Chapter 3: Rules of origin and origin procedures (CEPA Chapter 3)
28.The Government’s published objectives in this area were also very general: to agree “simple and modern” rules of origin (RoOs) that were “clear and flexible” and reflected “UK industry requirements”, including “existing as well as future supply chains”.33 Stakeholders also identified specific complexities for certain industries, in particular regarding cumulation. This chapter addresses RoOs first, followed by cumulation.
Rules of origin
29.RoOs provide criteria for determining the economic nationality of a good. To qualify for preferential tariff rates, a good must “originate” in a country party to the trade agreement. Due to global value chains, many final products, like foodstuffs or automotive vehicles, are made up of a variety of inputs, which may not always be sourced or processed in the countries party to the FTA. RoOs thus govern how “intermediate inputs which are not of ‘domestic’ origin” can be used while still benefiting from “preferential access into each other’s markets”.34 This is usually achieved by means of thresholds for how much of a product’s inputs must qualify as domestic, by reference either to a certain share of the total value or weight of the product. The more non-originating materials allowed in a product, the less restrictive the RoOs are.
30.While negotiations were ongoing, the Food and Drink Federation (FDF) stated that the RoOs needed to be generous enough to preserve existing supply chains, particularly as issues related to climate and seasonality required producers to source ingredients globally.35 The National Office of Animal Health argued that the RoOs should not restrict the supply and manufacturing processes of veterinary medicines.36 On the other hand, the NFU cautioned that they should not overly encourage the substitution of UK materials for imported ones.37 The National Sheep Association also noted that it “wouldn’t want to see the authenticity and value of UK sheep meat and sheep products undermined by ‘substantial transformation’” that would allow imported inputs to be used in place of UK ones.38
31.CEPA provides less restrictive RoOs for certain products than under JEEPA. The Government indicates that changes were made to the Product Specific Rules contained in Annex 3-B to allow UK exporters to import key ingredients from other countries and use them in their exports to Japan, in particular in products such as pet food, confectionery and baked goods, and certain textiles.39 FDF noted that most agri-food-related rules were unchanged from JEEPA, but welcomed the simplification of rules for some products, providing greater flexibility for the sourcing of inputs for use in UK products for export to Japan, particularly benefiting UK pet-food manufacturers and bakers and biscuit makers.40
32.For some sectors, it was important for CEPA to maintain the same RoOs as those in JEEPA, in order to be eligible for cumulation (discussed further below). The Society of Motor Manufacturers and Traders (SMMT) recommended during negotiations that CEPA maintain JEEPA’s RoOs for automotive vehicles and parts.41 The North East England Chamber of Commerce noted that “allowing Japanese parts to count towards local content from the UK to EU” was “crucial for automotive industries”, particularly regarding electric vehicles (EVs), because the EU was “not well developed in EV production” and “many parts” came from Japan.42 We discuss this further below, but in short this will remain uncertain until a UK trade deal with the EU is concluded.
33.CEPA’s origin procedures are also “more flexible”,43 for example allowing importing parties to specify longer single shipment origin statements (i.e. to certify the origin of those products for longer than the 12 months allowed in JEEPA) (Article 3.3.17). The FDF said this would probably help reduce costs for businesses.44
34.The rules of origin for some products, such as baked goods and textiles, are more liberal in CEPA than in the EU-Japan agreement, and this could be beneficial for some manufacturers seeking more flexibility in sourcing inputs. Continuity in the rules of origin for automotive vehicles and parts has been welcomed by the sector. We also welcome the increased flexibility of origin procedures in CEPA.
Cumulation
35.Cumulation is a mechanism through which trade agreements may allow inputs sourced or processed in a country outside the relevant agreement to count towards meeting the origin requirements for preferential treatment. There are several types of cumulation, with varying levels of flexibility.
(a)Bilateral cumulation allows originating products of one country in a FTA to be further processed or added to products in another country in the FTA, as if they had originated in the latter country. It is the most basic type of cumulation.
(b)Diagonal cumulation allows for materials originating in a defined country to be used as if they had originated in the home country, as long as the respective countries all have FTAs with each another and the product-specific RoOs are identical.
(c)Full cumulation allows the countries in a FTA to process non-originating products.
(d)Extended cumulation is an even more flexible approach, in which there is no requirement for the countries involved to have FTAs with each other or for any FTAs to have identical RoOs.
36.During the negotiations, many witnesses advocated diagonal cumulation between the UK, Japan and the EU to maintain trilateral trade flows.45 As noted above, this need is particularly acute for some sectors, like the automotive industry. SMMT told us: “because we are part of a European industry, we need to see that recognition and be able to cumulate parts and components from Europe”.46 Dr Anna Jerzewska noted the difficulty in achieving diagonal cumulation because all parties must have FTAs with each other and meet the highly restrictive requirement of having identical RoOs. She suggested that extended cumulation between the parties might be more achievable.47
37.Any trilateral cumulation relationship requires a UK-EU trade agreement. Under CEPA, cumulation will be allowed for products that are “economically significant for the UK”, “ensur[ing] continuity for those businesses that currently use inputs from the EU in their exports to Japan”.48 This extended cumulation for EU inputs and processing to be cumulated has been welcomed by stakeholders,49 and it represents the first leg of a triangular cumulation agreement, alongside a provision that “seeks to ensure continuity for UK exports to the EU which contain Japanese inputs”, subject to a UK-EU agreement being reached (Article 3.5).50 With that further agreement in place, UK manufacturers could continue to use Japanese components to meet RoOs requirements for onward export to the EU.
38.However, press reports in September suggested that, with regards to the automotive industry, the EU was unwilling to allow extended cumulation for Japanese inputs.51 This would be seriously disadvantageous to the UK. We note the evidence given to us by the SMMT that the cost to the industry of no-deal with the EU “could be as much as £110 billion”, split between the UK and the EU and “cost[ing] the European side slightly” but “not a huge amount” more.52 The North East England Chamber of Commerce also told us that “around 80% of finished products for the automotive sector” exported from the North East went to the EU,53 while “export trade to Japan” represented “only 2%” of the North East’s regional economy.54
39.CEPA alone cannot secure diagonal cumulation between the UK, Japan and the EU, which many industries have recommended, but it does take an important first step in extending cumulation to the EU for most products listed in the UK Global Tariff, with some exceptions, like some cereals and spices. This is particularly valuable for food and drink manufacturers and will help to ensure business continuity for UK exporters to Japan and Japanese exporters to the UK if they incorporate EU content to meet value-added thresholds.
40.To secure existing trilateral trade flows between the EU, UK and Japan, the UK and EU would need to extend cumulation to Japan through their own trade agreement. It appears that the EU does not intend to so. Such uncertainty affects certain sectors, such as automotive manufacturing, particularly acutely.
33 Strategic approach, pp 9 and 16
39 Parliamentary report, para 67
41 Society of Motor Manufacturers and Traders, SMMT Position Paper: UK-Japan Trade Negotiations (July 2020), p 4: https://www.smmt.co.uk/wp-content/uploads/sites/2/SMMT-Position-Paper-on-UK-Japan-Trade_Final.pdf [accessed 11 November 2020]
42 Written evidence from the North East England Chamber of Commerce (JTN0017); see also Q 2 (James Ramsbotham).
43 Parliamentary report, para 66
45 See written evidence from the National Farmers’ Union (JTN0015) and the Food and Drink Federation (JTN0009), and the Society of Motor Manufacturers and Traders’ Position Paper.
48 Parliamentary report, para 63. Annex 3-C of CEPA provides a list of the chapters and headings in the UK Global Tariff which contain products for which cumulation will be extended to the EU.
50 Parliamentary report, para 64
51 Faisal Islam, ‘Brexit: Blow to UK car industry in search for EU deal’, (30 September 2020): https://www.bbc.com/news/business-54345882 [accessed 11 November 2020]