What’s the problem?
There is growing concern amongst international trade experts that UK exporters aren’t aware that from 1st January 2022 they will be required to demonstrate compliance with the UK-EU rules of origin laid out in the Trade and Cooperation Agreement (TCA). Rules of origin specify what percentage of the raw materials or components of a product must have been obtained or manufactured in the UK or EU.
Why does it matter?
Products that meet the rules of origin can be sold tariff-free between the UK and EU under the terms of the TCA so any goods that fail to meet the criteria will cost more than similar items that do comply. It is becoming clear that during the one-year grace period that was granted for the duration of 2021, many companies were stating that their products met the rules of origin without checking whether they did or not.
Perhaps this is not surprising as the rules of origin section of the TCA is 50 pages long and a very detailed understanding of every part of the supply chain is needed to be certain that a product does comply. As a general rule 50% of the elements of a product need to be UK or EU originating however when you consider the number of components that make up a car for example, it is obvious why the calculation can be extremely complex.
Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, said rules of origin were “a particular area of concern” for the industry and urged authorities on both sides to show “flexibility” in January.
“Companies have been working tirelessly to better understand their origin footprint, but with thousands of components and complex and far-reaching supply structures the situation is challenging,” he added.
I don’t understand!
Many SMEs don’t have the resource or the expertise to properly investigate the original source of their materials and misunderstand the level of evidence required to qualify for zero-tariff sales. International trade experts have reported that during the grace period companies have simply stated on the commercial invoice that the goods are of UK origin even when they were originally imported from a third country. When the rules are strictly enforced next year, it is predicted that British exporters will face enforcement actions by EU customs authorities resulting in fines and unexpected duty liabilities.
Check your goods meet the rules of origin
- importers should establish whether their goods have met the rules for preferential tariff treatment
- exporters and manufacturers need to find rules which must be satisfied for their finished products which are going to be exported under preference, or for components or parts which are going to be used as materials for the manufacturing products which will then be exported under preference.
What are the rules?
- Origin conditions
- Wholly produced
- Sufficient transformation
- Conditions if processing done the UK
- Conditions if processing outside the UK or in a partner beneficiary country
- Lists of minimal processes
- General origin rules
- Exceptions to the rules
The rules are based on the origin criteria. They will lead you to identify if the products are wholly obtained or substantially/sufficiently transformed. Substantial transformation can be identified through three different methods: value added (% of ex works price of the final product), change in tariff classification and qualifying manufacturing processes (specified lists).
A recent survey by the Federation of Small Businesses found that one in four SMEs have stopped exporting due to increased costs and delays and that major new paperwork challenges such as this will discourage many more. There is also concern in the industry that delays delivering to EU customers from the UK due to investigations will result in EU importers recalibrating their supply chains and sourcing products within the EU.
In the febrile atmosphere that currently exists between the UK and EU over French fishing rights and the Northern Ireland Protocol there is a danger that EU strict enforcement of the rules could become a way of imposing tariffs by the back door.
Even The Netherlands, who the UK still has a friendly relationship with, plans to enforce the rules strictly and carry out random checks. However daunting the prospect, this is something UK manufacturers and exporters need to get to grips with as soon as possible.