Summary
While the House of Lords European Union Committee highlights the substantive unresolved issues under the EU/UK TCA, the focus is on the impact on UK businesses. While the impact on developing countries is referred to, this analysis is underdeveloped. A significant number of ACP supply chains are being affected. The new rules of origin complication is a particular area of concern, with ACP exporters being caught up in this new trade challenge. The affected ACP exports range from fresh horticulture, floriculture, and fisheries products, through the onward trade in ACP semi-processed products to ACP sugar exports. A solution to the rules of origin complication at the EU/UK level is unlikely. There is however scope for a solution for ACP exports shipped to the UK via the EU through the kind of UK pragmatic unilateral action which the Committee has called for and which the UK government is nominally open to. Coordinated action by ACP governments and business bodies to secure such unilateral pragmatic UK solutions in trade with the UK would appear urgent, given the scale of total ACP exports potentially facing export market losses.
Overview of the Report
The 25 March 2021 report of the House of Lords European Union Committee on ‘Beyond Brexit: Trade in Goods’ highlights:
- The rules of origin complications which are now faced.
- The customs clearance challenges faced resulting from the administrative changes required following the UK’s departure from the EU customs union and single market.
- The new SPS related challenges which have emerged.
- The road haulage challenges which have emerged.
- The VAT complications now faced.
- The wider non-tariff barriers now faced.
It should be noted many of these challenges compound each other. Customs clearance delays are intimately linked to the new rules of origin and SPS controls which will need to be carried out as part of the border clearance process, while overall border clearance delays impact on the level of road haulage cost price inflation.
The European Union Committee highlighted how while the EU/UK Trade and Cooperation Agreement (TCA) removed quotas and tariffs on goods, the benefits of the agreement are being undermined by the multiplicity of areas which were not fully addressed in the December 2020 EU/UK TCA. This is generating a situation where ‘the sheer volume and complexity of the new requirements for businesses’ is creating a significant drag on cross border UK/EU trade.
The European Union Committee took the view that while ‘an agreement with the EU is far better than a ‘no deal’ outcome…the TCA does not rectify significant regulatory, logistical, and administrative barriers to trade arising from the UK’s status as a third country.’ These non-tariff barriers will need to be substantively addressed ‘before smooth UK-EU trade will be possible.’ This includes new VAT complications arising from ‘the complicated and varied VAT rules in different EU jurisdictions’ which exist as a result of the absence of VAT harmonisation within the EU. In some sectors this VAT issue is proving particularly burdensome for small scale transaction and is seen as the ‘most problematic non-tariff barriers to trade’ (1).
In addition, the Committee report acknowledged the problems arising in the road haulage sector, particularly through the impact on low cost ‘groupage’ road haulage practices. ‘Groupage’ road haulage practices are commonly used in the onward shipment of ACP goods across EU/UK borders. This alongside the increased complexity of border clearance processes and fears of delays and disruptions is seeing much higher road haulage costs along EU/UK routes, with smaller scale importers and exporters being most severely affected. Against this background the European Union Committee called for the UK government to extend ‘the Groupage Export Facilitation Scheme to a wider variety of goods’ (1).
While some of these issues and constraints are transitional and will ease over time, as businesses become familiar with new requirement and new infrastructure, IT and staffing requirements are met, other issues are structural and will require ‘focussed government interventions.’ Some of these interventions can be unilateral, while others will require cooperation with the EU. However, the report notes ‘corrections and mitigation’ measures will not be enough to ‘rectify many of the trade difficulties which have resulted from leaving the EU Single Market and customs union.’
Overall, the Committee urged the UK governments to ‘identify and pursue realistic priorities’ to enhance the implementation of the EU/UK TCA. While the European Union Committee gave particular importance to the establishment and operational activities of the relevant Trade Specialised Committees established under the Agreement in addressing unresolved issues (2), in response to questioning from the Committee, the Paymaster General, the Rt Hon Penny Mordaunt MP, on behalf of the UK government, highlighted how there were areas where, acting unilaterally, the UK government could look ‘very pragmatically at how things can be improved’ (1).
The Committee also called on the UK government to ‘translate guidance into tailored advice and support’ for businesses, given ‘the substantial increase in administrative complexities’ now faced in moving goods across an EU/UK border. This needs to be seen against the background of the urgency of investing in the stretched customs intermediary sector, where staff numbers are too low to cope with the massive increase in demand for the service of customs intermediaries. It was implied the UK government does not appear to appreciate the importance of this issue and the need for further action beyond the support schemes the government has already set in place to stimulate the customs intermediary sector (1).
The Specific Rules of Origin Complications Arising for 3rd Country Suppliers
According to the Committee ‘rules of origin were among the biggest issues facing traders following the TCA’s implementation’, with ‘putting systems in place or upgrading existing systems to ensure compliance’, being ‘very burdensome’, especially ‘for businesses that have no previous experience of dealing with origin requirements.’ The report highlighted how ‘some traders, whose products do not meet those rules, may face a fundamental shift in their supply chains.’ These rules of origin complications alongside the ‘extensive paperwork, multiple testing requirements, changes to VAT, and transport restrictions’ were seen as ‘having a significant impact on UK traders’ (1).
The Committee’s report highlights how failure to comply with rules of origin requirements under the TCA means products containing 3rd country content and failing to meet sufficient processing requirements to attain EU or UK originating status under the TCA, will face MFN tariffs.
The Committee highlighted the range of 3rd country products affected, noting in particular:
- Problems linked to the re-export of non-processed goods (e.g., cut flowers and plants, fresh fruit and vegetables, fresh, chilled, and frozen fish).
- The impact on products which fail to stay within non-originating content ceilings or undergo insufficient processing to gain EU or UK originating status prior to onward shipment, and which therefore are not eligible for duty-free access under the EU/UK TCA.
The European Union Committee expressed concern over ‘the prospect of exporters from some of the poorest countries in the world being unfairly cut out of UK and European supply chains as a result of the terms of the TCA’ (1).
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Putting ACP Triangular Supply Chain Operations in Context In 2019 the UK exported £294 billion of goods and services to other EU Member States, equivalent to 43% of UK exports. Imports from the EU were worth £373 billion, 52% of UK imports. Of this total trade, goods were responsible for 58.6% of exports and 72.3% of imports. The operation of triangular supply chains forms part of this trade. In the case of the cut flower sector, it is estimated ‘about 80% of the flowers sold in the UK are imported from the Netherlands which, in turn imports and auctions off flowers from across the world’. The Netherlands takes around 90% of cut flower exports coming into the EU from the top 6 ACP cut flower exporters, with this being fed into the Netherlands-UK onward trade (see companion epamonioring.net article, ‘No-Deal Brexit Challenges in Cut Flower Sector Highlight Problems for ACP Triangular Supply Chains’, 1 March 2019). In the fruit and vegetable sector the Netherlands is a major destination for ACP exports to the EU, with 93% of total Dutch fruit and 23% of total Dutch vegetable exports being re-exported. Fully 9% of total Dutch fruit and vegetables exports are destined for the UK market (3). In addition, to the Netherlands, ACP vegetable products and high value fruit products have also traditionally been shipped via Belgium, Luxembourg, and France to the UK. Similarly, Ghanaian exports of cocoa butter and cocoa paste are largely shipped to the UK via the mainland EU, while a range of Caribbean bulk rums are bottled in the EU prior to onward shipment to the UK, often as country-of-origin specific Supermarket offerings of own label rums. All of these supply chains, and many more besides are now falling foul of rules of origin requirements under the EU-UK TCA, which if not fully complied with result in the imposition of MFN tariffs on ACP products. These same products, if exported directly without crossing an EU/UK border, would have enjoy duty free access to either the final market in the UK or EU. Making the necessary routing adjustments to these supply chains has been greatly complicated for all concerned ACP exports by the impact of the Covid-19 pandemic on air freight and sea freight services. For many smaller scale ACP exporters making the necessary routing adjustments, even without the impact of the Covid-19 pandemic, would be commercially non-viable given the limited volume of trade involved. |
The specific problems faced in the sugar sector were highlighted in this regard, with concerns being expressed by the Food and Drink Federation that ‘UK confectionary manufacturers would be “pushed to use UK and EU producers of sugar” rather than fair trade or non-EU sources.’
The Committee report highlighted how it was the ‘EU’s rejection of diagonal cumulation in the TCA negotiations’ which ‘is likely to have a negative impact on supply chains and exporters in developing countries.’. The report described the EU position as ‘disappointing’. It noted however that ‘re-negotiation of this issue appears unlikely in the short term.’
The Committee concluded ‘rules of origin present both short-term administrative issues and long-term structural challenges, chiefly where certain products do not qualify for zero tariffs under the TCA.’ It further highlighted how ‘rules of origin requirements are likely to trigger substantial supply chain shifts in certain sectors and adjusting to these changes will incur significant costs for many UK businesses, as well as exporters in developing countries’ (1).
The Committee’s report acknowledges how further elaboration and clarification or rules of origin requirements, particularly for ‘re-exports of non-processed goods, are urgently needed.’ The Committee called on the UK government to ‘embark on a programme of industry engagement to identify and pursue simplifications to adherence processes’ (1).
| Comment and Analysis While the UK House of Lords European Union Committee report focusses primarily on the impact on UK businesses, it does touch on the impact on developing countries. While the Committee report acknowledges the problems faced by non-processed products and insufficiently processed products arising from the absence of diagonal cumulation provisions in the EU/UK TCA, this is not fully developed.In terms of rules of origin complications, the effects on developing countries are particularly severe for ACP exporters shipping goods along triangular supply chains, which require their movement across an EU/UK border before reaching their final point of sale. This applies to goods crossing both from the UK to the EU (most notably to date from the UK to the Republic of Ireland) and goods crossing from the EU to the UK.In terms of agri-food products this affects products as diverse as o All ACP fresh fruit, vegetable and floriculture products traded across EU/UK o All ACP fresh, chilled, and frozen fish products traded across EU/UK borders. o ACP raw sugar refined in the UK and sold in an EU27 market (most notably to the o Bulk rum bottled in the EU prior to onward shipment to the UK. o Bottled rum shipped to the UK and sold into Irish markets. o Cocoa paste, cocoa butter and cocoa powder shipped to the EU prior to onward Far more attention needs to be paid to this issue than it has received to date. The situation in the sugar sector is a matter of considerable concern since 70% of all sugar consumed in Europe is in manufactured food and drink products. In addition, in the coming years the average price difference between domestically produced and imported sugar is projected to be only around €40 per tonne (4) (see companion epamonitoring.net article, ‘EU Sugar Projections to 2030 Suggest Less Room on EU27 Market for ACP Sugar Exports’, 16 February 2021). This could potentially carry serious implications for ACP sugar exports to the UK and remaining EU27 markets. In 2019 ACP sugar exports (including South Africa) were still valued at €130.2 million and €352.6 million to the UK and EU markets, respectively (5). This was despite the dramatic decline in EU sugar import prices since the implementation of EU sugar sector reforms (4). It should be noted that in the sugar sector, this rules of origin complication also affects ACP raw sugar directly exported to the UK and EU for refining, where this sugar is used in products to be shipped across an EU/UK border. Nestle UK and Ireland, was the first major confectionary company to make the switch to using exclusively EU/UK produced beet sugar in high sugar content products (see companion epamonitoring.net article ‘Nestlé Moves Away from Cane Sugar Compounds Wider Sugar Sector Demand Trends’, 11 August 2020). While the House of Lords European Union Committee report argued the UK governments should ‘continue to make the case for full diagonal cumulation’ and should in dialogue with the EU push for appropriate amendments to the rules of origin applicable under the EU/UK TCA. However, since progress through such renegotiations was deemed ‘unlikely in the short term’, it would appear incumbent on the ACP governments whose exports are being affected by this rules of origin complication to undertake initiatives to secure unilateral UK action to effectively address this issue. This should focus on securing a commitment from the UK government to taking unilateral action to allow full cumulation for products from countries which enjoy full duty-free/quota-free- access to both the UK and EU markets. In this context it should be noted how the House of Lords European Union Committee report identified the need for ‘focussed government interventions’ which should be set in place on a unilateral basis. This would appear to be particularly relevant for addressing the rules of origin complications faced along ACP triangular supply chains which move goods from the EU to the UK. It would appear perfectly feasible for the UK government to pursue one of the following two options on a unilateral basis: a) Modifying the direct transport provisions of the various rules of origin b) Establishing alternative arrangements for the verification of origin of products The first of these options would require revisions of the rules of origin under ACP trade agreements so recently concluded with the UK to ensure ‘continuity’ in post Brexit access to the UK market. However, this option would not address the needs of ACP least developed countries exporting under the UK’s unilateral duty-free access arrangements. A separate framework for a parallel arrangement on rules of origin applicable to UK imports from least developed countries would be needed. In contrast, establishing simpler alternative arrangements for origin verification could be adopted by the UK unilaterally, for both LDCs and non-LDCs who have trade agreements in place with the UK. This could potentially be more expeditiously set in place through a programme of UK government engagement with stakeholders in the affected sectors. The House of Lords European Union Committee report has implicitly set out the basis on which such arrangement could be set in place (see box). This would be wholly consistent with the UK governments’ commitment to ‘looking very pragmatically at how things can be improved’ and calls from the European Union Committee for the government to ‘identify and pursue realistic priorities’ in areas where trade flows can be improved, and newly created barriers can be removed.
The observation that rules of origin requirements are ‘very burdensome…for businesses that have no previous experience of dealing with origin requirements’, is relevant for the onward trade in ACP products across EU/UK borders. For example, many of the businesses involved in this onward trade in the fruit and vegetable sector are relatively small-scale businesses who have only ever traded within the EU single market and have no experience of the administrative requirements for rules of origin compliance. The learning curve of these businesses has been very steep. While the ‘grace period’ for the submission of supporting documentation to verify ‘self-certified’ origin claims provides such businesses with a breathing space, the procedures to be followed and verification documentation requirements for 3rd country goods crossing an EU/UK border are only poorly understood by many of the concerned businesses. This could give rise to serious trade disruptions, should recommendations for public information campaigns on rules of origin issues targeting the affected businesses be implemented. Given it appears few of these businesses are following the required procedures and/or maintaining the necessary documentary proof to validate ‘self-certified’ duty-free origin claims, many of these businesses may simply exit cross border on-ward trading operations once the full financial ramifications of the new rules of origin requirements have been made clear to them. |
Sources:
(1) House of Lords, European Union Committee report, ‘Beyond Brexit: Trade in Goods Paper 249, 25 March 2021
https://publications.parliament.uk/pa/ld5801/ldselect/ldeucom/249/249.pdf
(2) House of Lords, European Union Committee, 21st Report of Session 2019-21 ‘Beyond Brexit: the institutional framework’, 22 March 2021
https://publications.parliament.uk/pa/ld5801/ldselect/ldeucom/246/246.pdf
(3) Factsheet België en Nederland productie en handel groenten en fruit; April 2020
http://www.fruitandvegetablefacts.com/sites/default/files/Factsheet%20NEDERLAND%20afzet%20verse%20groenten%20en%20fruit.pdf
(4) EU Agricultural Outlook: For Markets, Income and Environment 2020 – 2030, December 2020, tables
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/medium-term-outlook-tables_en.pdf
(5) EC Market Access Data Base
https://trade.ec.europa.eu/access-to-markets/en/statistics?includeUK=true