Neil Amner
- Director
Insights | Brexit
Percy Pig and post-Brexit Rules of Origin
26 January 2021
To benefit from the “no tariffs and no trade barriers” preferential treatment negotiated in the post-Brexit “deal” between the UK and the EU, goods being imported to the UK from the EU and vice versa need to satisfy the conditions set out in the UK-EU Trade and Cooperation Agreement.
One of the key tests is that the goods being imported must be of UK or EU “origin” in terms of the detailed provisions of the Agreement. This is significant because, as many businesses (Marks & Spencer in relation to Percy Pigs included) have already found, the devil really is in the detail… and the accompanying red tape.
If the goods you import from or export to the EU don’t meet those conditions, you’ll default to trading on WTO terms with the standard UK / EU tariffs becoming payable on your goods.
Need you bother?
It’s worth pausing to consider whether you need to concern yourself with the “no tariff” conditions.
Under the World Trade Organisation (WTO) rules, every WTO member nation has to publish a table listing the customs tariffs to be applied to goods imported to it. The UK’s Global Tariff Schedule can be found here; the EU’s here.
Under the EU Schedule approximately 52% of imports from countries without access to preferential tariffs under free trade agreements (FTAs) are duty free, while the corresponding figure for the UK Schedule is 70%. If the tariff for your product is zero or a low % of value, it may not be worth the time and effort of seeking to establish and certify that your product meets the Agreement’s rules of origin.
If your goods are subject to quota limits (e.g. tuna or aluminium products) or you are part of a larger supply chain (on which see below) you may nonetheless wish your goods’ origin to be established.
The concept of origin
Rules of origin seek to ensure that tariff concessions (also known as “trade preferences”) agreed between the parties to the FTA only benefit their domestic producers.
Determining origin is simple enough with “wholly obtained” products such as plants or vegetables grown and harvested here, or animals born and raised here – all of which will have “UK” origin under the Agreement.
The Annexes to the Agreement contain detailed product-specific rules for determining whether goods have UK or EU origin, including processed materials and products which contain raw materials or ingredients from many countries (e.g. confectionary), or multiple components from an extended supply chain (e.g. cars).
The significance of securing “originating” status is that any non-UK or non-EU materials or parts you have used will not be considered in the evaluation of the further product which your goods go into.
Product–Specific Rules
Although the concepts used in the Agreement are well established in WTO rules and used in other FTAs, the detail of the rules and how they apply to different sectors and products are very specific.
The following rules are used for determining whether products containing non-UK / EU content can be treated as having UK or EU origin:
- Value – non-domestic content must not exceed a stated threshold % of the export price of the product (e.g. 50% in the case of musical instruments);
- Weight – non-domestic content must not exceed a stated threshold % of the weight of the product. This rule is applied widely to agri-food categories (e.g. non-domestic sugars not to exceed 20% of dried fruit product weight);
- Change in tariff classification – the exported product must be of a different classification in the Schedule than the imported materials used to make it. Where the rule is used, mostly a change of category heading (e.g. cocoa beans to chocolate) is required; although a few instances have a more fundamental change of classification chapter requirement (e.g. rail tracks to, say, ship); and
- Specific production process – the non-domestic content has to have been subjected to a stated process. This rule is used extensively for textiles (e.g. requiring spinning or weaving of fibres).
Often the Annexes provide for more than one of these rules to apply as alternatives where meeting one or more will suffice (e.g. change of heading or under 50% of value in motorbikes) or in combination where all must be met (e.g. for white chocolate).
In some cases, the rules as set out will change over time. For example, non-domestic content can comprise 70% of the value of battery packs for electric cars until 31st December 2023 when the threshold reduces to 40% until 31st December 2026. Unless the Agreement is amended, that threshold then drops to nil.
Tolerances and Insufficient Production
The Agreement allows for “tolerances” of non-originating materials (meaning they can be ignored in applying the product specific rules); generally, 15% of weight of agri-food products or 10% of the value of other goods (except the separate textiles provisions).
On the other hand, the Agreement provides that some operations will not count for establishing origin, including breaking bulk, packaging, bottling and labelling as well as washing, shelling or screening. Preserving operations (e.g. freezing) as opposed to pickling or smoking to create character are also excluded.
Cumulation
Inputs and processing taking place in one of the parties can count towards the origin of the final product exported from the other party, under a concept known as “bilateral cumulation”.
This means that EU components used in manufacturing in the UK are to be treated as of UK origin. It also means that if a component supplied from the EU comprises EU and (say) Chinese parts such that it does not itself qualify as originating in the EU, a UK manufacturer using it can count the value-added in the EU to the intermediate product towards the domestic value calculation for the final product’s export.
This is significant for the automotive, aerospace, and other sectors which developed integrated supply chains across Europe before Brexit, as it makes it easier to secure tariff free movements now.
The Agreement could have gone further to allow third country (i.e. non-UK or non-EU) inputs to be recognised but did not do so. The UK has agreed wider “diagonal” cumulation in the UK-Japan FTA, with EU inputs counting towards origin.
For sectors reliant on non-EU inputs, the absence of third country origin inputs could lead to supply chain reconfiguration and a refocus of investment. Freeports (or “green ports” in Scottish Government terminology) once designated in the UK may provide an answer. Equally, in time, the Agreement rules could be amended if UK and EU origin rules in their respective FTAs with key third countries can be aligned.
Just passing through?
The Agreement acknowledges that the Common Transit Convention will apply to movements through each party’s territory which are destined for the other party’s or a third country’s territory.
This means that, for example, a container of goods from Holland can pass through the UK en-route to the Irish Republic without being subject to UK tariffs (preferential or otherwise) and without having its origin affected.
Percy Pig’s problem
The Agreement creates an issue where a consignment of EU product arrives at a centralised distribution facility in the UK where only minimal processing occurs before it is exported back to the EU. That problem is particularly acute where the insufficient production rule means that splitting bulk or repackaging is ignored for the purpose of establishing origin, so not even “cumulation” will help. As the original consignment has been split, the transit rule exemption does not apply either.
That is precisely the issue which M&S has faced with Percy Pig sweets; a product manufactured in the EU will, if re-imported to the EU from a UK based retailers’ UK logistics hub, not have obtained UK origin and so become subject to the EU general tariff.
If you would like more information on rules of origin or any other aspect of international trade law, please contact our Brexit and Business Resilience Lead, Neil Amner.
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