Adam Bennett and Professor David Vines – Written evidence FUU0006

 

With regard to questions 1, 4, and 5, put by the committee, we have the following comments:

1.              As opposed to other possible outcomes, what does the presence of an EU-UK free trade agreement mean for trade in goods?

The UK has left the single market and customs union, and entered into a FTA with the EU. By leaving the EU single market, and entering this particular FTA, the UK has garnered a degree of independence regarding (a) its ability to diverge in its regulatory environment, and (b) an ability to strike independent trade deals with other countries. Although the UK retains the privilege of tariff-free trade with its former partner, the EU, it has nevertheless acquired a plethora of costly non-tariff barriers to trade.

Foremost among these barriers has been the paperwork needed to verify regulatory and product compliance for exports from the UK which are destined to become imports into the EU. In addition, unlike when the UK was a member of the EU, the UK is now subject to rules-of-origin limits on non-EU/UK intermediate inputs, which results in the application of tariffs for those goods shipped to the EU which do not satisfy these limits. There are also a number of other unexpected – and significant – barriers which we identify below.

A Partnership Council has been established. This Partnership Council has been given the role of monitoring regulatory and product divergence between the two parties; either party can complain that the level playing-field (a term defined below) has been compromised by the other party. Each party, subject to review by the Partnership Council, is entitled to respond by raising tariffs in a manner proportional to the task of protecting the aggrieved industries.

The alternative to an FTA (apart from staying in the EU) would have been either a customs union (which would have removed the said freedoms (a) and (b)), or trading purely on WTO terms. Should the UK diverge from the EU on its relevant regulatory architecture sufficient to trigger a widespread tariff response by the EU, there will, in practice, be little observable difference between the residual FTA and trading on WTO terms. The threat of this happening is likely to circumscribe the extent to which the UK will want to take advantage of its freedom to diverge.

In what follows we aim to demonstrate what might be done to mitigate the effects of each of the difficulties which we identify.

4.              What, if any, challenges arise because of those provisions? How should these challenges be addressed and what support is needed, if any?

Although the TCA allows for tariff-free trade for goods, subject to their complying with the maximum foreign rules-of-origin limit, this has not enabled frictionless trade to continue. A variety of non-tariff barriers to trade have arisen. We propose a way to remove very many of these, within the framework of the existing TCA.

Foremost among these barriers have been the paperwork needed to verify regulatory and product compliance for exports from the UK which are destined to become imports into the EU. Delays caused by this complicated paperwork have so far proven much greater than anyone expected. Many people seem to have imagined that avoiding a “no-deal” outcome – and in particular preventing the imposition of tariffs - was all that was required to ensure that trade could continue smoothly. But this has not proved to be the case. Difficulties have been especially problematic for perishable goods like food and, in particular, fish. The costs associated with these various impediments quite possibly exceed the cost of tariffs that would have applied had the FTA not been in place.

In our view, there is a potential solution to these problems relating to regulatory and product compliance.

Our potential solution arises because the TCA is an unusual trade deal in that involves two parties who were already fully aligned on regulations and product description. As a result, most of the new paperwork is unnecessary. If it was not needed on December 31, it should not have been needed on January 1, when nothing regarding the products themselves had changed. Our proposal is to borrow the concept of “equivalence”, which has been much discussed in relation to financial services, but should be of immediate use in helping to solve the problems of goods trade. Given that nothing has (yet) changed regarding the regulatory framework for goods production on either side of the EU/UK border, then (apart from the question of rules-of-origin which we discuss below), in all other respects UK goods could be held to be equivalent to EU goods and thereby automatically compliant with the relevant import documentation. This equivalence (which would not normally apply in the case of any other country applying to join a FTA with the EU) should obviate the need of most of the paperwork.

Such equivalence would need to be subject to review, should either party have grounds for querying it. Such review processes could be carried out by the Partnership Council, the first of many important roles which we believe will emerge for that body. If appropriate, equivalence for some goods would be withdrawn, which would then subject those particular goods to documentary scrutiny.

As time goes forward, regulatory standards, and product-compliance standards, will change in the EU for particular products. It could become the task of the Partnership Council to ensure that the UK maintains equivalence, in both regulatory requirements and product standards, to ensure that equivalence is sustained. This could become the means of ensuring that, once onerous paperwork has been removed in relation to trade in a wide range of goods, the burdens of such paperwork do not gradually grow again like topsy.

5.              What do you identify as the most important issues that the TCA leaves for further negotiation? What would represent a best-case resolution of these issues?

Although the FTA supposedly allows for tariff-free trade for goods, this has not enabled frictionless trade to continue for another reason: the imposition of tariffs because of rules-of-origin violations. A second major task will therefore be to find a feasible workaround to prevent exports from the UK to the EU, and exports from the EU to the UK, facing tariffs for rules-of-origin reasons. We recommend a workaround based on payment of TCA partner tariffs on imported intermediate inputs in lieu of the rules of origin limitation.

Rules of origin problems have arisen because the EU negotiators of the TCA were determined to ensure the integrity of the EU’s single market, or what has become known as the “level playing-field”. As with all FTAs around the world, level-playing-field type considerations require the use of “rules-of-origin” to prevent partners to the FTA from accessing “foreign” (as opposed to UK/EU) intermediate inputs and raw materials so as to gain an unfair price advantage, if that party has little or no tariffs on that input compared with the other party. This concern by the EU in the TCA negotiations became widely known as a concern about the UK becoming “Singapore-on-Thames”. Rules of origin are designed to prevent such an outcome: they limit the amount of such foreign inputs that can be included in a product for it to be eligible for tariff-free trade with the other party.

However, rules of origin can also be used for pure protection (beyond level-playing-field considerations) aimed at preventing the other party from encroaching on a favoured domestic industry. Examples of the latter in the TCA include the provision that a good, e.g., wholly produced in the EU, ceases to be an input which is eligible in the UK for rules of origin exemption the moment it is exported from the EU—unless it is substantially worked in the partner country. Goods that might, for example, cross the UK to Ireland en route from, say, France, appear to fall foul of this provision. Thus for example, tomatoes imported in bulk to the UK in a lorry and then repacked in a different lorry along with lettuces and strawberries for a particular supermarket in Ireland now face a tariff at the UK-Irish border; this problem is currently avoided only if a lorry full of tomatoes goes straight to Ireland without repacking. There are many other examples of problems which are arising because supply chains cross the EU/UK border, backwards and forwards. It makes little sense to levy tariffs in these circumstances from a level-playing field consideration. It is purely protectionist to do this. In our view, any good that would satisfy the rules-of-origin requirement the moment it is exported from party A to party B, should continue to satisfy these requirements if it is exported back to A again. Anything less than this does nothing other than add protectionist sand-in-the-wheels barriers that could add considerably to the cost of trade between the two parties for no purpose other than bilateral protectionism.[1]

As a solution to the rules of origin problem, we propose the following arrangement.[2] Under our scheme importers of “foreign” intermediate inputs intended to be incorporated into a final product to be exported to the partner country should pay the duty applicable by that partner country at the point of import, and that duty should then be remitted to the partner country. Under such a scheme, the level playing field is preserved—there is no way that the producer of the good can access intermediate inputs more cheaply than comparable producers in the partner country. For goods which this rule is not accepted as a substitute for rules of origin, it would then be transparent that the purpose of these rules of origin is bilateral protectionism, not level-playing-field considerations.

It is, of course, too late now to incorporate our idea into the EU/FTA, as it stands. However, we see it as an important area for future negotiation. Any scheme of the kind which we propose could be managed by the Partnership Council enhancing the role which that body might play in strengthening future cooperation between the UK and the EU. This scheme should also be borne in mind should rules-of-origin be a problematic issue in FTAs that the UK might aim to enter into with other countries, in particular with the CPTPP.

Another unexpected problem that has arisen since January 1, 2021, concerns the application of steel quotas relevant for Northern Ireland (NI). Prior to Brexit the UK had established its own UK-wide steel quotas for imports from abroad (including from the EU post-Brexit), preparatory to departure from the EU, with the aim of protecting its steel industry from (e.g., Chinese) dumping in the same way as the EU did to protect theirs. Then after Brexit, the question arose: what to do about NI? We don’t think that either side had thought carefully about what these quota arrangements would mean for NI steel imports. Under the Brexit agreement, NI is treated as being effectively still part of the EU. Because steel sent from Great Britain (GB) into NI is considered “at risk” of leakage into the EU (via the Republic of Ireland), they are subject to the UK steel quota set by the EU. This means, of course, that those shipments could run up against a binding EU total quota limit for UK originating steel. This problem is the greater because the UK share of the EU quota may have been determined on “normal” UK shipments to the (rest of the) EU, which did not include NI. So the quota is now (including NI) possibly too small. As soon as the total EU quota is used up, importers will be expected to pay the 25 percent levy on further imports. Unfortunately, the system designed to monitor shipments in relation to this quota is not working very well. So nobody knows how close they are to using up the EU-wide quota for UK steel. To help ease this problem, the UK has announced that even though they might be entitled to charge their own steel quota tariff (and tariff for shipments that exceed this quota) for EU shipments to NI (because this quota applies to EU shipments to the UK as a whole), they will waive this right pending a long term solution to the problem. In the meantime, we would suggest the British government encourage UK steel producers to prioritise shipments to NI over full members of the EU in order to prevent NI factories from being hit by punitive tariffs on UK sourced steel. If the EU’s quota for UK steel was calculated excluding steel imported from the UK, then the UK government should ask the EU to adjust (correct) upwards the quota so that “normal” shipments from GB to NI would not be penalized.

6

 


[1] Other transport problems have also emerged. As a result of the bans on tariff –free transhipment identified above, truckers from the EU have shown themselves unwilling to travel to the UK make the round trip. This problem has been compounded by restrictions resulting from the ongoing pandemic.

[2] Further details of this proposal are available from either of the authors.