Friday, 31 Jul 2020
New rules: A Toyota factory parking in Europe. The threat posed by post-Brexit rules to the UK operations of automakers such as Toyota could be existential. — AFP
LONDON: Specac Ltd makes laboratory equipment in the United Kingdom, selling more than 1,000 products worldwide and earning £1.8mil (US$2.3mil) exporting them tariff-free to the European Union (EU) each year.
Yet from January, Specac will be among the 120,000 exporters who have to prove the origin of their goods to qualify for duty-free access under any potential post-Brexit free-trade agreement. It’s a bureaucratic headache that’s about to menace £150bil worth of goods traded with the EU.
“It’s a hell of a lot of work, ” said David Smith, managing director at Specac, which has had staff on furlough due to the coronavirus pandemic. “It’s a huge burden to dig into your supply chain and find the ultimate source.”
The end of Britain’s customs union with the EU means UK firms will have to comply with “rules of origin” in order to trade with nations in the bloc once the Brexit transition period ends on Dec 31. Many have never had to identify the share of their exports that’s produced domestically, and if they can’t do it they’ll have to pay tariffs on goods shopped to the EU.
In addition to a new mountain of paperwork, a certificate of origin costs about £30 per shipment, according to the UK Trade Policy Observatory at the University of Sussex. Companies that aren’t used to the burden of satisfying the requirements may decide not to trade with the EU at all, or find that compliance is so much hassle that they decide to just pay the tariff instead, Smith said.
The rules of origin requirement applies even if the UK and EU strike a free-trade accord this year, similar to the need to file customs declarations for the first time in decades (at a cost of about £13bil a year). Proving origin is a feature of the international trade system designed to prevent products entering a country without paying the appropriate customs duties.
And it’s not just smaller businesses who face this new challenge. The threat posed by post-Brexit rules of origin restrictions to UK operations of automakers such as Nissan Motor Co and Toyota Motor Corp, for example, which collectively employ about 10,000 people, could be existential.
That’s because trade agreements usually require about 55% of a good to be produced locally in order to qualify for zero-tariff treatment. Yet only about 20%-25% of the overall value of cars produced in the UK originates domestically, according to research group UK in a Changing Europe.
True, carmakers are accustomed to handling rules of origin paperwork for international trade. But they would be hit by tariffs if the UK and EU don’t strike a deal that counts the inputs from their continent-spanning supply chains as “local” to Britain, as they do under the status quo.
The final agreement “will make the difference between continuing to make cars in the UK or being left with a very big empty shed, ” said Nigel Driffield, a professor of strategy and international business at Warwick Business School. “Rules of origin are going to be a massive issue.”
Even the famous Mini Cooper would be in the firing line. Only about 40% of the value of the parts in the iconic vehicle, made by BMW AG at its factory near Oxford, are produced in the UK.
Given that it would be virtually impossible for Mini to replace European-made parts with UK-made ones by Jan 1, models exported from Britain would be on track to face a 10% tariff without an agreement on rules of origin.
“Price increases would be inevitable, with potential for reduced demand and therefore reduced production, ” Graham Biggs, a spokesman for BMW, said in an email.
Hopes hang on the UK and EU coming to an agreement on rules of origin in their ongoing trade talks. Britain has made an ambitious proposal that counts inputs as local provided they originate from the bloc or any country with which the UK or EU has a trade agreement.
The EU’s stance is more modest, and seeks to build on the existing approach it has with countries outside the bloc. Negotiators may propose that Britain joins an agreement it has with several other nearby countries, including Turkey, Switzerland and Norway, known as the PEM convention, where inputs are recognised as local between all the parties, according to Sam Lowe, a senior research fellow at the Center for European Reform. Joining would address some of the concerns of UK businesses, Lowe said.
“The dream scenario is that the EU accepts the UK’s proposal, but that seems unlikely, ” he said.
“The UK does have a legitimate issue: it’s going to be quite difficult to sell an FTA, or even to make compromises to achieve an FTA, if zero-tariff trade is not going to be available to lots of its exporters.”
Until white smoke emerges from the talks – which could extend into October with no guarantees of a deal – companies are left not knowing whether they’ll have to reorganise their supply chains to be able to export to the EU tariff-free post-Brexit.
“Carmakers only change suppliers when you change a model, so it can’t happen overnight, ” said Mike Hawes, chief executive officer of the Society of Motor Manufacturers and Traders.
“Calculating rules of origin for a car with over 15,000 parts is a complex exercise that can take years to determine.”
A recent survey of the group’s members found the lack of clarity on trading conditions from Jan 1 is severely hampering nine in 10 companies’ ability to prepare for the end of the transition period. — Bloomberg
