{"id":1115,"date":"2017-09-27T09:47:33","date_gmt":"2017-09-27T08:47:33","guid":{"rendered":"http:\/\/blogs.sussex.ac.uk\/uktpo\/?p=1115"},"modified":"2017-12-12T16:51:41","modified_gmt":"2017-12-12T16:51:41","slug":"grandfathering-ftas-and-roos","status":"publish","type":"post","link":"https:\/\/blogs.sussex.ac.uk\/uktpo\/2017\/09\/27\/grandfathering-ftas-and-roos\/","title":{"rendered":"Grandfathering Free Trade Agreements and Rules of Origin: What might appear bilateral is in fact trilateral!"},"content":{"rendered":"Share this article: <\/em> \"Facebook\"<\/a>\"twitter\"<\/a>\"reddit\"<\/a>\"pinterest\"<\/a>\"linkedin\"<\/a>\"mail\"<\/a>

 <\/p>\n

\"Michael\"\"27 September 2017<\/em><\/p>\n

Dr Peter Holmes\u00a0Reader in Economics and Dr Michael Gasiorek is Senior Lecturer in Economics at the University of Sussex and Director and \u00a0Managing Director of InterAnalysis respectively.\u00a0Both are Fellows of the\u00a0UKTPO.<\/em><\/p>\n

With respect to the post-Brexit period, the UK needs to sort out its trade relationships not just with the EU but also with non-EU countries. In regard to the EU, Mrs May\u2019s<\/a> stated objective is for an \u201cimplementation\u201d period during which \u201caccess to one another\u2019s markets should continue on current terms\u201d,\u00a0 such that \u201cbusinesses and public services should only have to plan for one set of changes in the relationship between the UK and the EU\u201d.\u00a0 However, for this to be possible, the UK will also have to deal with the relationship with non-EU countries.\u00a0 In this blog, we focus on an important aspect of Free Trade Agreements (FTA) which centres around something which is a bit technical and often not well understood \u2013 called \u201cRules of Origin\u201d (RoOs).[1]<\/a><\/p>\n

There are more than 50 countries with whom the EU, and therefore the UK, currently has a FTA.\u00a0 In 2015, these countries accounted for over 15% of total UK imports and exports. If the UK leaves the EU without any agreement with these countries all this trade could be negatively affected as the UK would have no legal option but to switch to trading on less advantageous market access conditions<\/a>. In the first instance, this implies that the UK will face and also impose Most Favoured Nation (MFN) tariffs on trade with these countries in accordance with WTO rules, which require MFN tariffs to be charged to all countries with which you do not have a full FTA (with some very limited exceptions).<\/p>\n

Copy and paste?<\/strong><\/h3>\n

\u201cGrandfathering\u201d means either seeking to continue applying existing EU treaties with third countries that the UK is a party to as an EU member state or <\/em>seamlessly signing new bilateral FTAs with effectively the same terms. The idea of \u201cgrandfathering\u201d is to say: \u201cas an EU member we already have an agreement with these countries, such as Korea, so let\u2019s just agree that we can apply the same agreement between the UK and Korea in the post-Brexit period\u201d.\u00a0 This is a nice idea and on the face of it very logical. Some countries have expressed a willingness, at least in principle, to proceed on this basis.<\/p>\n

But there are several reasons why this might not prove so easy. Partner countries might easily seek to extract further concessions in particular sectors or areas of policy. Similarly, there is a lack of clarity as to whether this grandfathering is intended as a new permanent state of affairs, or as part of a transitional arrangement. The willingness of UK partner countries to go down this route may well depend on this, as well as on the state of play of UK negotiations with the EU. If it is intended as a permanent arrangement then this will be played out in the UK\u2019s domestic politics: There will be those that will argue that the point of Brexit was for the UK to choose the types of FTAs it wants and not just to take on all the old FTAs. Moreover, mutual recognition of standards and certification would not automatically apply if the UK did not have the same rules as the EU post-Brexit<\/p>\n

Furthermore, the EU is likely to insist that EU trade treaties can only be applied to EU member states, so it seems likely that in reality, it will be necessary to sign new bilateral agreements. However, even if the partners had no new demands it may well require more than just a simple cutting out \u201cEU\u201d and pasting in \u201cUK\u201d. \u00a0This is where Rules of Origin<\/em> (RoOs) turn out to be hugely important.<\/p>\n

The technicalities<\/strong><\/h3>\n

Imagine the UK grandfathered the EU-Korea agreement, which consequently allowed for continued free trade between the UK and Korea. As with all FTAs, the free trade is contingent upon exporters proving that their goods are produced in their country. Hence, for the UK to export cars to Korea, the firms in the UK have to be able to prove that the cars really were produced in the UK.\u00a0 Now in today\u2019s world, producers often use a lot of imported intermediates to produce a given good. So, we need some rules to determine how much can be imported and used by the UK producer for the good to still be considered a UK good. Indeed, EVERY Free Trade Agreement needs to include such rules about what goods can qualify for preferential market access, and these are known as Rules of Origin[2]<\/a>. The RoOs are crucial to facilitating bilateral trade, for example, between the UK and Korea.<\/p>\n

These RoOs really matter for industries with international supply chains where the exporters produce their goods using imported intermediates. Normally bilateral FTAs (e.g., between Country A and Country B) allow inputs imported from Country A to be \u201ccumulated\u201d with Country B\u2019s inputs into its exports to Country A. So, EU components going into Korean cars, which are then exported to the EU, would be included in determining whether the cars are counted as Korean and vice versa. The producer can add (cumulate) the value of both the EU and the Korean inputs in working out if the good qualifies for originating status.<\/p>\n

But it gets more complicated when a firm uses imported inputs from a non-partner country and then wants to export them to an FTA partner.\u00a0 For example, with respect to the EU-Korea agreement, how many Chinese components can go into a Korean car such that it is still eligible for duty-free access to the EU?\u00a0 A common rule is to say that at least 40% of the value of the product, such as machinery, has to come from domestic inputs\/activity.[3]<\/sup><\/a> These rules need to be agreed upon for every product which is traded, and this can be very tricky.<\/p>\n

Let\u2019s explore this a bit further by way of an example. Suppose that:<\/p>\n

Initially, pre-Brexit:<\/p>\n