In my previous post, I discussed how preferential RoO are far from insurmountable. How significant are the costs associated with preferential RoO ? Open Europe assumed leaving the EU Customs Union would add 4% to cost of trade transactions (RoO costs & customs admin) leading to a 1% loss of GDP. Other studies suggest RoO adding less than 2% to transaction costs. One detailed study suggests RoO is a one-time cost that does not increase with increased volume of transactions.
A Customs Union seems a very blunt instrument to use, especially as trade with 3rd countries would still be subject to RoO. Are there other ways to address this issue ?
Blockchain technology has been touted as a way to simplify the administration & auditing of complex supply chains, hence minimising RoO administration costs. However, as promising as this technology may appear, we are probably a decade away from fulfilling this potential.
A recent paper examined preferential RoO for the Food & Drink Federation, a sector which makes particular use of global supply chains:
- Five case studies are examined, identifying challenges provided by use of non-local content in qualifying for tariff-free trade via preferential RoO.
- Both Pan-European Mediterranean (PEM) RoO and CETA RoO are compared for each case.
- The first case study is UK wholemeal bread, which uses flour milled in the UK from grains sourced from UK, US and Canada: PEM RoO require grains to be sourced entirely locally; CETA RoO limits non-local grains to 20% by weight of final product. Otherwise the EU tariff of 9% would be payable on exports to the EU.
Some context is required here:
- Bread is primarily produced and consumed locally: 85% of wheat used by UK flour millers is home-grown, with most of the imports from Canada; UK domestic sales amount to £3.5bn per annum ("Bakery & Snacks").
- By contrast, UK bread exports to the EU amounted to just £87.5m for the first 9 months of 2016, i.e. ~£117m per annum ("BakeryInfo").
- The UK runs a massive trade deficit with the EU across the whole food and drink sector (Food & Drink Federation statistics).
The Food & Drink Federation paper makes a number of suggestions for addressing these RoO issues, which could also apply to others sectors:
- Allow 10% non-originating product content without losing originating status (already provided in PEM RoO, under article 5.2 (a) );
- Full bi-lateral cumulation in EU-UK trade so that EU content counts as local in UK exports to EU and vice versa - almost certain to be part of an UK-EU FTA;
- Full diagonal cumulation with EU FTAs, e.g. so that UK, EU and Canada can count each other's content as local in trade between themselves;
- Exempt Least Developed Country (LDC) origin content in UK-EU trade so that LDC content counts as local
- Exempt products / content where EU & UK have same MFN tariffs. i.e. count products as local where there is no risk of trade diversion arising from different MFN tariffs - a form of halfway house to the UK governments customs partnership concept);
- Allow origin to be determined on final value OR weight criteria (protects products where local processing adds high vale to a premium product);
- Simplify RoO documentation.
"... the world trading system could do without preferential rules of origin. Preferences can be granted on the basis of most favoured nation (MFN) rules of origin anyway. Empirical literature suggests that, if the purpose for enacting preferential rules of origin was to facilitate commerce or promote inward investment, then their implementation has in practice defeated the purpose. Beneficiaries of preferences often prefer to trade using MFN rules of origin, rather than going though cumbersome procedures to show that they can ‘benefit’ from preferential rules. Thus, in the end, preferential rules of origin are neither necessary for preferences to be granted, nor have they facilitated trade or investment. Our policy recommendation for the negotiators of the Harmonized Working Programme (HWP), which aims to establish common rules of origin for all WTO members, is to also decide to outlaw preferential rules of origin. " Abstract from "The case for dropping preferential rules of origin" by Edwin Vermulst and P. MavroidisAdopting amended or simplified RoO for UK-EU trade will of course be entirely dependent on EU agreement, which may not be forthcoming. Is there perhaps a more simple and radical way to avoid preferential RoO ?
- IoD's contention is that (i) preferential RoO is a significant trade barrier (ii) tariffs on manufactured products and processed foods are in any case low - so low that they offer no leverage in securing trade agreements with third countries.
- This actually chimes with arguments for "Unilateral Free Trade" as proposed by Economists for Britain, who argue that we should ignore preferential FTAs and instead unilaterally lower tariffs - favouring UK consumer interests (including manufacturers sourcing inputs) over producer interests. Preferential RoO is removed as a consideration for all imports and exports. Attention can then be focused on removing regulatory / technical barriers to trade.
- Unilateral Free Trade offers a way to eliminate preferential RoO, without requiring EU agreement. If as IoD and others argue, tariffs are sufficiently low to not be an issue, why chase preferential trade deals - even with the EU ?
Partial Customs Union & Irish border
IoD claim that a partial Customs Union like Turkey's would help alleviate issues with the Irish land border. But Turkish experience does not support this argument, with long lorry queues at the Turkey-Bulgaria border. A number of issues arise:
- Basic agricultural goods are excluded from the Turkish Customs Union and require full customs clearance is still required for these goods. Meat / dairy constitutes a significant portion of UK / RoI trade.
- An A.TR movement form must be presented at the Turkey-EU border, declaring all customs formalities have already been completed.
- Turkey is outside the EU's VAT union, so import VAT is also payable at the border. Does the IOD intend for UK to remain in the EU's VAT union as well ? (meaning UK could not cancel the "tampon tax" or eliminate VAT on household energy bills for example).
The IoD's proposed "partial" Customs Union would not remove the need for a customs border.
The IoD's argument for "partial" Customs Union rests entirely on RoO. RoO does not provide an insurmountable barrier. RoO administrative costs are subject to debate, appear low and may be negligible beyond an initial cost.
A "partial" Customs Union would only avoid RoO for trade with the EU - any preferential trade with third countries (including other European countries such as EFTA members) would still require preferential RoO.
A "partial" Customs Union would not allow an independent UK trade policy, and will keep the UK tied into an EU-centric trade policy. This is counter to UK's strategic interests. The UK runs a huge trade deficit with the EU, whereas UK trade with the Rest of the World is broadly in balance. UK exports to the Rest of the World have grown and overtaken UK exports to the EU, mirroring the EU's diminishing share of global GDP.
There are other ways to mitigate the impact of RoO. The worst case is that some supply chains may be repatriated to the UK - given the huge trade deficit the UK has with the EU, this may be no bad thing.
Ironically, Unilateral Free Trade offers a way to eliminate preferential RoO, without requiring EU agreement. If as IoD and others argue, tariffs are sufficiently low to not to be an issue, why chase preferential trade deals - even with the EU ? Perhaps a hybrid solution could be adopted - eliminate tariffs where UK has no domestic industry to protect (e.g. tropical fruits !) and also for inputs to manufacturing (e.g. car parts would be zero-rated), but retain higher-rated EU tariffs for key sectors / finished products to use as leverage in trade agreements (e.g. retain 10% tariff on finished cars, ~40% tariffs for meat etc.). The UK could then seek to negotiate FTA's to eliminate these high rated tariffs using non-preferential / MFN RoO.
Posts in this series:
A Brexit Turkey part 2 - Are Rules of Origin insurmountable ?
A Brexit Turkey part 3 - Customs Union is not a Brexit solution
A Brexit Turkey part 3 - Customs Union is not a Brexit solution