Summary
The new EU/UK trade agreement includes new rules of origin requirements, which in the absence of ‘diagonal cumulation’ arrangements, could pose problems for some ACP raw sugar sector supply chains, including those serving food and drink manufacturing industries. Given the absence of ‘diagonal cumulation’ provisions in the EU/UK trade agreement a significant restructuring of the affected supply chains will be needed, in a context where demand for ACP sugar is shrinking. This could result in all but the largest and most efficient ACP sugar exporters being driven off UK and even some E27 markets. There is potentially some scope for addressing the problems created by the absence of EU/UK ‘diagonal cumulation’ arrangements through the inclusion of specific provisions in enhanced ‘rolled over’ UK trade agreements and even existing EU agreements, should the EU come around to considering such arrangements. However, this will require a sustained lobbying effort on the part of the governments of the affected ACP countries and allies in other sectors facing similar ‘diagonal cumulation’ constraints on the functioning of triangular supply chains.
Any analysis of the impact of the new EU/UK trade deal on ACP sugar exports to the EU and UK market needs to be seen in a context where more than 70% of sugar consumption in the EU and UK takes place in the form of processed food and drink products.
In this context the details of the rules of origin to be applied under the new EU/UK trade agreement take on considerable importance (1). The most significant aspect in this regard from an ACP sugar exporters perspective is the absence of ‘diagonal cumulation’. This means the future usage of ACP sugar in food and drink products which are exported between the EU and the UK will be influenced by the specific rules of origin applicable to value added food and drink products traded across EU and UK borders.
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What is Diagonal Cumulation? The inclusion of ‘diagonal cumulation’ provisions in the EU/UK trade agreement 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 traded between the EU and UK. This would have eliminated any rules of origin verification problems faced along current EU/UK triangular supply chains and would have facilitated the smooth functioning of such supply chains under current arrangements and haulage practices. |
The rules of origin applicable under the EU/UK FTA take a number of forms, notably:
- A Change of Tariff Heading (CTH) requirement.
- A Change of Tariff Sub-Heading (CTSH) requirement.
- 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).
In the sugar category (1701) we find a change of tariff heading is required for originating status to be granted under the EU/UK trade agreement. Since the movement from raw sugar (170191) to white sugar (170199) involves only a change in tariff sub-heading and not the change of tariff heading stipulated in the product Specific Rules of Origin (Annex ORIG-2) of the EU/UK trade agreement, then the simple processing of raw sugar to refined sugar will not secure ‘originating’ status for the white sugar produced under the EU/UK trade agreement.
However, only products which remain under customs supervision and do not undergo any ‘manipulation’. When being traded along triangular supply chains can retain their initial originating status (e.g., South African, Mozambiquan, Guyanese, Belizean or Fijian etc) and hence the duty-free access provided for under their EU or UK trade arrangements. Where this is not the case the initial originating status of the sugar will be lost, and hence the refined sugar when traded across an EU/UK border will face standard MFN tariffs.
This means not only that white sugar produced from ACP raw sugar would face duties if traded across an EU/UK border, but also that ACP sugar refined in the UK would not be an ‘originating product’ when used in value added food and drink products.
This then creates complications for the use of ACP sugar in high value food and drink products traded across EU/UK borders which could influence the sugar sourcing decisions of both EU and UK food and drink companies.
The new reality faced is that for high sugar content food and drink products to enjoy duty free access under the EU/UK trade agreement the final products need to meet specific CTH requirements and value and/or volume tolerance requirements.
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, for a range of specific products containing sugar the volume and value tolerance threshold is different.
For example, we find:
- For sugar and sugar confectionery falling in products category 1702 a volume tolerance of 20% of final weight of the product applies to all materials falling under heading 1701 (raw and white sugar), 1703 (cane molasses) and 1101 to 1108 (flour)
- For white chocolate falling under category 1704 there is a total weight tolerance for sugar (1701) and cane molasses (1703) of 40% and a value tolerance for sugar (1701) and other sugar (1702) of 30%, while all dairy products must be ‘wholly obtained’.
- For other products falling under 1704 (pastes, throat pastille, cough sweets and sugar-coated goods) the weight tolerance is 40%, while all dairy products must be ‘wholly obtained’.
- For cocoa powders (180610) there is a weight tolerance of 40% of non-originating sugar (1701) and other sugars (1702), while all dairy products must be ‘wholly obtained’.
- For cocoa preparations in blocks of more than 2kg (180620) other blocs and slabs and bars (080631) and cocoa spread and preparations for beverages the non-originating weight threshold is 40% and the non-originating value threshold is 30%, while all dairy products must be ‘wholly obtained’.
- For preparations of vegetables, fruit, nuts, and other plants (2004 to 2009 – which includes jams) the weight tolerance for sugar (1701) and other sugar (1702) is 40%
- For Miscellaneous edible preparations falling under tariff code 2101 (Extracts, essences and concentrates, of coffee, tea, and mate) and 2102 (active yeast, inactive yeast and baking powder) the volume tolerance is 20% of the weight of the final product.
- For Miscellaneous edible preparations falling under tariff code 2104 to 2106 which includes soups broths and ice cream) the weight tolerance for sugar (1701) and other sugar (1702) is 20%.
- For beverages and spirits falling under product codes 2201 to 2206 (which includes beer, wine, and cider the weight tolerance for sugar (1701) and other sugar (1702) is 20%.
- For gums and resins (1301) the vegetable juices and extracts (1302) the weight tolerance for sugar (1701) and other sugar (1702) is 20%.
- For all dairy products falling in categories 0401 to 0410 the weight tolerance for sugar (1701) and other sugar (1702) is 20% (1).
For food and drink manufactures the issue is not only one of staying within these value tolerance thresholds but also, where products are manufactured for both the domestic (EU27 or UK) and export markets (both EU27 and UK), documenting the rules of origin requirements have been met in order to claim the duty-free access available under the EU/UK trade agreement.
The rules of origin compliance verification dimension could add a level of complication which simply makes it easier to source EU/UK sugar for use in food and drink manufacturing processes where the documentation and other administrative or processing costs involved in using imported cane sugar on a segregated basis exceed the benefits of cheaper sourcing at world market prices.
Against this background the new EU/UK trade agreement, in the absence of diagonal cumulation could further serve to reduce the potential market for ACP sugar exports, in a context where health related campaigns to reduce sugar consumption in the EU are already projected to reduce overall EU sugar consumption by 5.3% (or some 900,00 tonnes) between 2020 and 2030 (from 16.8 million tonnes to 15.9 million tonnes) (2).
| Comment and Analysis The absence of ‘diagonal cumulation’ under the EU/UK trade agreement will put an end to the processing of ACP raw sugar in the UK for onward export to the EU (e.g., the refining of Belize Fairtrade sugar in the UK for markets across the EU or the refining of ACP cane sugar in the UK for sale in the Republic of Ireland) or in the EU27 for onward shipment to the UK.To continue to trade along such supply chains would add substantial administrative complications or substantial new tariff burdens to the product when onward exported across an EU/UK border (£350/tonne). Any ACP exports of raw sugar or refined sugar to the EU27 via the UK or to the UK via the EU27 would need to remain under customs supervision (under Common Transit Convention procedures) until their final delivery to the UK or EU27 market. What is more any manipulation, even such simple activities as packaging and labelling, are not allowed without, in principle, the loss of preferential treatment (and hence being subject to MFN duties) if such manipulation of the product occurred. In future ACP exporters will need to refine their raw sugar in the market being served (i.e., in the EU27 for the EU market and in the UK for the UK market). This is most likely to impact on the sourcing of raw cane sugar for markets in the Republic of Ireland, given the traditional strong orientation of the Irish retail sector to UK sourcing. The rules of origin complications faced by a range of high sugar content food and drink producers in the continued sourcing of ACP and other non-EU/UK originating sugars are such this could give rise to a generalised move away from the use of cane sugar in the food and drink industry, where cross border EU/UK trade in the final product takes place. Establishing separate administrative and processing arrangements for production for domestic markets or neighbouring export markets (EU to UK or UK to EU) is likely to proof needlessly complicated given the diminishing commercial benefits to be gained from sourcing imported cane sugar. This needs to be seen against the background of the public health campaigns in Europe aimed at reducing the consumption of ‘hidden sugars’ in food and drink products in both the EU and UK. The absence of ‘diagonal cumulation’ provisions in the EU/UK trade agreement would appear to make it easier for food and drink producers to bring sugar sourcing closer to home, with this being depicted as more environmentally friendly and more secure given the disruption to global supply chains which the Covid-19 pandemic has generated in 2020. The decision of companies like Nestle to source beet sugar in the UK or EU for their chocolate products lines taken in June 2020 can be seen as ideally suited to the restrictive rules of origin which have merged from the 24 December EU/UK trade agreement, since this decision effectively side steps potential rules of origin complications across its high sugar content product range (see epamonitoring.net, ‘Nestlé Move Away from Cane Sugar Compounds Wider Sugar Sector Demand Trends’, 11 August 2020).
This needs to be seen against the background of the pre-existing EC projection of a 5.3% decline in EU27 sugar consumption between 2020 and 2030 (-900,000 tonnes, as consumption if projected to fall from 16.8 million tonnes to 15.9 million tonnes) (2). This is already seeing a reduction in import demand for ACP sugars. While some ACP sugar exporters have been diversifying their markets, others retain a worrying dependence on the UK and EU27 markets. This could see all but the largest and most efficient ACP sugar exporters being driven off the EU27 and UK market, as the economies of scale gained by serving a single EU28 market are lost. The departure of the UK is particularly important given the significance of the UK in the ACP sugar export trade to the EU28 (see annex). Against this background the new EU/UK rules of origin are likely to compound existing trends and require significant adjustments to some ACP sugar supply chains, at a time when the overall market for ACP sugar in the EU and UK is shrinking. There is some scope for addressing the challenges posed by the absence of ‘diagonal cumulation’ arrangements in the UK/EU trade agreement, via the bilateral trade agreements which ACP countries have with the UK and the EU. This would require the negotiation of the inclusion of specific rules of origin provisions, which allow ‘diagonal cumulation’ to take place in the sugar sector under specific defined circumstances, namely, where duty free-quota free access was enjoyed to both the EU and UK sugar markets by the country of origin concerned. While this is not an issue which the EU appears particularly open to at the present time. EU chief Brexit negotiator Michel Barnier has made it clear ‘the UK will not be able to rewrite structural changes that have led to checks on agricultural exports’ and that the agreement needed to be implemented not renegotiated. Against this background, ACP governments should consider taking this matter up in discussions first with the UK government in regard to the enhancement of their ‘rolled over’ trade arrangements, with the EU potentially being approached in due course. This would appear an appropriate sequencing since it was the UK which sought the inclusion of ‘diagonal cumulation’ provisions in the rules of origin included in the EU/UK, while the EU rejected this proposal. |
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) EC, EU Agricultural Outlook: For Markets, Income and Environment 2020-2030, December 2020
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/agricultural-outlook-2020-report_en.pdf
(3) Independent, Exports to EU to plunge by more than one-third because of Brexit trade deal, study warns’, 18 January 2021.
https://www.fpcfreshtalkdaily.co.uk/single-post/exports-to-eu-to-plunge-by-more-than-one-third-because-of-brexit-trade-deal-study-warns
Annex
Importance of the UK Market in ACP Sugar Exports (1701) to the EU28 – Tonnes 2019
| UK | EU28 | UK % EU28 | |
| ACP | |||
| Belize | 161,091 | 176,911 | 91.1% |
| Fiji | 57,000 | 125,429 | 45.4% |
| Guyana | 47,951 | 62,561 | 76.6% |
| Mauritius | 29,224 | 254,170 | 11.5% |
| Mozambique | 21,284 | 162,288 | 13.1% |
| Zambia | 11,590 | 11,590 | 100% |
| Jamaica | 6,600 | 6,600 | 100% |
| Malawi | 921 | 15,383 | 6% |
| Barbados | 300 | 300 | 100% |
| Zimbabwe | 0 | 24,902 | 0% |
| Eswatini | 0 | 279,472 | 0% |
| Sub-Total | 335,961 | 1,119,596 | 30.0% |