5The terms of rolled-over trade agreements
Introduction
45.In order to achieve the Government’s policy objective of a technical replication of what the UK has today in terms of free trade agreements, witnesses told us that some substantive amendments will be necessary. These amendments will need to be agreed with the third countries involved, and in most cases, the EU. The Explanatory Notes to the Trade Bill, which was introduced on 7 November 2017 (see Chapter 7 below), stressed that:68
It may […] be necessary to substantively amend the text of the previous EU agreements, so that the new agreements can work in a UK legal context. For these reasons, the Government has avoided describing new UK‐third country agreements as ‘equivalent to’, ‘replications’, or ‘copies’ of EU‐third country agreements.
46.In addition, there are some aspects of the EU’s FTAs which may prove politically contentious in the UK and may require amendment. Finally, there are some aspects of the EU’s FTAs that may affect future trade policy, and that we simply draw to the Government’s attention. This chapter addresses each category of amendment in turn.
Technical amendments
Tariff Rate Quotas
47.Some FTAs include arrangements for Tariff Rate Quotas (TRQs). These relate to allowing imports of fixed quantities of a product at a lower tariff; once the quota is filled, a higher tariff is applied on any additional imports. They almost invariably relate to sensitive agricultural products.
48.In the Secretary of State’s evidence to our predecessor committee in February 2017, he acknowledged that disaggregation of quotas might be problematic—but saw this as “a secondary complication […] which is for the EU 27”, rather than the UK.69
49.Philippe De Baere, a trade lawyer at the firm Van Bael & Bellis, told us that the EU might have an “incentive” to renegotiate the quotas in its FTAs with third parties once the UK left the EU to avoid having “to absorb the totality of the quota”, but that this “may well” prompt requests for concessions on other matters from the FTA partner concerned.70
50.Dr Fox mentioned the matter again when he appeared before us on 1 November 2017:71
Of course there are issues. […] But remember it is a transitional adoption, with an implicit understanding that this agreement is to ensure market stability at the point we leave the European Union, but with a view to being able to develop a more bespoke agreement with those countries in the future.
51.Disaggregating UK TRQs on agricultural products from those of the EU is also an issue in relation to establishing separate UK schedules of concessions and commitments at the WTO.72 In that context, the UK and EU have reached an agreement on an approach for sharing out the TRQs—splitting the existing quotas by reference to three years of data on quota consumption. However, several major agricultural exporters (namely Canada, the USA, Argentina, Brazil, New Zealand, Thailand and Uruguay) have objected to this,73 stating in a joint letter to the WTO that they “cannot accept such an agreement”, since it entails a reduction in EU quotas.74 Mr De Baere told us that this “precedent is not very encouraging”, as “[c]ountries will try to maximise the benefits”.75
52.The National Farmers’ Union told us that they are “particularly concerned about the protection of our sensitive sectors and therefore how full liberalisation and tariff rate quotas (TRQs) are going to be ‘inherited’”76 while others expressed concern about maintaining exports or imports under current preferential quotas with third countries.77
53.The Government should work with the EU to arrive at a consistent solution to the problem of dividing Tariff Rate Quotas in rolled-over agreements, just as it already has in respect of establishing separate UK schedules at the World Trade Organization. The Government should set out its approach to overcoming the objections made to its TRQ proposals at the WTO.
Rules of origin and cumulation
54.FTAs entail “rules of origin”, whereby the originating status of goods must be proved in order for these to qualify for preferential treatment in respect of customs duties.78 For goods that are not “wholly obtained or produced” in a given territory, these may involve requirements specifying a percentage of local / domestic content (or other “substantial transformation/sufficient working or processing” of raw materials or components from elsewhere).79
55.The application of originating status can be widened by means of provisions for “cumulation”—so that components (inputs) or working from outside a country can be treated as originating there for the purposes of applying rules of origin. For example, if a car were manufactured in the UK using parts from elsewhere in the EU, under cumulation provisions these parts could be counted towards whatever domestic (UK) content threshold might apply in a UK–third country FTA.
56.Mike Hawes, from the Society of Motor Manufacturers and Traders, told us that “most free trade agreements tend to have a minimum [domestic content] threshold of 55% to 60%” for automotive goods. Therefore, merely copying and pasting the EU-South Korea FTA “would not benefit us because we would not qualify for the preferential trading arrangements […] unless you could agree cumulation with the European content, which is what we currently enjoy”.80
Diagonal cumulation
57.One solution to this problem suggested by several witnesses and written submissions in the course of our inquiry was to create “diagonal” (EU-UK-third country) cumulation arrangements. This would allow inputs (materials) from any of the three parties concerned (the EU, the UK or a third country) to count as originating content.81
58.The UK currently, as an EU member, benefits from cumulation arrangements under the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin (the “PEM Convention”), to which the EU is a Contracting Party. All signatories to the PEM Convention have agreed to replace rules of origin in the trade agreements between each other with the rules of origin laid down in the PEM Convention.
59.These rules allow for diagonal cumulation between all signatories to the agreement (provided there are trade agreements in place between all the Contracting Parties concerned). Originating inputs from each country are thus considered to be originating inputs in the other countries, making it easier for supply chains to be dispersed across the cumulation zone.
60.We heard in evidence from Professor Dür that the advantages of the PEM Convention depend on having “a considerable number of free trade agreements” as it “only then […] kicks in. That is of course only going to be the case for the UK once it has a considerable number of trade agreements with the other signatories of the PEM Convention”.82
61.The UK Trade Policy Observatory told us “that the EU can be quite difficult in agreeing to diagonal cumulation” and “typically only” does so “if ALL the countries involved […] have free trade agreements among themselves, and all apply the EU’s rules of origin” as embodied in the PEM Convention. As a result, they also propose an alternative option of the UK and the EU agreeing in their FTA to only apply rules of origin “where external tariffs differ” as well as a “preferential partner” principle where “any preferential partner (e.g. the UK) can use the intermediate inputs of any other preferential partner (e.g. Korea), providing that for each intermediate input the [rule of origin] applicable to the country supplying the intermediate is used”.83
62.The EU currently applies “full cumulation” to trade within the EEA; and between the EU and Algeria, Morocco and Tunisia.84
Government’s approach
63.Speaking to us on 1 November 2017, Mr Falconer of DIT told us that “we need to make sure that when it comes to a rule of origin, the rule of origin is as close to what would reasonably be expected for a single arrangement between us and the third country as opposed to an EU one”.85 This suggests that the UK Government is seeking to amend the origin threshold in rolled-over FTAs rather than seeking to construct UK-EU-third country cumulation zones.
64.Asked to what extent he thought the EU was prepared to enter into a diagonal cumulation agreement in respect of rolled-over FTAs, Lord Price replied: “That would be one for DExEU [the Department for Exiting the EU]. That would be a conversation that they have. I was not involved in that conversation.”86
65.The Minister of State for Trade Policy also told us that membership of the PEM Convention “will be a matter for the negotiation with the European Union”.87
66.Rules of origin provisions in treaties between the EU and third countries cannot simply be copied and pasted. In order to maintain the status quo, the Government will need to negotiate either a reduced threshold for domestic content or “diagonal cumulation” arrangements. In either case the consent of the third country will be necessary. It is difficult to imagine a scenario in which the third country would not seek concessions from the UK in return.
67.The Government should consider seeking an agreement on “diagonal cumulation” in third-country agreements with the EU and the third country concerned in each case. While the trilateral method of negotiating may in many cases be aimed pragmatically at helping the EU and UK cumulate content for the purposes of rules of origin in agreements during a transitional period, it must not be undertaken at the expense of making bilateral agreements in case there ends up being a problem trilaterally. It makes sense for the UK to organise with the third countries to count EU inputs to UK exports to those countries as cumulated, and we would hope that if pursued in the right spirit the third countries and the EU would be amenable to treating UK input content of EU exports to those countries as cumulated also, at least during the implementation period of the UK-EU agreement.
68.The Government should seek UK accession to the PEM Convention after Brexit, in order to facilitate diagonal cumulation. It should also investigate the option of seeking full cumulation arrangements with the EU / EEA (at least on a temporary basis). DIT must show that it is liaising closely with DExEU on this matter. The Government should publish as a matter of urgency those sectors where it expects rules of origin issues could most significantly harm UK exporters and prevent industries benefitting from tariff-free trade.
Roll-over and the Northern Ireland-Republic of Ireland border
69.In December 2017 the UK and the EU signed a joint report on “progress during phase 1 of negotiations under Article 50 TEU [Treaty on European Union] on the United Kingdom’s orderly withdrawal from the European Union”. In respect of the island of Ireland, the UK gave a commitment to:88
[i]n the absence of agreed solutions […] maintain full alignment with those rules of the Internal Market and Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 [Good Friday] Agreement.
70.Professor Jim Rollo and Dr Peter Holmes of the UK Trade Policy Observatory at the University of Sussex have argued that:89
Art 49 of the joint statement [on Phase 1 of the Brexit talks] says the UK is committed to having no “hard border” [on the island of Ireland] […] To have no customs duties to collect would seem to imply a fully comprehensive customs union (as now) with the EU covering all products including agriculture, and with a totally comprehensive common commercial policy for all partners so that all EU FTAs are replicated for the UK and adjusted to include provisions for diagonal cumulation with the UK.
71.Dr Guillaume van der Loo told us of the situation of Turkey, which faced “trade deflection via the European Union” as a result of its customs arrangement with the EU. Third countries were sometimes “a bit reluctant” to sign matching FTAs with Turkey after they had done so with the EU, as they could simply route their exports to Turkey via the EU and still benefit from preferential treatment.90 To deal with such “trade deflection”, Turkey has introduced some origin controls to govern certain trade with the EU.91
72.It may be more difficult for the UK to keep the commitments that it has made in Phase 1 of the Brexit talks with regard to what will be the EU-UK border on the island of Ireland if it does not roll over third-party agreements as they currently apply to the UK. The Government should, therefore, take account of the implications of these Phase 1 Brexit commitments for the roll-over of third-party trade agreements. The UK’s continued participation in a customs union and the single market with the EU would be the approach least likely to risk a return to a hard border between Northern Ireland and the Republic of Ireland.
Agreements with Turkey and the EFTA States
73.In evidence to a House of Lords committee in February 2017, Lord Price indicated that rolling over EU FTAs was not necessarily a simple matter, since “[i]t is about the extent to which they are bound into EU legislation and regulation.”92 In the case of the EU’s agreements with Turkey, the EFTA states and European “micro-states”, these are predicated to a large extent upon acceptance of the Union’s regulatory and customs regimes. Ranked in diminishing order of the regulatory convergence involved, they are:
- The EEA (involving the EU and three EFTA states—Norway, Iceland and Liechtenstein), which provides access to the EU Single Market for industrial goods and services on terms close to those of EU members (as well as preferential access for agricultural goods). In exchange, the non-EU EEA members adhere to a large proportion of the acquis communautaire (the body of EU law), including to the free movement of people.93
- The bilateral agreements with Switzerland, which grant that country access to the EU Single Market for industrial goods on terms comparable to those of EU members. There is only comparatively limited access in services and some preferential access for agricultural goods. In exchange, Switzerland accepts the free movement of people and approximates significant proportions of the acquis.94
- The AA with Turkey, which features a partial customs union, enabling industrial goods to circulate freely between the EU and Turkey, and offering preferential treatment for unprocessed agricultural products.95 In exchange, Turkey approximates the EU Single Market acquis in certain respects.
- The partial customs unions with the European “micro-states” of Andorra and San Marino. These cover all goods bar coal and steel (San Marino) and agriculture (Andorra, although such goods are exempt from duties when imported into the EU) and feature additional provisions / agreements that mandate the adoption of the EU’s food, plant and animal health acquis.96
74.The Minister of State for Trade Policy, Mr Hands, was unable to comment on roll-over in respect of this group of agreements, since UK “agreements with the EEA, Switzerland, Turkey and the European microstates […] are the responsibility of DExEU”.97 As we have noted (see Chapter 3 above), Dr Fox had seemed to indicate to us that rolling over the EU-Switzerland agreements was a priority for his own Department.98
75.The Government should consider the implications of the prospective UK-EU trade agreement for the rolling over of agreements with the EFTA states and Turkey, which currently entail close adherence to the EU’s regulatory and customs regime. It should also consider the degree to which the rolled-over agreements might also entail negotiations and commitments on the free movement of people in respect of the EFTA states.
Other implications of rolled-over agreements
76.The terms of rolled-over agreements have a range of potential implications that go well beyond considerations relating simply to ensuring the continuity of market access terms in the short term.
Most Favoured Nation clauses and trade in services
77.The EU’s trade agreements largely deal with services on a relatively limited basis, only tackling specific market access restrictions. However, recent ones (such as those with Canada and South Korea) feature an “MFN clause” regarding these commitments. We heard and received evidence that such a clause provides that, where a party to an agreement subsequently offers better terms to another third country, the existing agreement must be revised to incorporate those same terms.99 This is subject to certain exceptions. Consequently, were the agreements concerned to be rolled over with these clauses intact, the UK would be likewise bound.
78.Given the importance attributed by the Government in its overall trade policy to trade-in-services liberalisation, it should consider the potential impact of Most Favoured Nation clauses on services in rolled-over agreements.
Dispute resolution arrangements
The Court of Justice of the European Union
79.The Government gave a commitment in its Brexit White Paper in February 2017 to “bring an end to the jurisdiction of the CJEU [Court of Justice of the European Union] in the UK”.100 A small number of the EU’s trade agreements contain dispute resolution provisions which involve the CJEU. We heard from trade lawyer Mr De Baere that the relevant provisions state:
that in case there is a dispute relating to the imputation of a provision of EU law, then the dispute settlement body […], which is a state to state panel, […] should ask a question to the European Court of Justice on the correct interpretation of European law.101
Investor-to-State Dispute Settlement
80.One of the most controversial elements to come out of the incomplete EU-US Transatlantic Trade and Investment Partnership (TTIP) and the completed EU-Canada CETA negotiations have been proposed provisions on investor-to-state dispute settlement (ISDS). ISDS involves independent tribunals adjudicating whether investors have been treated unfairly by host states and accordingly awarding compensation.102 An amended model of investor protection, the “Investment Court System” has been included in CETA and the EU-Vietnam FTA103 (and the EU is also seeking similar provisions in a standalone investment agreement with Japan104). The Minister of State, Mr Hands told this Committee that the UK’s position “on any sort of investment court system” was “a matter for future trade policy”.105
81.Investor-state dispute settlement or Investment Court System provisions in existing Free Trade Agreements have been controversial in the past. The Government should fully consider and explain the implications of rolling over these provisions in the agreements concerned. The appropriate time to do this may be when the Government lays a new agreement before the House under the provisions for treaty ratification in the Constitutional Reform and Governance Act 2010.
82.The Government must show that it has taken into account the need for all aspects of rolled-over agreements to sit coherently within the UK’s overall trade-policy architecture in the longer term.
68 Explanatory Notes to the Trade Bill [Bill 122 (2017–19) – EN], para 53. See also Delegated Powers Memorandum to the Trade Bill [Bill 122 (2017–19) – EN], para 46.
69 Oral evidence taken before the International Trade Committee on 1 February 2017, HC (2016–17) 817-vii, Q 454
71 Oral evidence taken before the International Trade Committee on 1 November 2017, HC (2017–19) 436-ii, Q 145
72 These are lists submitted by each WTO member detailing their market access commitments, including limits to tariff levels and specific TRQs, by which they undertake to be bound in setting their trade policy where the MFN principle applies (in those cases where there is no preferential arrangement).
73 “Trump opposes EU-UK agri-deal in blow to May’s Brexit plans”, Financial Times, 5 October 2017
74 “Trump administration rejects Theresa May’s post-Brexit agriculture deal with EU”, Independent, 6 October 2017
78 Since an FTA does not entail a common external tariff, parties to it can set differing tariffs in respect of third countries, leading to the risk of trade being deflected for the purposes of avoiding duty. Rules of origin are a means of obviating this risk.
79 World Customs Organization, Comparative Study on Preferential Rules of Origin, Version 2017
80 Oral evidence taken before the International Trade Committee on 31 January 2018, HC (2017–19) 481-v, Qq 273, 281, 282
81 Qq 40, 67–68, 121, 226; British Retail Consortium (EUT0012), UK Trade Policy Observatory (EUT0009)
84 Under full cumulation, operations conferring origin on non-originating materials can take place across the entire cumulation zone—they do not need to occur within the territory of a single country, as they do in the case of diagonal cumulation. On this basis, the EEA is considered as a single territory, with the option to claim common “EEA originating status” for goods produced in the EEA. European Commission, “The pan-Euro-Mediterranean cumulation and the PEM Convention”
85 Oral evidence taken before the International Trade Committee on 1 November 2017, HC (2017–19) 436-ii, Qq 163–164. See also Q 191.
88 “Joint report from the negotiators of the European Union and the United Kingdom Government on progress during phase 1 of negotiations under Article 50 TEU on the United Kingdom’s orderly withdrawal from the European Union”, 8 December 2017, para 49
89 Jim Rollo and Peter Holmes, “Softer Brexit, Softer Irish Border?”, 8 December 2017
91 World Bank, Evaluation of the EU–Turkey Customs Union, Report No. 85830, March 2014, p 25
92 House of Lords, Brexit: trade in goods, Sixteenth Report of the Select Committee on the European Union, Session 2016–17, HL Paper 129, para 249
93 House of Lords, Brexit: the options for trade, Fifth Report of the Select Committee on the European Union, Session 2016–17, HL Paper 72, Box 1 (pp 19–20), paras 60, 74–75
94 Institute for Government, Trade After Brexit: Options for the UK’s Relationship with the EU, December 2017, pp 21–22
95 House of Lords, Brexit: the options for trade, Fifth Report of the Select Committee on the European Union, Session 2016–17, HL Paper 72, Box 4 (p 29); Q 217
96 European Commission, Obstacles to Access by Andorra, Monaco and San Marino to the EU’s Internal Market and Cooperation in Other Areas, Staff Working Paper SWD(2012) 388 final, November 2012, “San Marino: Customs Unions and preferential arrangements”, European Commission
98 Oral evidence taken before the International Trade Committee on 1 February 2017, HC (2016–17) 817-vii, Q 453
100 H M Government, The United Kingdom’s exit from and new partnership with the European Union, Cm 9417, February 2017, para 2.3
102 Oral evidence taken before the International Trade Committee on 25 October 2017, HC (2017–19) 481-i, Q 69
103 EU-Vietnam Free Trade Agreement, Chapter 8, Section 3
104 European Commission, “The EU-Japan agreement explained”
Published: 6 March 2018