Bar chart of Estimated % of foreign inputs in UK goods (2016) showing Rules of origin

What’s driving the EU on rules of origin?

Companies are increasingly asking themselves whether they will actually get to reap the benefits of any trade deal the EU strikes with Britain. 

Take the case of television manufacturers, which have warned EU chief negotiator Michel Barnier that they risk being clobbered with import duties when exporting to Britain because their screens come from Asia. 

Or that of the car sector, which said this month that the EU was taking an approach to the future-relationship negotiations that was “not in the long-term interests of the EU automotive industry”.

The source of concern in both cases is the same: the EU’s negotiating stance on the rules that will be used to determine whether goods are British or European, and so eligible for tariff-free trade. 

These so-called rules of origin are an eye-wateringly complex part of trade policy, but one with massive implications for business.

The rules set percentage thresholds for how much of a product must be locally made for it to qualify for preferential trading terms. In bilateral trade deals, “local” tends to mean coming from the territory of the two parties to the agreement, although sometimes a wider perimeter can be used.

Mr Barnier often talks about the “unprecedented” market access the EU is offering the UK through a trade deal, but the rules of origin are one of several topics where the EU is not willing to go as far as it did with other countries such as Canada and Japan. (There are many other examples of this in the negotiations: financial services co-operation, trust in veterinary standards, and access for services professionals, to name a few). 

Britain entered future-relationship talks with the EU seeking arrangements that would allow companies to count all EU and UK content as local, as well as content from other countries with which Britain and Brussels both had trade deals — such as Japan. But Brussels resisted including goods from other trade partners in the arrangement. 

One source of concern for the car sector has been the European Commission’s position on what factors should be taken into account when calculating whether a good meets the rules of origin.

Under the EU’s trade deals with Canada, Japan and Singapore, among others, importers can point to production processes and other inputs, as well as physical components, to show that enough of a good is locally made. 

The European Automobile Manufacturers’ Association — a group representing carmakers such as Daimler, Renault and Fiat — complained in a letter to the commission this month that Brussels was not taking such an open-minded approach in its talks with the UK. It called for any EU-UK trade deal to ensure that “all inputs and operations carried out in either the EU or the UK” could be taken into account in meeting the rules of origin.

So what is driving the EU position in the negotiations if it is not the concerns of its own companies? 

There’s always the possibility that some of this is negotiating tactics by the EU, but there are also deeper roots. Mr Barnier has repeatedly warned that Britain cannot be seen to reap the benefits of the single market from outside, arguing that such an outcome is not in the EU’s long-term political or economic interest. 

In a speech in June, he mentioned rules of origin specifically.

“Do we really want to take a risk with rules of origin that would allow the UK to become a manufacturing hub for the EU, by allowing it to assemble materials and goods sourced all over the world, and export them to the single market as British goods: tariff-and-quota-free?” he asked.

His overarching point was that this was not a normal bilateral trade negotiation. Instead, Mr Barnier has often described his efforts as an exercise in “damage limitation”. 

The question companies are asking is: “How much damage?” 

Peter Foster returns next week

Brexit in numbers

Two-thirds of Britons are unclear about how the UK’s relationship with the EU will change when the Brexit transition period ends, a survey found, as government concerns grow over the preparedness of UK businesses for the new era.

Polling by YouGov found a high level of ignorance or confusion on the post-Brexit regime, ranging from travelling within Europe to the UK’s immigration system as well as trade and customs rules. 

The survey of 1,778 participants found that in seven separate areas more than 60 per cent of those polled said they were “not at all clear” on how policies would change from January 1. Read more

Further reading

Robert Shrimsley: A Biden win would save Britain’s Tories from themselves
As Boris Johnson contemplates the possibility of a Joe Biden win and an unfriendly face in the Oval Office, the prime minister has reason for trepidation. The Democrat sees him as a British Donald Trump, and Brexit as a foolish endeavour. This view has been entrenched by the threat to breach the EU withdrawal agreement, a move that displays a Trumpian disregard for international deals and kicks against the Good Friday Agreement, to which Mr Biden is deeply attached. Read more