Insight
Brexit and rules of origin: Why free trade agreements ≠ free trades by Sam Lowe 13 March 2018
Without an EU-UK customs union British exporters will face a new barrier to trade: rules of origin. No amount of positive thinking and innovative solutions can eliminate this problem. Where is the phone in your hand actually from? Designed in California, assembled in China, it says. But what about the components: the battery, the screen, the processor? Modern supply chains span continents – sometimes the globe – dipping in and out of countries as value is added along the way. The global factory, atomised among many locations, is mind-boggling to contemplate, it can also make it tricky to determine the provenance of any given product. And it throws up a specific challenge for post-Brexit, ‘free-trading’ Britain: preferential rules of origin. Because of rules of origin, even if the UK enters into a trade agreement with the EU, UK manufacturers embedded in pan-European supply chains are going to face new bureaucracy and costs, with long-run implications for their continued viability. What are preferential rules of origin? In brief, to benefit from the preferential tariff rates offered by a trade agreement, a UK exporter must prove that the product it is selling is actually from, or has had sufficient work done on it in the UK (subject to myriad terms and conditions). This is easy enough if the product is wholly obtained in the UK – for example, a cow – but it becomes more difficult if the product consists of inputs (components) sourced from all over. For example, in order to sell a car to Korea tariff-free under the EU-Korea trade deal, an EU car exporter must demonstrate that over 55 per cent of the value of the car was created within the EU. These preferential rules of origin exist to ensure that the product being sold under the terms of a free trade agreement is from one of the countries party to the agreement, and not, for example, from a Chinese firm exporting a widget to the EU via Vietnam (which will soon have a trade agreement in force with the EU) so as to avoid the EU tariffs normally levied on Chinese widgets. CER INSIGHT: Brexit and rules of origin: why free trade agreements ≠ free trade 13 March 2018
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