It took many years of patient negotiation, led by the UK, to transform the EU’s tariff-free zone into a genuine Single Market free of regulatory barriers. This blog explains why the post-Brexit reintroduction of Rules of Origin for UK imports and exports might cause problems, even if we achieve a zero-tariff agreement with the EU27.
Why are rules of origin needed? The short answer is that (assuming we leave the single market) such rules will be needed to show that the UK is not being used by third countries to gain low tariff access to the single market. Let’s assume that the EU27 want to impose higher tariffs on imports from China than on imports from the UK – which will post-Brexit hopefully be tariff-free. The EU27 are clearly not going to allow the UK to import Chinese goods, pack them in a different box, and sell them on to the EU as if they originate here. All UK exporters will therefore need to comply with the EU’s ‘Rules of Origin’ bureaucracy – and the EU will have to comply with ours.
(I am told that the rules go back at least as far as to a case involving Singer typewriters which were made in Japan, assembled in the UK & described as British.)
Here are the main potential problems if rules of origin need to be enforced in future in respect of trade between the UK and the EU:
Paperwork: Every exporter – however small – will have to work out whether their goods originate in the UK or abroad. They will therefore need to understand important concepts such as preferential and non-preferential origin, percentage rules, diagonal and full cumulation, and minimal processing. These are explained in the annex to this blog.
There are unlikely to be any SME exemptions – even if you are selling only via Etsy or eBay. UK origin may often be obvious, but what if you are a small scale exporter of handmade chocolates, say, or handicrafts? The cocoa or raw materials will most likely originate outside the UK – so do you have to declare non-UK origin and pay EU customs duties?
Customs delays could be much more serious. Many manufacturers work on a ‘just in time’ basis so as to avoid holding stocks which need to be stored and financed. Modern customs processes are pretty efficient but even spot checks to ensure compliance with rules of origin could devastate a production schedule. And who in Germany is going to buy a Christmas present from the UK if it not going to arrive quickly, especially when customs checks delay an already stressed Christmas postal system?
It must also be of some concern that a very large percentage of UK exports to the EU will go via Dover, Calais and other Channel ports which don’t currently have the infrastructure to process or spot-check a large number of lorries per day. So – if the UK exits the Single Market before the French authorities have either had the time or the inclination to upgrade the facilities at the French ports – do we end up with a queue of lorries half-way back to Birmingham within a week? There will presumably also be queues back towards Brussels if we don’t start building new facilities at Dover (or Calais?) pretty soon now – unless HMG is absolutely confident that we will not need them, maybe because our external tariffs are very low.
And what happens at the Irish/Northern Irish border? Somebody will need to build and operate customs facilities either here or at the Irish, French and Spanish ports.
This in turn leads to possible underhand non-tariff barriers. Protectionist pressure can lead to Customs authorities inspecting imports in considerable detail, opening random boxes and taking products apart to inspect components, as the French did in their famous use of Poitiers as a border port some years ago. We clearly hope to achieve an amicable divorce from the EU27, but who is to tell whether this friendship will last forever?
I wonder, too, whether there could be pressure to remove UK components from EU27 products so as to avoid those products being reclassified as non-EU because they contain UK components? An Airbus without British wings is unlikely, I guess, but less prominent examples might start to appear. Angela Merkel has already started encouraging German owned manufacturers to consider investing in Eastern Europe rather than the UK.
What does originating and non-originating mean? As the purpose of this blog is to draw attention to the consequences of leaving the Single Market, it might be helpful if I stress the importance of understanding the voluminous HMRC guidance in this area. This is summarised here. I do not expect many to read it – but you might like to draw it to the attention of anyone who is currently exporting or importing within the EU, but not outside it. They have around two years to get their heads around this stuff!
OECD studies of trade costs have indicated that trade facilitation measures such as simplified documentary requirements, automation of customs procedures, availability of advance customs rulings, and risk based clearance can deliver significant cost savings to businesses engaged in trade. I have seen estimates that the absence of such trade formalities can increase the average cost to trade by the equivalent of 10%+ of the value of the traded goods, although this figure seems high and has been challenged – see the first comment below. It is to be hoped, of course, that our eventual agreement with the EU will eventually enable our businesses to avoid some of these costs, but it will be impressive if we have negotiated many of them away by March 2019 … or perhaps for a good time after that.
This note should be read in conjunction with my previous blog on non-tariff barriers. As with that blog, I do not claim specific expertise in this area and would be glad to be corrected if I have misunderstood or exaggerated anything. Any corrections will be incorporated in this blog, and significant changes will be notified via Twitter.