The Brexit process has been regularly punctuated with niche phrases and jargon. During Phase 3, as the focus switches to trade, one reference that is likely to become familiar is ‘rules of origin’. So, what are they, how will they be affected by Brexit and what are the implications for businesses?
Rules of origin concern how exports are classified by customs authorities, depending on the nature and ‘economic nationality’ of the goods involved, and the identity of the importing country. These criteria determine any applicable duties and restrictions.
The UK has insisted that when it leaves the EU it will also leave the customs union and become a ‘third country’ thus triggering the use of rules of origin. Depending on whether a free trade agreement can be agreed between the EU and the UK, some goods may qualify for preferential status and have lower rates of duty imposed upon them or be completely tariff-free if they are predominantly manufactured in the UK.
Businesses exporting goods with preferential status from the UK to the EU will have to prove that they have originated from the UK. This procedure is designed to ensure that countries without trade deals will not be able to freely access the EU market and vice versa.
In order to protect its own industries from cheap imports, the UK or the EU could decide to place temporary tariffs on particular items, known as non-preferential goods. In such instances, the party imposing the tariff will need to differentiate the origin of the import so as not to apply it to another country.
Many goods are comprised of multiple components derived from multiple countries and, in such cases, the economic nationality is determined by the location of the ‘last substantial transformation.’
For goods exported by the UK to the EU that predominantly comprise of components manufactured in other countries, a possible solution known as ‘cumulation’ may be sought as part of a free trade agreement. This would allow the UK to include the percentage of components made in countries which also have free trade agreements with the EU to meet the ‘economic nationality’ threshold (usually around 50% of the final product). Checks on supply chain components and completed goods as they cross borders are also a likely consequence of the UK leaving the customs union.
Supply chains can be complex, potentially presenting a challenge to suppliers in proving the origin of goods and to authorities in attempting to assess any such evidence. In turn, this could make the process more time-consuming and mean that businesses may be exposed to increased administrative and compliance costs, potentially negating the benefits of any preferential status.
Given that businesses have not previously had to consider rules of origin under the customs union structure, extra support may need to be provided to them in order to cope with this Brexit side-effect.
Article published: 1st May 2018
