Future EU-UK trade relationship: Rules of origin

03-04-2020

The United Kingdom (UK) withdrew from the European Union (EU) on 1 February 2020, and moved into the agreed transition period, running until 31 December 2020. The EU and UK have launched negotiations towards a free trade agreement (FTA) that will shape their future trade relationship. Both parties expressed a preference for reducing 'trade frictions' to the extent possible, and rules of origin will play a role in that regard. Rules of origin (RoO) are provisions in FTAs that govern the conditions under which an imported good is recognised to 'originate' from the FTA partner country and becomes eligible for preferential trade. These conditions are restrictive – implying trade 'frictions' – to various degrees and designed product-by-product, following operation- and/or value creation-based rules. Importantly, the EU's RoO admit the 'cumulation' of preferential origin across other existing FTAs signed by both parties. As RoO thus create incentives for manufacturers to allocate production and sourcing across countries, they are an important trade instrument. The European Commission and European Parliament favour RoO provisions in the EU-UK FTA that are consistent with the EU template and protect the EU's interest; the UK government has declared that it is seeking 'appropriate and modern' RoO, providing for cumulation across common FTA partners. The EU and UK positions therefore converge in favour of unrestrictive RoO. Nevertheless, the geographical distance between the EU and UK is short and the resulting shipping costs low. In this context, should the UK unilaterally lower its production costs after the transition period – through, for instance, lower labour and environmental standards, and State aid – less restrictive RoO will provide manufacturers with incentives to increase the UK share in the production chain, penalising the EU. This explains the call in the Political Declaration for frictionless trade 'and' the alignment of standards. Indeed, protecting EU interests implies that RoO are likely to be restrictive, unless the UK commits to aligning standards.

The United Kingdom (UK) withdrew from the European Union (EU) on 1 February 2020, and moved into the agreed transition period, running until 31 December 2020. The EU and UK have launched negotiations towards a free trade agreement (FTA) that will shape their future trade relationship. Both parties expressed a preference for reducing 'trade frictions' to the extent possible, and rules of origin will play a role in that regard. Rules of origin (RoO) are provisions in FTAs that govern the conditions under which an imported good is recognised to 'originate' from the FTA partner country and becomes eligible for preferential trade. These conditions are restrictive – implying trade 'frictions' – to various degrees and designed product-by-product, following operation- and/or value creation-based rules. Importantly, the EU's RoO admit the 'cumulation' of preferential origin across other existing FTAs signed by both parties. As RoO thus create incentives for manufacturers to allocate production and sourcing across countries, they are an important trade instrument. The European Commission and European Parliament favour RoO provisions in the EU-UK FTA that are consistent with the EU template and protect the EU's interest; the UK government has declared that it is seeking 'appropriate and modern' RoO, providing for cumulation across common FTA partners. The EU and UK positions therefore converge in favour of unrestrictive RoO. Nevertheless, the geographical distance between the EU and UK is short and the resulting shipping costs low. In this context, should the UK unilaterally lower its production costs after the transition period – through, for instance, lower labour and environmental standards, and State aid – less restrictive RoO will provide manufacturers with incentives to increase the UK share in the production chain, penalising the EU. This explains the call in the Political Declaration for frictionless trade 'and' the alignment of standards. Indeed, protecting EU interests implies that RoO are likely to be restrictive, unless the UK commits to aligning standards.