EU Exit Perspectives: Rules of origin – what’s the big deal?

One of the myriad issues that have arisen since we left the EU single market are Rules of Origin, a complex set of requirements which have seen many food businesses caught off guard. This week, our senior policy analyst Tom Forshaw unpicks what the rules mean and why they matter.

Since 1 January, the full implications of leaving the single market have been realised for a number of businesses, both within and outside of agriculture and food industries. The results are mixed, and some businesses are faring better than others, likely dependant on a combination of trader readiness for the new rules, and also the level of complexity involved with differing consignments. One of the key issues that has come to the fore, and that has caught a number of businesses slightly off guard, including some big names such as M&S, are new rules of origin requirements.

Rules of origin chapters are fairly standard in free trade agreements but it was unknown precisely how they would play out in the context of the Trade and Cooperation Agreement (TCA), although there was a reasonable estimation that could be made. The implications of rules of origin are fairly widespread and are reportedly impacting a number of agricultural sectors.

So why does it matter?

Rules of origin (RoO), simply put, determine where a certain product is made and how much input from ‘third countries’ can be used in the making of that product. Rules of origin can often get quite complicated quite quickly and the more processed a product is, the more complex the rules of origin tend to be.

For products like fresh meat, such as lamb carcasses, the rules are quite simple. The lamb has to be solely sourced (known as wholly obtained) from the UK. For products like meat pies and ready meals, the rules become more complex and generally products have to undergo significant processing within the UK in order to qualify for preferential treatment, in addition to a number of terms and conditions about how much third party inputs can be used.

This is important for agriculture as it ensures, for both the UK and the EU, that third party suppliers aren’t unfairly accessing one market or another without paying the required tariffs. However, it can have implications for UK- and EU-based businesses using solely EU/UK supplies.

What are the issues arising and why may it implicate farmers?

The one key change for supply chains is that, regardless of whether a particular product adheres to rules or origin or not, exporters will now have to provide proof of origin when exporting to the EU. This means extra admin and extra paperwork that many businesses won’t have previously been used to. This will add cost to the product, and reduce the competitiveness of those products in relation to EU-27 members who won’t have to comply with rules of origin to supply the EU market.

Crucially however, the TCA allows for bilateral cumulation, which means that EU inputs can be treated as UK inputs for products made in the UK. However, there is a provision that those EU inputs undergo sufficient processing in the UK. In particular situations goods imported from the EU, which are due to be re-exported to the EU that haven’t undergone ‘sufficient processing’ are liable to pay tariffs when re-entering the EU.

For instance, if Mozzarella cheese is imported into the UK from EU, machine grated and sent back, that counts as ‘sufficient processing’. But if a product is imported into a UK distribution centre, repackaged and sent across the UK, Northern Ireland (NI) and Republic of Ireland, (ROI) as is very often the case, that product entering ROI would now be subject to full EU tariffs as repackaging is considered an insufficient process. This can impact farmers, as food supply chains around the EU are inextricably linked and an increase in cost for UK food businesses will likely squeeze supply chain margins which may well feedback through to the farm gate.

There is also no provision for diagonal cumulation within the TCA, which would allow goods from countries both the EU and UK had trade deals with to be classed as originating. This is important, as it means that goods en route to the UK that would be tariff free if sent directly, can now fall foul of RoO requirements if they are routed through the EU (and clear customs) and vice versa. For instance, fruit and vegetables sent from the African Continent to the UK, which would normally be free from tariffs, will be subject to the full UKGT if sent via the EU, as once landed in the EU they lose their originating status and become third country imports from a HMRC perspective.

This is an issue that AHDB will be monitoring and reporting on again in future blogs.

The future?

It’s important to note that RoO requirements work both ways, so EU exporters sending product to the UK also have to adhere to these new set of rules. Going forward, rules of origin are likely to become more important as the UK signs new trade deals with countries around the world. While certain products may be imported to the UK at a reduced tariffs, if the products are ultimately exported to the EU, they may not meet the specific rules of origin requirements under the TCA and therefore reduce the competitiveness of those products in the EU market.

Ultimately, these new rules will lead to a period of adjustment as supply chains get used to assessing the origins of products where previously it was much simpler, especially in value added products that have multiple inputs from a number of countries. It is likely that supply chains will adjust to accommodate these new requirements, which will likely make some supply chains no longer viable, but may also create some opportunities for domestic product.