimated the customs intermediary sector at a minimum will ‘require some 50,000 customs agents, compared with between 5,000 and 10,000 now being employed’ (4). In mid-October, the UK governments Border and Protocol Delivery Group (BPDG) assessed the capacity of customs intermediaries as a “red risk” for the successful delivery of the envisaged services for both 1 January 2021 and 1 July 2021. This implies the attainment of the envisaged role of the customs intermediary sector before the second half of 2021 (at the earliest) appeared ‘unachievable’ (3). Secondly, there is a similar constraint in regard to the establishment of the transit site infrastructure, necessary to complete the discharge of cargoes from transit procedures in line with the requirements of the Common Transit Convention. HMRC’s assessment is the establishment of the necessary physical infrastructure by 1st January will be ‘very challenging’ (3). This provides the overall context within which ACP exporters of value-added cocoa products who currently serve the UK market via initial ports of landing in an EU27 member states will need to decide whether to continue to ship cargoes to the UK via the EU or whether to shift over to direct shipment of such value-added cocoa products to the UK. Potential extra transitional costs along EU/UK transportation routes resulting from road haulage disruptions will need to be factored into these calculations as will the longer-term structural cost increases arising from the full implementation of new EU/UK border control procedures. However, shifting over to direct shipment of value-added cocoa product cargoes to the UK faces its own challenges at the present time. This largely arises from the ongoing disruptions to shipping schedules and the operation of UK ports arising from the knock-on effects of the Covid-19 crisis. While larger scale exporters should be able to adjust their operations to these challenges, smaller scale ACP value added cocoa product exporters may face challenges in making such shipping adjustments on a commercially viable basis. This could then see these exporters squeezed out of the UK market. The extent to which this occurs will be critically influenced by the extent to which additional costs arising from the creation of a new EU/UK customs border can be passed on to final manufacturers and final consumers. Given the recessionary pressures generated by the Covid-19 crisis and the ongoing market disruptions generated by lock down measures in quality differentiated niche markets for value added cocoa products, the prospects of passing on additional costs to manufacturers and consumers would appear remote. The need to balance the costs and benefits for ACP exporters of using the Common Transit Convention where deliveries currently take place along triangular supply chains will need to be carefully assessed. Main ACP Value Added Cocoa Product Exports to the EU28 (2018 -tonnes)
Source: EC market Access Data Base The absence of ‘diagonal cumulation’ could also pose problems for the trade in high sugar context chocolate products, unless manufacturers switch over to the use of sugar wholly obtained in the EU or UK (beet sugar in the case of the UK or, in the case of the EU, beet sugar or EU cane sugar produced in French or Spanish territories). This is most likely to adversely impact on current supply chains for high sugar content Fairtrade chocolate products manufactured in Germany and sold in the UK. It will probably require the abandonment of the use of Fairtrade sourced sugar in these high sugar content products where the sugar usage requirement exceeds the 40% by weight and 30% value tolerance threshold. These products will still be able to be classified as Fairtrade, but it will further serve to reduce the demand for Fairtrade sugar used in goods traded into the UK market from the EU. |
Sources:
(1) Official Journal of the European Union, ‘TRADE AND COOPERATION AGREEMENT BETWEEN THE EUROPEAN UNION AND THE EUROPEAN ATOMIC ENERGY COMMUNITY, OF THE ONE PART, AND THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND, OF THE OTHER PART, 31 December 2020
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:22020A1231(01)&from=EN
(2) The Guardian, ‘From tariffs to visas: here’s what’s in the Brexit deal’, 24 December 2020
https://www.theguardian.com/politics/2020/dec/24/from-tariffs-to-visas-heres-whats-in-the-brexit-deal
(3) NAO, ‘The UK border: preparedness for the end of the transition period’, 6 November 2020
https://www.nao.org.uk/wp-content/uploads/2020/11/The-UK-border-preparedness-for-the-end-of-the-transition-period.pdf
(4) Reuters, ‘UK delivery prices jump ahead of Brexit cliff edge as firms rush to stockpile’, 27th November 2020
https://www.fpcfreshtalkdaily.co.uk/single-post/uk-delivery-prices-jump-ahead-of-brexit-cliff-edge-as-firms-rush-to-stockpile