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Executive Summary

Negotiations in this area have a unique starting point, as UK and EU businesses do not currently pay tariffs or meet Rules of Origin (RoO) in order to trade with each other. This paves the way for an innovative and ambitious partnership.

While tariffs generate tax revenue and can benefit some domestic producers, in the long run these beneits are more than offset by losses to consumers, exporters, and impacts on domestic productivity. It is therefore in the interests of both the UK and EU to agree zero tariffs across all sectors, with no quantitative restrictions.

The UK wants to ensure that UK-EU RoO enable businesses in the UK, the EU, and current EU FTA partner countries to continue to operate, as much as possible, through their established value and supply chains, including continuing to make use of UK and EU content in their exports.

lntroduction

Tariffs are used by countries to restrict trade and protect domestic industries from overseas competition by increasing the price of imported goods relative to domestic goods. Tariffs can be compounded where products cross borders multiple times as part of value chains. This means that the effective tariffs for some processed products can rapidly increase beyond the stated tariff rates.

Tariff rate quotas (TRQs) also restrict trade by setting the amount of a good that can benefit from a preferential tariff rate. Outside of the quota amount the good will be subject to the full Most Favoured Nation (MFN) tariff which is thedefault tariff that is applied to countries with whom there is no tradeagreement.

RoO are used to determine the country of origin of a product for the purposes of international trade. There are two different types, preferential and non-preferential:

  1. Preferential rules apply when goods take advantage of a tariff preference (a tariff rate lower than the MFN rate, such as under an Free Trade Agreement).
  2. Non-preferential rules are used for a variety of commercial policy measures.

Non-preferential Roo are decided unilateraily and not within FTAs and regional trade regimes, therefore in this context we focus on preferential RoO.

Preferential RoO are used in FTAs to ensure that only goods that originate in these countries receive the preferential tariff rates specified by that FTA. RoO help to prevent tariff circumvention as well as help to preserve both sides, third country negotiating capital.

It is therefore important that RoO agreed between the UK and the EU support existing UK-EU supply chains allow for supply chain flexibility, are not unduly burdensome and are only in place where a risk of tariff circumvention genuinely exists.

Objectives

ln her Mansion House speech, the Prime Minister stated that trade at the UK-EU border should be as frictionless as possible. That means we don’t want to see the introduction of any tariffs or quotas.

ln line with this, the UK is seeking:

  1. To agree zero tariffs across all goods with no quantitative restrictions.
  2. To agree a preferential RoO arrangement that will enable the majority of goods traded bilaterally to qualify for preferential tariff treatment based on existing supply chains
  3. To agree a system for administering compliance with those RoO that places minimal burdens on UK and EU businesses
  4. Within this context, we want to maximise opportunities to trade with the rest of the world and to minimise negative impacts on developing economies

The UK’s preferred outcome for tariffs builds on existing EU precedents for zero tariffs in trade deals but is unprecedented in its scope, as no existing EU FTA achieves the elimination of tariffs across all sectors. We welcome the European Council’s negotiating guidelines which seek a zero tariff agreement.

For RoO we envisage a future UK-EU agreement which is based on a precedent framework, but which includes more liberal provisions to support UK and EU business.

To deliver this, the UK seeks an agreement that provides for:

  1. Full bilateral cumulation between the UK and the EU
  2. Diagonal cumulation with all current and future EU TA partners including developing country FTAs
  3. Content from the Least Development Countries to continue to cumulate in bilateral trade
  4. Minimal administrative burdens on UK and EU business, through the use of both importer and exporter-based certification systems, including access to the Registered Exporter system (REX), and with a de minimis provision which exempts goods from RoO requirements where the risk of tariff circumvention is negligible.

By agreeing these, UK and EU businesses would continue to operate through their current value and supply chains. Furthermore, UK businesses could continue to use EU content, and EU businesses could continue to use UK content. This will benefit both the UK and the EU, buy enabling businesses to continue to find the best value from their supply chains across Europe, taking advantage of innovation, seeking low costs, and avoiding costly interruptions to trade flows.

RoO negotiations will track discussions on the future UK-EU customs relationship particularly closely. The detail of the RoO agreement will vary depending on which customs model is implemented.

Under the Highly Streamlined Customs Arrangement in the UK and the EU would agree a RoO protocol. Any business wishing to claim a UK or EU preferential tariff would need to satisfy the UK-EU RoO requirements. This arrangement would allow exemptions for small traders on the island of Ireland as well as trade where the risk of tariff circumvention is negligible.

In the New Customs Partnership, businesses would not need to prove the origin of their goods in UK-EU trade, and the UK and EU would agree how to handle rules of origin issues if businesses choose to claim a tariff differential repayment on goods that are imported.

Precedents

No existing EU FTA meets the ask of the elimination of tariffs across all sectors. Tariff elimination depends on the industries of the particular countries in question, but tends to exclude sensitive agricultural products to protect those producers.

CETA provides a key precedent in terms of tariff elimination, with 98.6% of all Canadian tariff lines and 98.7% of all EU tariff lines fully eliminated (over a 7-year staging process). This includes 100% of lines on industrial and fisheries products. Exceptions remain for some sensitive agricultural products, outlined in a negative list. Exceptions include poultry meat, eggs and egg products (fully excluded), and beef, pork and sweetcorn (reduced within set quotas, but not eliminated).

A number of other agreements, such as EU-Singapore and EU-South Korea, eliminate tariff lines excluded in CETA, but exclude from elimination other tariff lines which are eliminated in CETA.

[A non-EU precedent for tariff-free trade exists with the North American Free Trade Agreement (NAFTA), where all tariffs and tariff rate quotas (TRQs) have been eliminated on US exports to Canada and Mexico].

The EU’s standard approach to RoO with its near neighbours is captured in the Regional Convention on pan-Euro-Mediterranean preferential rules of origin (PEM), the members of which include the EU, EFTA States, Turkey, the Western Balkans, and others. lt is based on a network of trade agreements with identical origin protocols. This makes it easier to source supplies from the PEM area, while still enjoying tariff preferences, by enabling diagonal cumulation. The available evidence suggests that these measures have facilitated trade among countries in the European neighbourhood.

[The EU also has several preferential agreements with RoO that are more trade liberal than those contained in PEM]. CETA, for example, combines generally more liberal RoO for various different products with full bilateral cumulation. lt also provides opportunities for diagonal cumulation, including – on a limited number of products – looking forward to a future trade deal between the EU and US without relying on identical RoO with the US. However, these provisions are not yet in operation.

There are many arrangements that reduce the administrative burden associated with RoO. For example, in addition to a variety of de minimis exemptions, the EU’s Registered Exporter (REX) system for preferential trade with Canada and some developing countries allows businesses to register for self-certification of origin using an online system, avoiding the need to fill out paper certification of origin. The approach to RoO administration in many US bilateral agreements involves no obligation to provide origin documentation, unless specifically requested.

However, all of these precedents impose RoO on preferential trade where there is no risk of tariff circumvention, including where MFN tariffs are very low. We are exploring options for limiting the use of RoO in these situations.

Areas of mutual interest

[On top of the benefits to EU and UK supply chains and consumers of maintaining tariff-free trade, the UK also contributes to EU demand as a major net importer of goods from other Member States.] The table below demonstrates that in many sectors where the EU applies consequential tariffs on non-preferential imports – based the bound tariff schedule it shares with the UK – the EU exports significantly more to the UK than it imports from the UK.

This table highlights the strong mutual interest which the UK and EU share in achieving an outcome which the imposition of tariff barriers on UK-EU trade. UK and EU businesses have highly integrated supply chains, such as in the automotives and chemicals industries, with parts and inputs crossing borders many times. Therefore, it is in the interests of both the UK and the EU to agree RoO that enable our businesses to continue to operate, as much as possible, through their established value and supply chains, including continuing to make use of UK and EU content in their exports.

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