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3 July 2020

A car constructed entirely of Korean components could be classed as Made in Britain under proposals put forward by the UK Government to the EU, our new analysis reveals.

As part of its negotiations over a Free Trade Agreement (FTA), the UK is calling on the EU to allow it to escape EU tariffs on products made with imported parts from any country in the world that both the EU and the UK have FTAs with.

The UK Government is requesting that goods using inputs imported from third parties should be treated as if they had been made in the UK so long as the two relevant FTAs have equivalent rules of origin.

The terms of the UK proposal in effect ask for some of the benefits of a Customs Union with the EU – an option that has been scathingly dismissed previously by both Boris Johnson and Theresa May.

Under the proposals, goods manufactured solely from Korean parts and then assembled in the UK could be exported to the EU and receive the same tariff exemptions as goods made in the UK from UK components.

Among the countries the UK Government has initiated preliminary FTA discussions with whose goods could be included in the new arrangements are Japan and South Korea.

Under current EU rules typically 50-55% of the “value added” of a good has to come from the UK or the EU  in order for the good to benefit from the tariff reductions. Typically a “made in UK” car has about 44% UK value.

L. Alan Winters, Director of the UKTPO, said:

“In some areas of their Free Trade Agreement negotiations, the UK has been unwilling to agree to the deep integration that the EU is seeking or that its own Political Declaration foresaw. But in other areas, however, and somewhat ironically for a country seeking just an ordinary free trade agreement, the UK is seeking deeper connections than the EU has offered in other FTAs. Rules of Origin is one of these.”

Dr Peter Holmes, Reader in Economics at the University of Sussex Business School and UKTPO Fellow, said: “What the UK Government is seeking from the EU on Rules of Origin is unprecedented. FTAs grant zero-tariff entry to goods made in the partner country but rarely allow foreign components to be simply assembled and shipped on duty free.

“To the average Brexit supporter this approach may sound ridiculous and not part of any deal they voted for, but without it Japanese car plants risk facing 10% tariffs on cars made in the UK if they use engines, gearboxes or other components made in Japan. From a trade policy perspective it makes sense because it will allow a larger share of goods emanating from the UK to get the zero-tariff treatment but the EU will want to do all in its power to stop the UK becoming a duty free offshore assembly base.”

Rules of Origin is one of a number of areas identified by our analysis, published today in a new briefing paper, where the UK is seeking deeper integration with the EU than the bloc currently has under FTAs with other countries such as Canada. These areas include deeper integration over technical barriers to trade, financial services and the recognition of professional qualifications – moves seemingly at odds with the UK Government’s rhetoric around the aims and purposes of Brexit.

Our analysis identifies a serious risk that goods made in the UK will not be allowed to be sold in EU markets without inspection certificates issued by testing bodies based in the EU. The UK Draft FTA has called on the EU to allow UK testing bodies to certify goods as made to EU standards without further inspection at the border, even where the UK has set different standards for goods sold in the UK.

The analysis also highlights the potential for dispute between the UK and EU over the mutual recognition of professional qualifications which, if not achieved, could curtail the employment ambitions of UK skilled specialists to work in the EU.

The UK’s proposal would see professional qualifications be granted recognition as the default option, with the possibility of some being subject to an aptitude test, unless it can be shown that there are specific reasons why this is not possible. This proposal goes far beyond what we believe the EU is likely to agree to.

If mutual recognition is not achieved, working abroad will be made much more difficult for workers in regulated professions such as health care professionals, architects, veterinary surgeons and pharmacists, who currently enjoy relatively easy recognition of their qualifications within the EU.

Julia Magntorn Garrett, Research Officer in the Economics of Brexit at the UK Trade Policy Observatory, said: “The UK’s requests over mutual recognition of professional qualifications is ambitious and asks the EU to go way further than it has agreed to with any other developed nation.

“If the UK and EU cannot agree terms on this, then this will be a major shock for many UK professionals considering plying their trade in the EU or for UK companies looking to fill vacancies for specialist professionals with EU applicants. It is far from clear that the UK will prevail on this, given its resistance to EU demands in many other important areas.”

To find out more, see Briefing Paper 43: UK-EU Free Trade Agreement: Please, Sir, I Want Some More

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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