Heard of “Rules of origin”? They could severely restrict Britain’s trade post-Brexit

Having been forced to understand the intricacies of the Irish border, we will all soon have to become experts on the scope of trade deals, and the rules and practices behind them. Brexit negotiations will soon turn to Britain’s future relationship with the continent.

These talks with be fraught. Already discussion is raging over what model Britain should look to emulate—Norway, Switzerland or Canada. Bound up in all this are big political questions over Britain’s membership of the customs union and single market, both of which, as things stand, Britain will shortly be leaving.

You’ve probably heard of most of these things—but there are other significant details to be resolved which may have passed you by. They are not all glamorous—but could have a marked impact on Brexit Britain’s future trading relationship with the EU. Even if it manages to strike that much-vaunted free trade deal.

A key one is what are known as “rules of origin,” a feature of trade agreements the world over. As explained in a technical briefing note by the World Trade Organisation—the international organisation responsible for overseeing the global trading system—these rules establish “the criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports.” Essentially, if country X and country Y have an FTA, they may still have to pay tariffs on certain goods when they trade with one another, if they contain parts imported from a third country.

The detail of the rules can be bewildering, as even a quick look at an explanatory note on what is known as “cumulation” from the WTO makes clear. But the nub of it is this.

At the moment, rules of origin pose no barrier to British trade with Europe. This is because we are part of the single market.

But if we leave, such rules could kick in. There is a possibility that in future, if something a UK company wants to export to the EU uses components sourced from, for example, China, the finished product would be deemed to be part British and part Chinese. There is a question over what percentage of imported parts a good must contain to avoid the tariffs. A common threshold is 40 per cent.

So what does all this mean? In short, the economic consequences could be severe. If Britain does not manage to strike a free trade agreement with the EU, tariffs will be imposed on all its trade with the bloc, hindering trade. But even if Britain does manage to strike such a deal, it could still face the prospect of tariffs on certain goods. And note, the UK imports around $80bn worth of goods from third countries for use in British production (not including precious metals and stones).

The potential good news for the UK is that the EU does allow what is known as “diagonal cumulation”—meaning both the value added in the exporting country and any imported raw materials or components are exempted from tariffs—in many of its existing trade agreements.

But such an outcome cannot necessarily be taken for granted, which could be very worrying for successful British industries. For example, British car-makers are very dependent on sales to continental Europe: one in two Nissan cars made in Sunderland is sold to another EU country.

Moreover, modern manufacturing relies on closely integrated production networks and supply chains. A finished Nissan or BMW car sold to a French or German will have components sourced from several other countries, both inside and outside the EU, and it is well known that some of these parts may cross the border several times in the course of production.

If what the EU proposes on rules of origin is not favourable to us, we may suddenly find that we are all talking about the respective merits of diagonal as opposed to other variants on cumulation. Merry Christmas.