50.Tariff-free trade from one bloc to another is conditional on a traded product meeting rules of origin, a set of criteria which establish its ‘economic nationality’. The rules of origin in the TCA allow for ‘full bilateral cumulation’, allowing both the UK and the EU to count inputs from the other Party when assessing the origin of goods. In simple terms, if raw materials or parts from the EU are imported into the UK, and then used to manufacture another product that is then re-exported back into the EU, that product will be deemed to have originated in the UK, and thus benefits from a zero tariff. The TCA includes both general provisions which apply to all products traded under preferential terms, as well as product-specific rules of origin (PSRs). These rules define and establish thresholds for ‘local content’.
51.Products which do not meet the ‘local content’ thresholds—for instance, products assembled in the UK that are substantially made up of components originating in a third country, such as China—will face tariffs on a Most Favoured Nation basis. As Alessandro Marongiu of the Society of Motor Manufacturers and Traders (SMMT) told us, “there is no such thing as a tariff-free deal; tariffs apply, unless you can comply, and demonstrate that you can comply, with the rules of origin requirements.” The Institute for Government described the TCA’s provisions on rules of origin as “in line with those agreed in other EU free trade agreements”, and suggested that the product-specific rules are “comparatively quite generous in many sectors”.
52.The TCA establishes a Trade Specialised Committee on Customs Cooperation and Rules of Origin, which will monitor and review the implementation of the rules of origin chapter, ensure its uniform administration and discuss technical issues.
53.Small quantities of goods are exempt from requirements to prove origin. For the rest, a claim by a trader for zero-tariff treatment can be based on one
of two permitted proofs of origin:
Traders do not necessarily need to prove compliance each time they import or export goods; rather, they need to ensure that they are able to prove compliance if required to do so by the importing customs authority, and to keep records of the relevant documentation for verification purposes.
The interaction of the TCA and the Withdrawal Agreement’s Protocol on Ireland/Northern Ireland means that rules of origin apply differently with respect to Northern Ireland.
54.Fergus McReynolds, Director of EU Affairs at Make UK, distinguished between “system” and “structural” issues with respect to rules of origin:
“The system issues are about coming to understand rules of origin and the processes that are required. Those things are a learning curve, but in time they can be addressed … The structural issues are more challenging. That is where the business model does not fit with the new relationship.”
We agree with this distinction, and have structured our analysis accordingly.
55.Multiple witnesses told us that rules of origin were among the most significant issues traders faced in January and February 2021. Both Fergus McReynolds and Liam Smyth, Director of Trade Facilitation at the British Chambers of Commerce, said that rules of origin formed the bulk of the inquiries they had received in the first weeks of 2021. Anna Jerzewska, Director of Trade and Borders, likewise saw “an incredible number of questions from companies struggling with rules of origin”.
56.The LEP Network’s written evidence highlighted the administrative complexity of rules of origin, citing the example of an exporter in the defence sector: “Customers are asking for rules of origin [information] and to supply this they need full records of where items have come from down to component level.” These requirements could have a “disproportionate impact on smaller businesses”, for which rules of origin “could be a significant disincentive to export to the EU”.
57.It is unsurprising that some businesses are misunderstanding the rules. Liam Smyth said: “There is a grace period on providing the evidence that you are compliant with rules of origin, but there is no grace period on rules of origin. A misinterpretation that businesses are hearing is that there is a grace period and that you do not need to provide it for 12 months.” The Institute for Government agreed: “Firms are importing goods in the belief that they comply with rules of origin requirements—and are therefore not subject to tariffs—when in practice the goods do not comply, and duties are payable.”
58.Some evidence suggests that the TCA’s rules of origin have been applied inconsistently. Des Hiscock, Director General of ACITA and Regional CEO of Customs Support, said: “We have seen the same TCA being interpreted very differently in the UK and across Europe.” Liam Smyth reported similar experience, and recommended that the Government work with the EU to iron out inconsistencies in the implementation of the rules.
59.The short lead-time between the TCA’s agreement and implementation may have exacerbated matters. Luke Hindlaugh, Senior EU and International Food Trade Executive at the Food and Drink Federation, said: “Over time, there will be adaptation … but that initial late application is causing the most issues.” The Institute for Government said that “many firms with complex supply chains have not yet been able to assess whether their goods comply with rules of origin requirements in the TCA”, though it added that the phase-in for supplier’s declarations would “help some firms bridge this gap”.
60.Some difficulties are likely to reflect short-term adjustment costs, which will subside in the medium term. The Road Haulage Association told us: “It may be the case that this will bed-down over time as people become familiar with the complexities and limitations imposed by the rules.” Alessandro Marongiu said that the requirements established in the TCA itself are “not overburdensome”; instead, the issue is that “putting systems in place or upgrading existing systems to ensure compliance … can be very burdensome, in particular for businesses that have no previous experience of dealing with origin requirements”.
61.As well as calling for improved guidance (which we return to in Chapter 9), Luke Hindlaugh recommended that the Government provide digital search tools for businesses to “punch in the ingredients of their goods to understand whether they meet the rules of origin requirements”.
62.Rules of origin were among the biggest issues facing traders following the TCA’s implementation. The very short period between publication and implementation exacerbated administrative difficulties and costs. Businesses will adapt over time, but the Government must ensure full awareness of the need to follow the rules during the grace period.
65.Preference utilisation describes the extent to which imports eligible to enter a country using zero or lower tariffs actually enter under these rates. Traders may elect to pay Most Favoured Nation tariffs rather than comply with the requirements to access preferential terms under the TCA, and as Government guidance states, it is for businesses to decide “whether it is in their interest to meet (and prove that they meet) the rules of origin”. In the case of UK-EU trade, take-up of this option does not appear to have been widespread, though we heard that some businesses “are being told to swallow tariffs rather than even consider rules of origin, because it is potentially much cheaper”.
66.The TCA requires the collection and sharing of preference utilisation data, but as the Minister acknowledged: “There is a lag on it being helpful of about three months.” While studies in the context of other trading relationships suggest that preference utilisation tends to be high, industry-specific data is necessary to inform future dialogue with both the EU and affected businesses.
67.We recommend that the Government regularly publish detailed, sector-specific data on preference utilisation, and use it both to identify particularly affected sectors and to inform future dialogue with the EU on the implementation of the TCA.
68.Product-specific rules (PSRs)—standard practice in free trade agreements—are set out in Annex ORIG-2 of the TCA. Witnesses highlighted specific PSRs which are causing challenges to particular sectors and products. On food and drink, Luke Hindlaugh told us that the PSRs are “quite challenging” for sugar and confectionary, “particularly prohibitive” for processed meat, and “much harder to do” for chicken.
69.For the automotive sector, the TCA’s PSRs are a “mixed bag”. Alessandro Marongiu welcomed the phase-in provisions which, until 2026, allow electric vehicles to qualify for tariff-free trade with relatively low originating content thresholds. Long-term rules on electric vehicles were, however, “some of the toughest ever negotiated by the European Union”. He also emphasised that electrified trucks would not benefit from the flexible rules of origin permitted for other electric vehicles. Other evidence suggested that bicycles and jewellery were also likely to be particularly affected by rules of origin.
70.In most cases, major changes to problematic PSRs are unlikely to be politically realistic in the short term. Luke Hindlaugh told us that “the opportunity to renegotiate is limited … I do not think we will see wholesale changes to … product-specific rules”. However, there are some PSRs with specific review provisions established in the TCA—most notably the rules on battery packs for electric vehicles, which the Partnership Council may review in 2027.
71.Under the EU’s Union Customs Code (UCC), ‘Union goods’ lose that status when they leave the EU’s customs territory. Goods exported from the EU to a UK distribution centre and re-exported to the EU without additional processing lose their status as EU goods, and are not, by way of processing, deemed to be UK goods under the TCA’s rules of origin. They therefore face tariffs on re-export to the EU.
72.This issue was highlighted by several of our witnesses. Fergus McReynolds gave the example of Spanish tomatoes:
“They are wholly obtained in the EU. They come to the UK. You do not process them, and then you export them to an EU country, perhaps the Republic of Ireland … By the nature of not being processed, they lose their wholly obtained content. Reality dictates that they are still Spanish tomatoes, so surely they should be able to be traded without a tariff.”
Luke Hindlaugh told us that this issue “predominantly impacts EU businesses that have set up hubs in the UK to supply both the UK and Ireland … If they have to stop doing that, it means either that they stop supplying or that they have to start supplying from the EU to Ireland direct.” As the Institute for Government told us, these tariffs “may mean that it is no longer viable for some firms to use Great Britain as a distribution hub for the EU”.
73.While these goods may be eligible for duty relief (allowing the trader to apply for a reimbursement for the cost of the tariff), or can be re-consigned under Transit (meaning that they are considered not to have left the EU’s customs territory), we were told that these processes “are burdensome and may not be a viable option for many firms”.
74.Paymaster General Penny Mordaunt told us:
“We are very aware of this issue and its disproportionate impact on particular business models. We are continuing to work very closely with industry to support it. We are also looking to see whether there are other things that we can do, whether through further negotiations … or through applying particular procedures and reliefs.”
We welcome the news that the Government is considering “further negotiations” to address this issue.
75.Through continued engagement at the Partnership Council, we urge the Government to seek a negotiated exemption with the EU, allowing non-processed EU-originating goods to be re-exported to the EU without tariffs. In the meantime, the Government should encourage and support affected businesses to apply for duty relief, and to use transit procedures.
76.One of the notable absences from the TCA’s rules of origin is diagonal cumulation. Diagonal cumulation would have allowed firms to ‘cumulate’ content from third countries with which both the UK and EU have FTAs (such as South Korea and Japan), as well as developing countries to which both the UK and the EU grant tariff-free access (such as Tanzania and Bangladesh), allowing inputs from these countries to be treated as originating from the UK/EU. Diagonal cumulation was a UK ask in the negotiations but was rejected by the EU.
77.As Rt Hon Lord Goldsmith QC, the Chair of the House of Lords International Agreements Committee, stated in a letter to the Chair of the EU Select Committee, the loss of diagonal cumulation will lead to “instances where using a UK supplier will mean the EU company losing preferential access for its exports. In those cases, the UK company will likely become less attractive as a supplier and may lose its place in the supply chain.” We have included a copy of this letter in Appendix 4.
78.The lack of diagonal cumulation will also mean that a product traded between the UK and the EU will not qualify for zero tariffs if it contains over a certain threshold of content from a third country, including a developing country. Luke Hindlaugh told us that this “will impact manufacturers using inputs from developing countries”. Mantis World, a small UK company which trades in sustainable clothing, told us that products imported tariff-free from Bangladesh, Pakistan and Tanzania and re-exported to the EU attract “12% duty on any goods we ship across the channel”. Quite apart from the (considerable) cost of this duty to UK businesses, this is likely to deter some from trading with other nations, including developing nations, “who themselves have preferential zero duty entry to both the UK and the EU”.
79.A number of witnesses called for the Government to seek diagonal cumulation, but this does not appear to be feasible in the short term. Alessandro Marongiu said that “realistically a discussion on that point can happen only if there are fundamental changes in the interests of the parties”. Similarly, Christophe Bondy told us that the UK “needs to sell any potential enhanced improvements to the rules of origin on the basis of mutual interest with the EU. Frankly, I do not think that simply saying, ‘We don’t like the impact of this on supply chains’, will be very successful.”
80.The EU’s rejection of diagonal cumulation in the TCA negotiations was disappointing, and its absence is likely to have a negative impact on supply chains and exporters in developing countries. Although re-negotiation of this issue appears unlikely in the short term, the Government should continue to make the case for full diagonal cumulation and push for related amendments when the TCA’s provisions are reviewed.
81.Many traders will struggle to absorb the costs of meeting rules of origin requirements, and some may relocate parts of their supply chain to the EU as a result. Mantis World had found that its business model of importing sustainable clothing from developing countries for distribution to the UK and EU was no longer viable: “we cannot afford to absorb this [tariff] cost and would be uncompetitive if we passed it on.” Mantis World is now in the process of establishing a German company, adding: “As the deal stands … we will become a Germany company and our UK market will be seen as a marginal market where our goods are expensive because of the duty.”
82.In other cases, the likely outcome of supply chain adjustment may be onshoring of manufacturing in the UK and the EU. For example, Luke Hindlaugh told us that UK confectionary manufacturers would be “pushed to use UK and EU producers of sugar” rather than fair trade or non-EU sources. Although some UK producers may benefit from such adjustments, we are deeply concerned by the prospect of exporters from some of the poorest countries in the world being unfairly cut out of UK and European supply chains as a result of the terms of the TCA.
83.Fundamental shifts in some sectors’ supply chains will require strategic planning and, in some cases, Government support. Alessandro Marongiu said that for the motor manufacturing sector, an “ambitious industrial strategy” of localising the manufacturing of electric car cells and battery packs within the UK will “be essential to maintain tariff-free market access” to the EU. Such a strategy could enable some UK manufacturing businesses to benefit from supply chain shifts.
85.Rules of origin requirements are likely to trigger substantial supply chain shifts in certain sectors and adjusting to these changes will incur significant costs for many UK businesses, as well as exporters in developing countries. Targeted intervention could, however, enable some sectors of UK manufacturing to benefit from supply chain shifts. We recommend that the Government take an ambitious approach to the onshoring of some manufacturing processes. For example, the Government should seek to attract manufacturers of cells and battery packs for electric vehicles to shift production to the UK.
59 . A product can be considered as ‘originating’, and thus eligible for zero tariffs, if it has been exclusively obtained or produced in the territory of one country, or if it has been substantially transformed (for example, through processing) in line with the relevant product-specific rule.
62 The World Trade Organization’s General Agreement on Tariffs and Trade establishes the ‘Most Favoured Nation’ (MFN) principle, which states that countries should not discriminate between partners (for example, by applying tariffs at differing levels) unless the countries in question have a free trade agreement or are in a customs union together. In the context of the TCA, the MFN principle means that non-originating goods face tariffs at the same level as goods from countries with which the UK and EU do not have a free trade agreement.
63 (Alessandro Marongiu)
64 Written evidence from the Institute for Government ()
66 For goods imported to the UK from the EU, this exemption applies to any goods valued under £1,000. For goods imported to the EU from the UK, this applies only to non-commercial imports, and they must be under €500 in the case of products sent in small packages, or €1,200 in the case of products forming part of a traveller’s personal luggage.
68 (Alex Veitch)
70 , Article 5 [accessed 4 March 2021]
71 Decision of the WA Joint Committee on the determination of goods not at risk, Articles 3, 5-7.
72 , Article 5(6)(c) [accessed 5 March 2021]
73 (Fergus McReynolds)
74 (Fergus McReynolds), (Liam Smyth)
75 (Dr Anna Jerzewska)
76 Supplementary written evidence from the Local Enterprise Partnership Network ()
78 (Liam Smyth)
79 Written evidence from the Institute for Government ()
80 (Des Hiscock)
81 (Liam Smyth)
82 (Luke Hindlaugh)
83 Written evidence from the Institute for Government ()
84 Written evidence from The Road Haulage Association ()
85 (Alessandro Marongiu)
86 (Luke Hindlaugh)
87 HM Revenue & Customs, ‘Introduction to rules of origin and claiming preferential tariffs (duties)’ (29 December 2020): [accessed 3 March 2021]
88 (Jo Lappin)
90 (Penny Mordaunt MP)
91 See, for example, A. Keck and A. Lendle, ‘New evidence on preference utilization’, World Trade Organization Economic Research and Statistics Division (3 September 2012): [accessed 3 March 2021]
92 (Luke Hindlaugh)
93 (Alessandro Marongiu)
94 (Alessandro Marongiu)
95 Written evidence from The Crafts Council ()
96 (Luke Hindlaugh)
98 The UCC is the EU’s legislative framework for customs. It no longer applies to or in the UK (except in Northern Ireland, under the Protocol). UCC rules governing the status of ‘Union goods’ can, however, have a knock-on effect for UK-EU trade. Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the Union Customs Code ( 10 October 2013)
99 Regulation ( ) Article 154
100 European Commission, Guidance on distribution centres (5 February 2021): [accessed 3 March 2021]
101 (Fergus McReynolds)
102 (Luke Hindlaugh)
103 Written evidence from the Institute for Government ()
104 Under the UCC, goods exported from the EU and re-imported within three years are eligible for duty relief, provided that it can be proved that they are the same goods. The information requirements are set out in the UCC Implementing Act. REG(2013) 952, Article 203; see also Commission Implementing Regulation (EU) 2015/2447, Article 253: , 10 October 2013
105 European Commission, Guidance on distribution centres (5 February 2021): [accessed 3 March 2021]
106 Written evidence from the Institute for Government ()
107 (Penny Mordaunt MP)
108 The EU allows imports of all goods (except arms and ammunition) from a number of developing countries to enter tariff-free under the Everything But Arms scheme. The UK has introduced its own similar scheme, the Least Developed Countries Framework, following the end of the transition period.
109 For discussion of why this was the case, see (Allie Renison)
110 Letter from Lord Goldsmith, Chair of the International Agreements Committee, to Lord Kinnoull, Chair of EU Select Committee (25 February 2021):
111 (Luke Hindlaugh)
112 Written evidence from Mantis World ()
113 (Liam Smyth); written evidence from the Railway Industry Association ()
114 (Alessandro Marongiu)
115 (Christophe Bondy)
116 Written evidence from Mantis World ()
117 (Luke Hindlaugh)
118 (Alessandro Marongiu)