What should UK do to lower the barricade of Rules of Origin after Brexit

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What should UK do to lower

the barricade of Rules of

Origin after Brexit

MA theses in International Trade and Investment Law

University of Amsterdam

HUI YANG 12071897

Friday 26-07-2019

SUPERVISOR: DHR. DR. G. (GERALDO) VIDIGAL Email: pipyoung@163.com

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Abstract

Purpose – With Brexit as an leading and most famous example of exiting from Custom Union and Single Market, many legal consequences need to be untangled. Not the least of which is the impact of Rules of Origin (RoO). This paper aims at analyzing the current models of European Union (EU) RoO that could be chosen by negotiators for a future UK–EU Free Trade Agreement (FTA). It also underlines the impact of different models from the

perspective of implementation. The paper focuses on three different RoO models that could be chosen by negotiators. For each of them, it analyses the pros and cons and the impact on economic operators. The choice of a RoO would directly affect the trade efficiency between UK and EU. It will affect the utilization rate of the FTA as well as corporate investment strategies in the UK and EU. This paper takes the view that RoO in new UK-EU FTA should not deviate from the current EU RoO models. Certain arrangements in EU RoO models such as cumulation and electronic platform will help the UK soften Brexit impact on trade.

Keywords

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Introduction

With several extensions, the departure date of UK from the EU is still unclear. The failed attempts of reaching consensus in the UK Parliament further obscure the future of UK-EU relationship, leaving key issues unsettled, ranging from the trading model to financial matters. The urge to have an agreement with EU is clearly there, given that the possible chaotic scene in trade regulations is unwanted by EU or the UK. Without proper arrangements, every good that is currently being freely transferred inter UK-EU will be subject to customs controls and possibly to tariffs.

The deep concerns of many corporations surrounding Brexit are on the table. Such concerns are boosting them to relocate their production facilities to EU 27, as the reintroduction of customs, tariffs and the rules that come along with them could eat away their profit margins and slow down the supply chain operations. In the wave of comeback rules, Rules of Origin (RoO) is one of the most burdensome and necessary in trade practice. If new preferences are to be agreed between EU and the UK, preferential RoO will be coupled with future Free Trade Agreement (FTA). This is to make sure there is no free-rider of this FTA, since if without specific rules to regulate the conferral of benefit-receiving origin, corporations will exploit the benefit by transporting the goods just for obtaining origin of that FTA party. Having to deal with such new set of RoO could incentivize corporations to leave UK and go to the EU, where such procedures are not necessary.

Moreover, all the EU FTAs benefits would not be extended to UK goods in the future. To draft new FTAs with third country also requires adoptions of preferential RoO for the same free-rider concern. The balance of the restrictiveness of new RoO is important for actual utilization the FTA.

As the other end of the Brexit, EU exporters will also be impacted by the new set of RoO. Materials sourced from the UK would not contribute to EU origin without cumulation clauses, and therefore affect benefits received by exports of EU towards other FTA partner countries. This thesis will analyze how Brexit and RoO will impact the UK-EU trade and the pros and cons of different models of RoO that could be chosen for a future UK–EU FTA. Considering the economy impact different models have on UK business, this thesis will also focus on the key features of an ideal RoO.

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Brexit and RoO impact: what, why and how

1. What is RoO?

Every modern customs legislation includes rules to determine the origin of the goods, it’s an essential step in international trade no matter in import or export. Apart from national customs legislation, FTAs are normally equipped with their own set of RoO to determine how goods can obtain a favourable origin and therefore be granted with all the preferential treatments under FTAs. In international trade practice, most countries still have separate sets of preferential RoO and non-preferential RoO.

The non-preferential RoO is used to determine the so-called “economic origin”, the “nationality” of a good. Just like nationality, the non-preferential origin demonstrate the economic relationship between goods and the state. Non-preferential origin is used for multiple purpose. Primarily, it is used to pool together trade statistics on an international scale. In addition, it becomes necessary with trade remedy such as antidumping and countervailing measures. Thirdly, when a public procurement legislation requires a minimum percentage of domestic goods, non-preferential origin is used for determinative criteria. Apart from the purposes above, economic origin is often used in sanctions and retaliation to limit trade on goods from targeted countries.

Different models of RoO are used to determine to non-preferential origin of goods in different countries. Even in the same country, there are differences in rules depending on the specifics of products. When a product is domestically manufactured by the citizens of that country with originating material, the determination of product origin is easy.1 It is even easier with products wholly obtained in a country, no matter if its coal extracted or corns grown in a country. But things get more complicated with the trend of manufacturing in a Global Value Chain (GVC). Sophisticated products such as race car or airplane require the suppliers from all over the world to put together one machine. Even simple garments involve gathering and processing yarn, fabrics and accessories in different countries in order to lower the overall production cost. In these complicated cases, the RoO to determine non-preferential origin can be very different depending on the country’s role in global production generally.

The variation in non-preferential RoO is also because of the lack of binding result from WTO harmonization in this area. WTO members signed the Agreement on RoO to bring more uniformity in non-preferential RoO. The Agreement strive to achieve so by setting certain principles to limit disguised restriction to trade through non-preferential RoO.2_{The Agreement}

mainly refers to three principles in determining the origin: the Change in Tariff Classification (CTC), the Added Value and the specific manufacturing/ processing operations.

1_{Hoekman, B. (1993), “Rules of origin for goods and services”, Journal of World Trade, Vol. 27 No. 4, p81-82.} 2

La Nasa, J. (1996), “RoO and the Uruguay round’s effectiveness in harmonizing and regulating them”, American Journal of International Law, Vol. 90 No. 4, p. 625.

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The CTC principle is based on the Harmonized System (HS) Convention where every good is classified under a specific HTS tariff number, which is binding on all the WTO Members. Under HS Convention, products are classified under six-digit code, each code goes to one specific product regardless its origin. If the HTS classification of the material is different from the one of the final product, that final product will obtain the countries origin where the change take place according to CTC principle. Normally, a country will require four-digit change in the six-digit code for the origin to be granted.

In case of second principle - Added Value, or “ad valorem” principle, a product is will obtain the origin of one country if the domestic processing include non-originating material under certain value. RoO based on this principle involves comparison between the ex-works price of the final product and the value of the originating material used. If the value of the non-originating material is below the threshold set in the rule, the origin of the country where last transformation take place will be obtained by the product.

The third principle, the specific manufacturing or processing principle is often used when the global manufacturing of the product is complex. A defined production process is required to be completed in the country if the origin of the country is to be granted to the product. Such part of manufacturing has to take place in a particular way so that the transformation is substantial enough for the origin to be granted.

Even though there are certain requirements in the Agreement on RoO for all WTO members, and the major principles for non-preferential RoO is mentioned, there is no binding model for Member states to follow. Member states still have the discretion to establish their own rules to determine whether a product can be considered as made in their territory.3

Preferential origin on the other hand, stands in a different category based on its purpose. It is designed to provide the exporter with preferential treatments when being exported to a foreign market. In other words, it is designed for qualified products to receive reciprocal benefits that fall outside the MFN obligation in WTO.

If a producer can qualify for preferential origin, its export to FTA partner will be exempt from tariff and therefore gain competitive advantage in the market. Such comparative advantage is not only over other countries’ producer trying to sell the same export in the same market, but also over the same country producers whose products do not meet the specific requirement in the preferential RoO.

For the very reason that preferential treatments are desirable, parties to a FTA will raise the bar of qualification by setting more restrictive preferential RoO, in order to ensure that goods merely transshipped to the territories of the partner countries or simply assembled there would not obtain preferential origin. More than that, preferential RoO usually specify the processing level for a product for a preferential origin to be granted. Depending on the FTA parties, other

3

Hoekman, B. and Inama, S. (2018), “Harmonization of rules of origin: an agenda for plurilateral cooperation?”, East Asian Economic Review, Vol. 22 No. 1, pp. 3

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conditions such as direct transportation may be attached to the RoO to make “free-riding” even harder. An example is the RoO for sea fishing products in FTA, where the nationality composition of the crew may even influence the products origin. The balance of restrictiveness is in the hands of the FTA parties, the rationale is that as long as both parties agree, reciprocal RoO can contain any terms.

2. Why and how RoO will affect UK-EU trade?

a. The impact of non-preferential RoO on UK-EU trade

The Brexit referendum result indicates the UK citizens’ determination to depart from the EU, this means that the UK will leave EU Customs Union and Single Market and will no longer be subject to customs and trade laws and policies of EU.4 If ‘no deal’ Brexit becomes reality, the reintroduction of tariff, customs and checks will become inevitable and the only fall-back would be the World Trade Organization (WTO) arrangements.

Both as the Member of WTO, the UK and EU decide what tariff shall be applied to a specific imported product in Geneva. In the case of ‘no deal’ Brexit, the baseline tariffs set under the Most Favored Nation (MFN) clause the in WTO will be applied to each other.

The Most Favored Nation (MFN) clause of Article I of the General Agreement on Tariffs and Trade (GATT) requires every Member of the WTO to provide no less favorable treatment to any other WTO Member. This foundational article of the WTO aims at extending the benefits of bilateral negotiation results to WTO Members and eliminating discrimination among Members.

In regards to tariff, the bound tariff rates decided by the EU will also be adopted by the UK after leaving the EU. As a matter of fact, the UK was the EU member state that negotiated the tariffs on behalf of the Union. If the UK is satisfied with the MFN tariff rate under Article I of the GATT, the EU’s non-preferential RoO will be applied to UK exports to be granted with UK origin, and UK’s non-preferential RoO will be applied to EU exports for being granted EU origin.

The reintroduction of non-preferential RoO can be cumbersome for UK-EU trade, as the implementation of such RoO is complicated.

Currently, under the Common Commercial Policy (CCP), the EU and UK share the same non-preferential RoO based on the Union Customs Code (UCC) and its Implementing Provisions

4

European Commission (2017), “Position paper on customs related matters needed for an orderly withdrawal of the UK from the union”, TF50 (2017) 13/2, 20 September.

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(IP).5 Under the EU regulation, before imports enter EU territory, the importing EU country can request a Certification of Origin (CO) as proof of origin in its custom legislation. Furthermore, in serious doubt of the CO, the importing custom can request further documents to verify if the issued CO, mostly given by the institution in exporting country, comply to the UCC and its IP.6

The UCC grants origin for different products differently. If products are wholly obtained or they only involve one single country in manufacturing, non-preferential origin is granted under article 60(1) UCC. In cases where multiple countries are involved in the manufacturing, the process can be complicated under 60(2) UCC.

Based on the products HS tariff headings, different products have directed to different rules to test if the manufacturing process can satisfy the requirement for the origin of a specific country to be granted. Depending on if the product concerned is included in the Annex 22-01 UCC or not, different rules for origin granting will apply.

For products included in the Annex 22-01 UCC, the test for granting origin could include 2 steps. As a first step, a set of rules called the primary rules apply. When a primary rule is not fulfilled, another set of rules called residual rule applies in order to determine the origin of the product concerned.7

For the primary rules, the HS tariff heading again plays a roles in deciding the specific rules to be applied. The rules can be categorized into 3 models that have been introduced before: CTC, Added Value and Specific Manufacturing. Depending on the tariff headings of some specific products, additional requirements such as minimum operation will be applied. If the product cannot satisfy the primary rules, residual rules will apply in determining the origin of the products.

The residual rules generally apply to products failed the economic justification under the primary rules, and when operation performed on products does not go beyond minimal operations of article 34 UCC. In very limited cases, some products can skip the primary rules and be tested directly with residual rules.8_{Again, the inspector will look at the tariff headings}

of the product and apply rules accordingly. As the case may be, the major portion rule which is based on value or weight of the materials used would normally apply. 9

5_{Regulation (EU) Number 952/2013 of the European Parliament and of the Council of 9 October 2013 laying down the}

Union Customs Code (OJ L 269, 10.10.2013) and Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015 laying down detailed rules for implementing certain provisions of Regulation (EU) Number 952/2013 of the European Parliament and of the Council laying down the Union Customs Code (OJ L 343, 29.12.2015).

6

Articles 26 of Council Regulation No. 2913/92, available at:

https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1992R2913:20070101:EN:PDF

7

Article 2.2.1 Guidance on Non-preferential Rules of Origin, European Commission, December 2018, available at: https://ec.europa.eu/taxation_customs/sites/taxation/files/guidance-on-non-preferential-rules-of-origin_en.pdf

8_Ibid. 9_Ibid.

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Most products obtain origin based on the “substantial transformation” principle defined in Article 60 of the UCC. For a limited number of products, specific binding rules are set to confer origin. In case that the RoO of some products are not covered by Annex 22-01 UCC, origin should be determined in accordance with EU’s position during the negotiations under the WTO Harmonisation Work Programme. In practice, EU’s position goes along with the definition and rules of “last substantial transformation” laid down in the Table of list rules applicable to products (List Rules).10

In fact, these RoO are the rules UK and EU are complying with to determine the country of origin to be declared in origin marking under the Single Administrative Document necessary for import and export declarations.11 When foreign exporters want to export non-EU products to EU through UK, they would apply a non-preferential CO from the Chamber of Commerce from the UK12, to certify the non-preferential origin in case the UK custom will conduct relevant checks. However, to UK exporters that export to the EU 27, such non-preferential certifying system is rather unfamiliar, since they still aren’t required to obtain non-preferential CO for UK-EU trade. In the future, should such CO become necessary for UK-EU trade, to whom UK exporters should turn for CO application? The Chamber of Commerce in the UK? Or other institution in certain EU countries? Furthermore, another difficulty to these UK exporters is that, how to make sure the manufacture of their exports will qualify under such complicated rules? What kinds of documents should they submit to be eligible as proof of origin? Even though the answers to these questions will come with practice, the reintroduction of non-preferential RoO will inevitably increase the delays and cost in addition to tariff and custom checks.

If UK inherit the same non-preferential RoO that are in place in the EU now, a non-preferential CO can be obtained online with a Chamber of Commerce, and the document is ultimately produced as a paper document as is stipulated by the World Customs Organisation and is required by the EU.13 The cost for such CO vary from £20 to £50, depending on the Chamber of Commerce member status of the particular exporter.14 The cost for CO and the extra time spent on the application and production of CO for each shipment can add up and significantly lower the efficiency and the profit margin of UK-EU trade. Therefore, compared to staying in the EU where no such bureaucracy is required, non-preferential RoO and their implementation can take lots of UK exporters aback and cost their time and money.

10

Table of list rules applicable to products, available at: https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/nonpreferential- origin/table-list-rules-applicable-products-following-classification-cn_en (accessed 3 May 2019).

11

Mavroidis, P. and Vermulst, E. (2018), “The case for dropping preferential rules of origin”, Journal of World Trade, Vol. 52 No. 1, pp. 5.

12_{See: https://iccwbo.org/resources-for-business/certificates-of-origin/international-certificate-origin-council/} 13

Articles 26 of Council Regulation No. 2913/92, available at:

https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1992R2913:20070101:EN:PDF

14

Export Documents price list January 2019. (n.d.). Retrieved from www.londonchamber.co.uk: http://www.londonchamber.co.uk/LCCI/media/media/6309_10-Export-Document-January-2019-(3)_1.pdf

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With the choice of accepting WTO MFN tariff, custom checks, and the implementation of non-preferential RoO, not only the profit margin for corporations will immediately be smaller because of tariff and cost for CO, but delays will occur with custom checks and application process of CO. Therefore, UK corporations and exporters will urge the UK government to reach agreement with the EU to avoid the costs and streamline the certification and custom process. In other words, the WTO plan will be the bottom line for the UK, far from an ideal solution.

b. The impact of preferential RoO on UK-EU trade

i. Why do preferential RoO become relevant in future UK-EU trade?

Should the UK decide to reduce the tariff and soften the impact on UK-EU trade, it would have to look for exception within the WTO rules to lower the tariff.

The first exception is the creation of a customs union (CU) under Article XXIV of GATT 1994. A CU allows free circulation of goods without being subject to tariffs within the territories of CU members, while all members share the same external tariff.15_{CU represents a high level of}

liberalization. This approach has been considered by the EU and UK negotiators and is even included in the Draft Agreement. Unfortunately it has already been rejected by the UK Parliament for three times for the limitation of customs sovereignty that comes along with it as a permanent solution.

The second exception is the “enabling clause”, which was adopted in a 1979 GATT Decision16

that allows developed countries to provide preferential treatment to developing and least developed countries, in order to boost trade growth in developing or least developed countries by granting benefits to exports going into developed countries. Such clause is based on the Generalized System of Preferences, which is adopted by most developed countries. Such granting of preferential access to the markets is unilateral. However, as a developed country, UK would not be eligible to receive such non-reciprocal benefits under the enabling clause, therefore such an exception would not be possible to be applied to the UK–EU trade relations. The third exception is by concluding a FTA under Article XXIV of the GATT 1994. With the aim to reduce and eliminate tariffs and barriers, FTAs are international treaties concluded by two or more countries to receive reciprocal benefits. Since lower tariffs and other benefits are granted under the FTA, it is important for parties to the FTA to make sure that the goods a party receive is manufactured or obtained in another party, instead of being repacked or simply assembled by exporter in the territory of that party in order to take advantage of the FTA. This is why preferential RoO are generally more restrictive than the non-preferential ones.

15

Kruger, A.O. (1993), “Free trade agreements as protectionist devices: rules of origin”, NBER Working Paper No. 4352. National Bureau of Economic Research, Inc.

16

Decision of 28 November 1979 (L/4903). (n.d.). Retrieved from www.wto.org: https://www.wto.org/english/docs_e/legal_e/enabling1979_e.htm

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Therefore, having excluded the possibility to creating a CU and receiving benefit as developing country, the only choice for UK to reduce tariff with EU is to conclude a “bold and ambitious” FTA.17 Consequently, for further trade liberalization with EU without forming a CU, preferential RoO equipped in the FTA is the topic UK cannot surpass.

ii. How do the EU and UK implement preferential RoO currently

(1) The Approved Exporter system

The Approved Exporter (AE) system stands out from all other preferential RoO implementation system, as it simplifies export formalities for the EU exporters by allowing the AE to certify the preferential origin by attaching a specific declaration on the invoice or another commercial document identifying the exported products. Thus, the AE is not obliged to apply upon each export for issue of CO for preferential treatments. Once the authorisation for an EU exporter’s AE status is issued, it is valid for all exports of the covered originating goods during the period of the authorisation. The AE system is in place for almost all the FTAs that EU conclude, including EU-Singapore FTA18_{, EU Vietnam FTA}19_{and EU-Korea FTA}20_.

If an EU exporter wish to be register as AE, it would only need to send one application for the AE status to the competent customs office with the necessary information. In the case of the UK, the competent customs office, namely the Her Majesty's Revenue and Customs (HMRC) states21_{that a firm may be authorised as such if HMRC is satisfied that 1) the firm exports or}

intends to export on a regular basis; 2) the goods to be exported satisfy the relevant origin rules and; 3) the firm will correctly complete the documents and take proper care of them. Approved Exporter status in the EU pertains only to specified goods and is not a general authorisation of the exporter. 22

In conclusion, AE system is a shortcut for qualified EU exporters to obtain preferential origin under different FTAs EU conclude with other countries. Once an exporter obtain the AE status in certain products, their description on invoice and additional declaration will have the same legal status as other preferential CO’s.

17_{UK Government (2017), Formal Notification of Withdrawal, Letter Dated 29 March.} 18

EU-Singapore trade and investment agreements, Protocol 1: Rules of Origin (incl Annexes and Joint Declarations), Article 17.1(a)(i), Article 18.

19

EU-Vietnam trade and investment agreements, Protocol 1: Concerning the Definition of the Concept of "Originating Products" and Methods of Administrative Cooperation, and its Annexes , Article 15

20_{EU-Vietnam trade and investment agreements, Protocol: Concerning the definition of ‘originating products’ and methods}

of administrative cooperation, Article 16.1(a), Article 17.

21

See: https://www.gov.uk/government/publications/notice-827- european-union-preferences-export-procedures/notice-827-european- union-preferences-export-procedures

22

Certificates and Rules of Origin: The Experience of UK Firms, Briefing Paper 15 – January 2018, Peter Holmes and Nick Jacob, available at: http://blogs.sussex.ac.uk/uktpo/publications/certificates-and-rules-of-origin-the-experience-of-uk-firms/

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(2) EUR.1 Movement Certificate and EUR-MED Certificate system that implement Pan-Euro-Mediterranean Convention

The Pan-Euro-Mediterranean Convention (PEM Convention) is made for further integration around the Mediterranean. The function of such Convention is to harmonize the preferential RoO in existing and future FTAs that are concluded among EU, EFTA, Balkans and Southern Mediterranean countries. In nature, it is not an FTA but an agreement on the uniformed arrangement of preferential RoO. By agreeing to the PEM Convention, parties unify preferential RoO in the FTAs concluded with other PEM countries while other reciprocal provisions are free to be negotiated among parties.

The aim of the Convention is to replace all the bilateral protocols on RoO among the countries of the PEM area by transforming them into a multilateral framework. As a result, contracting parties updated their preferential RoO to a new list of RoO, thus, harmonize preferential RoO within the PEM region.

As a document designed for uniformed protocol and trade facilitation, PEM Convention provides prominent benefits for countries that adopt the Convention. The first benefit is the availability of an already agreed text that requires no further negotiations.

The agreed RoO in PEM Convention consist of the same general provisions as UCC on how origin is and is not obtained (‘wholly obtained’, ‘sufficient working or processing’, ‘insufficient working or processing’, etc.) and the product-specific “List Rules.” 23_{The “List}

Rules” is also not that much different compared to the “Table of List Rules” and UCC discussed in the non-preferential RoO, where three basic mechanisms are included: CTC, Added Value and Specific Processing. Under such RoO, the HS Tariff Headings associate certain products with specific rules and special requirements may be in place for some products, and some special requirements are applied to all products. For example, for textile products to obtain preferential origin, ‘two-step rule’ requires both the “fibre to yarn” and “yarn to fabric” steps are completed in the origin-generating country. Additional requirements on top of processing requirement are also in place, such as ‘direct transport rule’ that strictly requires the transportation of exports.24 These requirements make PEM RoO relatively strict in the conferral of origin compared to non-preferential RoO.

An important feature of PEM Convention is the access to diagonal cumulation within the region.

The concept of cumulation derived from the case when two countries are material provider and export destination of each other. In such case, cumulation is introduced to make sure that when

23

The Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin (PEM Convention): What It Is and How It Works for Products of Lebanese Priority Sectors, 17th February 2016, Hannes Schloemann. Available at: https://www.economy.gov.lb/media/11298/15-7591-finalrevwtia07-clean-with-efta-and-lebanon-inputs-efta-lebanon-technical-cooperation-manual-o-2.pdf

24

EU: Council Decision of 26 March 2012 on the conclusion of the Regional Convention on pan-Euro-Mediterranean preferential rules of origin OJ L 54, 26.2. (2013). Official Journal of the European Union , p 116.

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goods that obtained preferential origin in one country are used as components of goods originating in another country, components still contribute to the preferential status of the end product. In other words, economic operators in both ends of the bilateral cumulation can use materials and components originating in the other parties as if they originated in their own country.

For example, a good wholly obtained in Switzerland is sent to the EU for further processing. Afterwards the processed products are exported back to Switzerland. Without bilateral cumulation rule, Swiss good will not contribute to EU origin when exported back to Switzerland. If the processing carried out in the EU is not substantial enough for the end products to qualify under the preferential RoO in EU-Switzerland FTA, preferential origin won’t be given to this end product, so as the preferential treatments. However, thanks to the bilateral cumulation rule, the end product will obtain EU preferential origin when exported back to Switzerland since Swiss-origin component will be counted as EU component. As a region that often outsource components and processing from external countries, EU normally include this form of cumulation its FTA with other parties.

And the PEM Convention takes cumulation one step further, it includes diagonal cumulation, which is also contained in the Regional Cumulation Rule under the Generalised System of Preferences (GSP) for developing countries. Diagonal cumulation operates among all countries that adopt the same RoO that contains such rule. As the result of diagonal cumulation, originating products from contracting parties can be used to produce an originating product in all of their territories. Within this “cumulation club” countries don’t have to worry about using each other’s originating materials without qualifying for preferential treatments.

Among all the countries signed to the PEM Convention, some countries, namely EEA countries are covered by another form of even more trade-liberating cumulation - full cumulation. Under full cumulation, even non-originating materials can be exported to each other for further processing, and when the end products are finally exported to each other, all operations carried out in the area adopting full cumulation will contribute to the granting of preferential origin. The key distinction from diagonal cumulation is that it does not require the materials to be originating for the purpose of cumulation. Full cumulation only requires that all the working or processing contribute to the conferral of preferential origin are carried out within full-cumulation countries.

Under the PEM Convention, the EU produce two kinds of documents to certify the preferential origin of exports, EUR.1 Movement Certificate (EUR.1) and EUR-MED Certificate (EUR-MED). The key distinction between EUR.1 and EUR-MED is in the function of the CO. While imports with EUR-MED can be re-exported to other markets for purposes such as further cumulation with preference, imports with EUR.1 cannot be re-export with preference.25 In

25_{UNSPECIFIED (2008) A User's Handbook to the Rules of Preferential Origin used in trade between the European}

Community, other European Countries and the countries participating to the Euro-Mediterranean Partnership. 17 December 2008. [EU Commission - Working Document]

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some cases, EU exporters can choose if they would like to obtain EUR.1 or EUR-MED and provide documents in the application accordingly, the choice is often based on the purpose of the exports - being used for end-consume or re-exportation. However, in some cases, exporters cannot choose the type of CO to obtain.

Exporters can only obtain EUR.1 if full cumulation within the EEA is fulfilled or originating country refund tax charged on the imported materials for producing such product, which violate the “no drawback rule” in PEM Convention. EUR.1 is the most commonly obtained preferential CO by UK exporters exporting to EU-27.26 Regardless the situation where exporters can only obtain EUR.1, having the EUR.1 for products has been regarded as a sign of high-quality.27

Exporters can only obtain EUR-MED if cumulation with any Mediterranean countries has been applied to qualified and originating products. This is because the network of the FTAs with the Mediterranean Partners is not complete, so it is absolutely necessary to identify the above mentioned products with EUR-MED that includes relevant texts to trace back the countries participating in the acquisition of the originating status. 28

In conclusion, PEM convention unify the RoO within the PEM area, taking up a big part of EU as well as UK trade. UK exporters have been obtaining EUR.1 as well as EUR-MED for many years. The electronic system for application is available from the Chamber of Commerce of the exporting country, and the whole process cost around £30 and 20-30 minutes per application per shipment seem acceptable to UK exporters.29

(3)Registered Exporter System

Registered Exporter System (REX) is an online database of registered exporters under Generalised System of Preferences (GSP) of the EU. It was launched by the EU at the start of 2017, aiming at facilitating the granting of preferences to imports from developing countries. The EU wants to promote the system to incorporate the future EU FTAs and digitalize the preferential RoO system. In fact, the REX has already been applied to CETA in order to streamline the custom procedure and shorten the delays in importation and exportation.30

26

Certificates and Rules of Origin: The Experience of UK Firms,Briefing Paper 15 – January 2018, Peter Holmes and Nick Jacob, available at: http://blogs.sussex.ac.uk/uktpo/publications/certificates-and-rules-of-origin-the-experience-of-uk-firms/

27_Ibid. 28

UNSPECIFIED (2008) A User's Handbook to the Rules of Preferential Origin used in trade between the European Community, other European Countries and the countries participating to the Euro-Mediterranean Partnership. 17 December 2008. [EU Commission - Working Document]

29

Certificates and Rules of Origin: The Experience of UK Firms,Briefing Paper 15 – January 2018, Peter Holmes and Nick Jacob, available at: http://blogs.sussex.ac.uk/uktpo/publications/certificates-and-rules-of-origin-the-experience-of-uk-firms/

30

Guidance relating to the Registered Exporter System (REX), Annex 5 - Provision enabling the application of the REX system in the FTA between EU and Canada. Available

at:https://ec.europa.eu/taxation_customs/sites/taxation/files/registered_exporter_system_rex_-_guidance_document_v1_en.pdf

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The REX does not impact the rules for determining the origin of goods. It only relates to the method to certify the originating status of goods. With the REX, the statement on origin is a statement on the originating status of goods added by the registered exporter on the invoice or any other commercial document.

To be entitled to make out a statement on origin, an economic operator needs to have a valid registration in the REX system. However, for consignments of originating goods having a value below 6000 EUR, the statement on origin can be made out by any exporter, with no obligation to be registered. As an inclusive digital platform, REX is also extended to the AE, stating that an exporter being established in the customs territory of the Union may request to be approved for the purpose of acting as a registered exporter.31

The RoO being operated in REX include the GSP RoO, CETA RoO and EU-Vietnam RoO, like the PEM Convention, they all share the same prototype - UCC and “List Rules”, with differences in specific requirements. For example, GSP does not include “Direct Transport” requirement as CETA does, GSP replace it with a more flexible “non-manipulation rule”.32 With REX, registered exporters can upload invoice and origin declaration to replace the application of CO and Form A under old GSP. With Customs receiving the digital information prior to the physical arrival of imports, the delays caused by origin inspection will be saved in pursuing a more efficient import procedure.

In conclusion, REX is the electronic platform that allows exporters to upload origin information so that digital origin verification can replace CO application and inspection. With such system, the operation of ROO will be more transparent and efficient, the cost for origin verification can be reduced for both exporters and the customs.

iii. How would these preferential RoO implementations be affected by Brexit

Without arrangement with the EU, the UK in principle would not be able to participate in the further design and operation of these preferential RoO implementations.

The AE system finds its legal basis on the EU level, after Brexit, there is no legal obligation for the EU to allow UK Customs Authorities to approve certain exporters to be AE in the EU system. With no legitimate supervision over UK Customs Authorities, EU will not be able to ensure that UK will approve exporters as AE based on EU’s rule book. Therefore, special agreement have to be achieved in order to align EU rules with UK rules in this regard for AE system to be extended to the UK.

31

Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015 laying down detailed rules for implementing certain provisions of Regulation (EU) No 952/2013 of the European Parliament and of the Council laying down the Union Customs Code OJ L 343, 29.12.2015, p. 558–893

32_{Commission Delegated Regulation (EU) 2015/2446 of 28 July 2015 supplementing Regulation (EU) No 952/2013 of the}

European Parliament and of the Council as regards detailed rules concerning certain provisions of the Union Customs Code, OJ L 343, 29.12.2015, p. 25, Article 43.

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The EUR.1 and EUR-MED that implement PEM Convention will not be extended to UK either. In nature PEM Convention is an international agreement signed by countries, without accession into such multilateral RoO framework, UK will not be able to benefit the trade facilitation arranged in the PEM Convention. Even if it does accede to PEM Convention, the status of the UK is still debatable in the sense of cumulation: can UK benefit from full cumulation under the EEA? Or it can be regarded as Mediterranean countries that once cumulation of UK is applied EUR.1 cannot be granted anymore? This issue would only be sorted out should the UK decide to join the PEM Convention.

The REX, as an electronic platform, in principle will not shut its door to the UK. However, to be able to benefit from such platform, UK need to conclude an FTA with EU, otherwise, with the absence of preferential trade regime, a developed country that cannot qualify under GSP should not have access to such platform.

Some FTAs concluded by the EU have been analyzed by both UK and EU to provide possible models for a potential UK–EU FTA. Negotiators from both parties also made attempts to look into these models together. In the process, few models are highlighted as the perimeters of future cooperation, these existing FTAs are iconic because they categorize different degrees of cooperation between the parties.

The “CETA model” is a deep and comprehensive model that provides cooperation that goes beyond the trade in goods. This model provides further liberalization in areas such as Intellectual Property Rights and Service. CETA also includes mutual recognition of qualifications, Foreign Investment as well as Labour and Environment protection.

European Economic Area (EEA) is the benchmark for another comprehensive model of FTA33. Under the EEA, for example, the UK would continue to benefit from the freedom in movement of people, capital, goods and services. Meanwhile, the UK would still need to contribute to the EU budget and comply with EU regulations while having no say in decision making. Even the European Council itself claim that such an agreement cannot offer the same benefits as EU Membership and is not equal to participation in the Single Market.34

When it comes to a less comprehensive FTA model, the UK and the EU would mainly limit form the cooperation to a reciprocal preferential access in trade. Given that Service amounts to the bigger part of UK’s GDP, UK may want to include financial service into the liberalization and consider FTA model with deeper cooperation and liberalization.

The choice of FTA model set the tone for the future UK-EU relationship. No matter what is the final decision on the models, a preferential RoO would always be included in the FTA.

33_{Craig, P. (2017), “The process: Brexit and the anatomy of article 50”, in Fabbrini, F. (Ed.), The Law and Policy of Brexit,}

Oxford University Press, Oxford, p60.

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Therefore, such preferential RoO will be introduced to UK-EU trade should there be any FTA agreed, the compliance of preferential RoO will increase the bureaucracy and cost of UK-EU trade, such non-tariff rules can be considered as trade barriers and therefore increase the cost of UK-EU trade.35 Therefore, the choice of model of RoO will become the key element for the utilization of future FTA. It is of vital interest for both parties to work out the least trade-hindering plan to implement the RoO that works for both parties, which will be looked into with more details in the next part.

Main options for UK and EU to design their RoO

Option 1: aligning preferential RoO with non-preferential RoO

As mentioned before, under the Common Commercial Policy (CCP), the EU and UK share the same non-preferential RoO based on the UCC and its IP.36 The UCC grants origin for most products based on the “substantial transformation” principle defined in Article 60 of the UCC. For a limited number of products, specific binding rules are set to confer origin. In case that the RoO of some products are not covered by UCC IP, origin should be determined in accordance with EU’s position during the negotiations under the WTO Harmonisation Work Programme. In practice, EU’s position goes along with the definition and rules of “last substantial transformation” laid down in the “List Rules”.37 In fact, these RoO are the rules UK and EU are complying with to determine the country of origin to be declared in origin marking under the Single Administrative Document necessary for import and export declarations.38 Since the RoO model of UCC IP which base on List Rules has been adopted for years by EU and the UK to grant origins to their products in trade with non-EU countries, UK and the EU can agree to adopt the same model in the future FTA. To put it another way, the preferential RoO in the future FTA can be a verbatim adoption of the non-preferential RoO being used now by EU and UK. While adopting this set of rules, UK and the EU can agree to keep the CO issuing entity unchanged. In this way, when UK exporters need to certify the origin of the exports, they can go to the same Chamber of Commerce in the UK where digital application of CO is possible.

The advantage of such approach is familiarity to the rules themselves. For exporters who have been familiar with the non-preferential RoO, years of practice guarantee a smooth FTA transfer, in the sense that the same model for granting origin would not create extra calculation

35

Treasury Committee, “Economic and financial costs and benefits of the UK’s EU membership”, First Report of Session 2016-2017, HC 122, para 168.

36

Commission Implementing Regulation (EU) 2015/2447 of 24 November 2015 laying down detailed rules for implementing certain provisions of Regulation (EU) No 952/2013 of the European Parliament and of the Council laying down the Union Customs Code OJ L 343, 29.12.2015, p. 558–893

37

Table of list rules applicable to products, available at: https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/nonpreferential- origin/table-list-rules-applicable-products-following-classification-cn_en (accessed 3 May 2019).

38

Mavroidis, P. and Vermulst, E. (2018), “The case for dropping preferential rules of origin”, Journal of World Trade, Vol. 52 No. 1, pp. 5.

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burden on these economic operators in the EU and UK. Moreover, the current non-preferential RoO does not include requirements such as “no drawback rule”, “direct transport” and “territorial principle”. The absence of these requirements in the rules will make the calculation and implementation substantially more convenient.

However, by simply having a verbatim adoption of existing non-preferential RoO, some problems still exist. One problem is that such RoO have not been updated to reflect the fast-advancing production reality. For example, the technological advancement may have changed the production process and deviate from the original process that may qualify under UCC IP. Another problem is regarding the lack of reflection in policy objectives of the EU or the UK. In the context of global manufacturing, having such set of RoO may not be enough, especially when UK outsource many materials from the EU, both UK and the EU may prefer to adopt some other rules to facilitate the proof of origin or simplify the calculation model. The existing non-preferential RoO also don’t include rules that allow UK and EU to integrate each other’s production chain. These further liberalization can’t be achieved through adopting non-preferential RoO into the future FTA. Moreover, for UK exporter who only export to the EU, they have not been in practice with the non-preferential RoO which was only involved in EU import. Education is needed for these exporters, and the level of dedication is the same as educating them with a complete new set of RoO.

Option 2: adopting the RoO set out in the PEM convention as well as the AE, EUR.1 and EUR-MED system

Acceding to PEM Convention provides readily made preferential RoO, if UK wish to conclude new FTAs with PEM countries, it can skip the long and difficult negotiations on preferential RoO and head directly to discussions on other provisions.

In principle, the PEM Convention is open for UK to join after Brexit. Considerandum Number 2 in the preamble of the Convention explicitly states that there is possible future extension of the geographical scope of diagonal cumulation to neighbouring countries and territories. Given that UK was included as EU territory when the Convention was signed, opening the door to UK after Brexit is feasible. UK can initiate the ratification procedure as arranged in the Convention and adopt the PEM RoO.39

The existing Convention parties should welcome the accession of UK, since the aim and effect of cumulation is to extend the liberalization through the RoO.40 For parties to the Convention, having to deal with the complication in production adjustment, such as searching for new non-UK supplier, is something they also want to avoid. Generally, with more parties in the Convention, the cumulation will be able to benefit more business operators, since it widen the

39

2013/94/EU: Council Decision of 26 March 2012 on the conclusion of the Regional Convention on pan-Euro-Mediterranean preferential rules of origin

OJ L 54, 26.2.2013, p. 3–158

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scope for eligible suppliers. Multinational corporations with production chains involving several countries will benefit more from more participation in cumulation.

There are pros and cons of joining the PEM Convention.

First, same as the non-preferential RoO, both the EU and the UK producers and customs have been familiar with this set of rules and its implementation. The preferential RoO set out in the Convention have been practiced by both the exporters and customs on both sides, which is important since the familiarity in RoO implementation decides the efficiency of the import and export procedure. Also, by joining the PEM Convention, the AE system which saves UK exporters the trouble of applying for CO will continue to apply.41 And the REX which include the AE provides uniformed electronic platform for UK exporters, this will benefit both the exporters and customs. To minimize the negative impact of reintroducing custom check, having such well-practiced preferential RoO is an effective solution.

Moreover, joining the Convention is the stepping stone that helps the UK in its future negotiation with non-EU parties to the Convention. One of the biggest advantages of UK taking back the control is that it can freely decide its tariff and trade policies with other parties. Therefore, UK would not let go of the chance to negotiate with PEM countries for new FTAs that would allow cheaper imports into the UK market and preferential access to its exports. After joining the Convention, the UK won’t need to negotiate RoO with its PEM partners. This will speed up the negotiation for those new FTAs.

Following the conclusion of those FTAs, with diagonal cumulation rule in the Convention, the producing materials from PEM partners will contribute to obtaining preferential origin, this will improve the utilization of FTAs and benefit UK exporters. Similarly, having UK in the diagonal cumulation system would also mitigate the impact of Brexit on the EU economic operators, since UK components will still contribute to obtaining preferential origin for their exports towards PEM destinations42 .

On the other hand, the new round of negotiations for amendment that has already started may give resistance against UK’s participation. Having UK as a new party on the negotiation table may make the already long and difficult amendment negotiation even more so. Since UK may increase the difficulty for the adoption of any amendment, parties to the Convention may not want to have the UK on the table anytime soon.

Option 3: drafting new RoO

Even though negotiating new and tailor-made RoO may take time, UK and EU can still choose such option and in the negotiation of future FTA. CETA, which is newly concluded between

41

42

European Commission (2018a), Notice to Stakeholders Withdrawal of the United Kingdom and EU Rules in the Field of Customs and External Trade Preferential Origin of Goods, 4 June. pp 3.

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EU and Canada, is an attractive model for the UK to improve on. CETA provides excellent reference to the UK for new RoO drafting, mainly because of its practicality and flexibility. CETA RoO is highly practical for EU to model after for the following reasons.

First, CETA represents the forefront of EU trade liberalization. EU has been convincing in promoting theits own RoO model, which is largely based on UCC IP. Such reality repeated again in the case of CETA. Therefore, the baseline of the new UK-EU RoO won’t deviate far from CETA. Realistically speaking, requesting the EU to agree on the removal of additional conditions such as Direct Transportation Rule or “two-steps procedure” should not be the focal point in the negotiation of future UK-EU RoO, since these restrictive conditions are prevalent in EU FTAs including CETA. Having EU to back down on this point is difficult and it would only waste the UK more time in concluding the much-needed FTA. It’s worth noticing that when designing these rules, EU did take into account the production reality of the UK. For example, the textile production reality in the UK reflects the “two-steps procedure” in EU RoO. Moreover, the removal of certain additional condition would not make a difference to the UK. Take “direct transportation” requirement as an example, due to UK’s geographic location to the EU, transportation is best and most likely direct.

Second, CETA contains bilateral cumulation and even full cumulation with the EU, which is the focus of the negotiation, as the pillar industry - car industry relies heavily on EU components as well as other non-UK components. The cumulation arrangement in CETA is generous and feasible considering UK’s production reality. The cumulation in CETA works even in case of insufficient production, where non-originating material from EU or Canada is involved.43 For example, some non-originating products from the EU which have undergone insufficient production are exported to Canada for further production. In Canada, they have also undergone insufficient production. After both production in EU and Canada, the product specific rule of origin is met with the total production carried out on the final products. In the end, as long as the sole aim of this production in the Canada, demonstrated on the basis of a preponderance of evidence, is not to circumvent import duties in EU44, the final products can be exported to the EU as Canadian origin under CETA. With such precedence in CETA, the UK should push the EU to agree to similar terms in the new RoO. Since EU will also benefit by keeping the UK’s orders in the European continent instead of handing them out to other countries, such terms go along with the common interests of UK and EU.

CETA RoO are also flexible in the following ways.

Primarily, the product-specific rules in CETA are flexible. Compared to PEM Convention, CETA contains a set of more relaxed List Rules. For Example, motor vehicles, with the Tariff Heading of 8703, will be granted preferential origin under CETA if the value of all non-originating materials used does not exceed 50% of the ex-works price or transaction value of

43_{Legislation L11, Volume 60. (2017). Official journal of the European Union, 468.}

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the product. However, the tolerance in PEM Convention is 40 % of the ex-works price of the product. Such more favorable arrangements in product specific rules can be seen in the List Rules for many products.

Moreover, CETA provides flexible mechanism of proof of origin and electronic custom procedure. According to Article 18 in the CETA Origin Protocol, the proof of origin to be used in CETA is the origin declaration. In the EU, the REX applies according to Article 68(1) UCC IP. It means that exporters to the EU simply need to upload production information in the REX prior to the shipment of the products, and EU custom authority will inspect the origin declaration in the electronic system before their arrival, so that they can be released immediately at the EU custom.45 Since such mechanism has already been in place in the UK, future UK-EU FTA can inherit the EU implementation in CETA to speed up the transaction of goods.

No matter what method is used to define the RoO in a UK–EU FTA, the additional burden on economic operators would be inevitable, complying with a new set of RoO can be difficult and expensive to handle, especially when external specialist may have to be hired at the beginning to get the belt running. To make up for the burden laid upon economic operators, there are two main things the UK can strive for.

First is the alignment of new RoO to existing rules. As explained before, familiarity to the practice of rules can avoid the chaotic and time-consuming period of adaptation and therefore increase efficiency.

Secondly, UK can actively push for an electronic system to verify the origin and develop user friendly application to smooth the transition. More specifically, the focus of the negotiation is the continuance of AE system and extending the REX to future UK-EU FTA. The practice of CETA have proven the effectiveness of REX in saving time46, by including REX into the future implementation of RoO, UK exporters will benefit as much as Canadian ones. The electronic system can also be combined with a prior submission and verification system of proof and origin similar to the provision in CETA47_{, so that the goods won’t be detained at the custom}

for a long time.

In conclusion, having a new set of RoO does not only mean burdens, the UK and the EU can seize this opportunity to design a set of rules that reflects business reality more closely and integrate the available technology into the implementation of rules to advance RoO and reduce its long-condemn trade-restrictive effect.

45_{Schmitz, Jan. "The Comprehensive Economic and Trade Agreement (CETA): An Appraisal from the Perspective of the} EU." Issues of the European and International Economy in the Era of Globalization: 11.

46_Ibid.

47_{The economic impact of the Comprehensive Economic and Trade Agreement (CETA), Directorate-General for Trade}

(European Commission),5th February, 2018, ISBN 978-92-79-68694-8. available at:

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Recommendation

Having gone through three possible options that UK has in regards to the design and implementation of RoO, this section will focus on giving recommendation to the UK government with a comparative approach.

Comparing the provisions to determine the origin of the products in CETA, PEM Convention and non-preferential RoO, EU takes a consistent approach in the design of these rules. In all of these RoO, if the HS Tariff heading is associated with a specific rule in the “List Rules”, such rule, no matter modeled on CTC, Added Value of Specific Processing, will primarily apply. If no specific rule is assigned to a certain product, the “substantial transformation” principle and “minimum operation” requirement will be applied to determine the origin of the product. The explicit texts in all three sets of RoO are modeled after UCC and IP. Therefore, the UK would not go far in the attempt to drastically change the provisions that determine the origin. EU is persistent in promoting its standard including the unified rules such as UCC, such position was clear in the case of CETA. While Canada and EU has different sets of RoO, the agreed RoO in CETA is almost the same as UCC and the IP.48 Therefore, since UK has been operating such set of rules under the EU for long, it’s not likely that EU will agreed to new RoO that deviate much from the existing ones.

Comparing how PEM, CETA and non-preferential RoO is implemented and operated for customs and economic operators, there are convenient implementations for the UK to strive to include in its RoO with the EU. The AE system and its combination with REX has benefited Canada in CETA. Such prior to transport RoO verification will help speed up the traffic of UK-EU import and export, as the products will be released at the custom instantly just as in the case of Canada.49 Therefore, UK is in a good place to request for the same model in CETA if new FTA is to be negotiated. If the UK decides to join the PEM Convention, the REX maybe will not be in place for exporters not qualified as AE, and the application of EUR.1 and EUR-MED will be the same before Brexit. Good news is that most Chamber of Commerce have separate online platforms for the application of these COs, so there is some convenient element in the process. But, compared to the CETA model, the digital facilitation exists even in the custom clearance, the time spent on custom check on paper-form EUR.1 and EUR-MED for

48_{Schmitz, Jan. "The Comprehensive Economic and Trade Agreement (CETA): An Appraisal from the Perspective of the}

EU." Issues of the European and International Economy in the Era of Globalization: 11.

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importation will be saved under the CETA model. The same goes for adopting non-preferential RoO system, since under the current policy, non-preferential CO is also in paper form, the comparative advantage in CETA in this regard comes clear. Therefore, the UK should try to push for the inclusion of REX as well as the custom cooperation provision50 in CETA in its future RoO with EU.

Comparing the cumulative arrangement in CETA and PEM Convention, PEM Convention stands out with diagonal cumulation. In fact, CETA include bilateral cumulation and quasi-diagonal cumulation. Under such cumulation provision, a material that satisfies the CETA rules of origin based on production undertaken in one party is treated as originating when it is used to make goods in the other party. If a claim for preferential tariff treatment is made on the basis of the accumulation of production, the exporter must possess a statement from the supplier with information on the non-originating materials. CETA cumulation also includes provisions under which Canada and the EU can agree to treat materials from other countries with which they each have an FTA as originating, subject to any conditions the Parties may establish. This is known as cross-cumulation. In addition, if the EU and the United States enter into an FTA, producers will be entitled to count US materials toward the originating status of Canadian or EU goods of Chapter 2 or 11, heading 16.01 through 16.03, Chapter 19, heading 20.02 or 20.03, or subheading 3505.10, subject to agreement by Canada and the EU on the applicable conditions.51 Such arrangement is somewhere close to diagonal cumulation. Indeed, such quasi-diagonal cumulation is not comparable to the diagonal cumulation set out in PEM Convention in size. However, since CETA set the precedence of such cross-FTA based diagonal cumulation, UK can pursue to include similar provision in future UK-EU RoO. In conclusion, the UK government should not focus on changing the long-practiced UCC IP model of determination of origin, nor on the removal of territorial principles such as direct transportation. Instead, the UK should dedicate to participate the diagonal cumulation to preserve existing production chains. Meanwhile, the uniform digital REX system in combination with AE system can streamline the custom clearance and improve the efficiency of importation and exportation like in the case of CETA.

50_Ibid. 51

Barbee, Inu. "Canada’s Trade Policy: In Search of a Roadmap." American Review of Canadian Studies 45, no. 4 (2015): P 399.

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Conclusion

This thesis aim at providing analysis for the possible options and recommendation for designing the preferential RoO in future UK-EU FTA.

In the context that UK and EU 27 used to have no customs and tariff, the goal of negotiators should be reducing the impact of Brexit on UK-EU trade, with an eye on achieving more liberalization. It is for the benefits of both parties to make sure that whatever RoO are to be included in the future FTA, they should not add burden on the parties apart from the unavoidable administrative mundane.

With preferential RoO coming into being for decades, both the governments and corporations have accumulated knowledge in this area. Experience help business understand the impact of different RoO on both selling and purchasing strategies. Meanwhile, the duty avoidance strategies developed over the course start to focus on preferential RoO more and more, as obtaining preferential origin will help economic operators increase their profit margin effectively.

However, the complexity of RoO may scare off small or medium size corporations. To these economic operators, they prefer to avoid complicated new rules and stick to the familiar set of RoO to originate their exports even if they have to pay more on tariff.52 And it’s especially so when the cost of external specialists is not affordable for many small and medium corporations. It is a pity because their products have high chances of qualifying for preferential origin with locally sourced production chain, and they are simply taken aback by the paper documents required by the new rules. In addition, certain rules such as direct transport, physical segregation and prohibition of drawback are further distancing them to the use of preferential regimes. Therefore, given that the EU FTAs do not have prevalent practice of leaving out the additional conditions like direct transport, adopting the RoO that economic operators are familiar with and streamlining the mechanism of proof of origin is the key.

In line with the argument that familiarity can soften the impact of complexity, economic operators also prefer predictable RoO, the rules that demonstrate the predictability of obtaining preferential origin. For corporations, it is essential to predict whether or not their products can be granted preferential origin and optimize their production chain accordingly. If RoO are written in a general and implicit way, the utilization of such RoO is low, as producers won’t be able to know how to adjust their production chain and if preferential origin will be granted after they’ve done so. RoO based on the value added may reduce predictability in a way that it’s hard to predict the variable costs and with what exact prices the customs calculate the added-value ratio. Based on the implementation model of RoO, CTC or a specific RoO are

52

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considered more predictable than an Added Value RoO where the fluctuating values of the raw materials affect the predictability of the origin of the exports.

Apart from simplicity and predictability, the harmonization of RoO is always welcomed by economic operators. The EU has concluded more than 30 FTAs,53_{among which different RoO}

are applied. As a result, economic operators have to perform several calculations on the same products that may produce different results. A more harmonized approach, at a national if not global level, might decrease the burden for economic operators to comply with preferential origin and enhance the utilization of FTAs.54 With this argument, aligning the preferential RoO with the widely accepted PEM Convention will be a good solution for both the EU and the UK. The cumulation arrangement in PEM will also help the UK in terms of outsourcing the production to EU countries while acquiring preferential origin. The tariff will be therefore saved and economic operators won’t have to go through drastic change in their originally EU-based production chain.

The new UK-EU FTA RoO can also strive to include available technology. As more corporations are using software for RoO calculation and compliance nowadays, the compatibility of RoO with software should be taken into consideration during negotiations. The inclusion of software or online system can facilitate and streamline trade processes for international operations. As a result, compliance and utilization of RoO will be boosted. By linking the RoO Software to corporations’ enterprise resource planning, the barrier of paperwork will be reduced. Utilizing the existing REX system with AE is an effective approach of doing so.

In sum, this thesis highlighted the pros and cons of three different approaches that could be adopted by negotiators under different economic and political considerations. Adopting the PEM is a readily available solution that allow the UK to maintain the EU outsourcing reality, while adopting the CETA model of digital implementation can bring more benefits to EU and UK corporations.

Whatever model is adopted, negotiators should reflect on the practicality of such RoO. The most impacted group is economic operators. RoO should be written and adopted to their benefits. The balance of interests between global production and local production should also be considered by UK negotiators. RoO are important trade and industrial policy instruments that provide benefits to local producers if designed more restrictively.55 The weighing and balancing authority is in the hands of the negotiators of the FTA, and what they need to keep in mind is the long-term consequence their decisions will cause.

53

The European Commission, Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on Implementation of Free Trade Agreements, 31 October 2018, SWD(2018) 454 final.

54

Barcel o, J.J. (2006), “Harmonizing preferential RoO in the WTO system”, Cornell Legal Studies Research Paper No. 06-049. pp 37.

55

Coyle, J.F. (2004), “RoO as instruments of foreign economic policy: an analysis of the integrated sourcing initiative in the US–Singapore free trade agreement”, Yale Journal of International Law, Vol. 29 No. 545, pp. 579.

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What should UK do to lower the barricade of Rules of Origin after Brexit