Explaining Cumulative Rules of Origin
Because boring things have become important again
In order to benefit from the advantages of a trade agreement the UK has with another country, a UK exporter must prove that the product it is selling is actually from, or has had sufficient work done on it in (subject to myriad terms and conditions), the UK.
While in a sense these rules are quite logical, I have previously written about why they will likely cause problems for UK exporters to the EU post-Brexit.
In brief: because of long supply chains, it is often difficult (and expensive) for a UK exporter to prove that the product it is selling is actually from, or has had sufficient work done on it in, the UK.
However, approaches to rules of origin differ.
For this exercise I’m going to assume the UK has left the EU and the European customs union and has fallen into a relationship that pretty much zero tariffs all goods we sell each other, so long as said goods abide by the agreed rules of origin requirements.
The rules of origin requirements in a future UK-EU FTA will almost certainly allow for bilateral cumulation.
This means that any good originating in the EU can be treated as being from the UK, and vice versa, for trading purposes between the two.
Take a car, for example. If a UK company sourced all of the parts from across the EU and then put it all together in a factory in the UK, it could sell it back to a customer in the EU, taking advantage of the preferential zero tariff rate, as if all the bits of the car originated in the UK.
This is where it gets a little more complicated.
Let’s say that as well as an FTA with the UK, the EU has another one with Japan (currently being negotiated), and the UK also has one with Japan (… maybe one day).
If the rules of origin requirements in the EU-UK FTA allow for diagonal cumulation explicitly with Japan, a UK producer could import a good from Japan (that originates from Japan), incorporate it into something else, alter it, do nothing with it, whatever, and then sell it to a customer in the EU and it would be treated as if it was of UK origin no matter how much value was added, or not, in the UK.
The big one.
If rules of origin requirements allow for full cumulation then in a deal between the EU and a free trade zone consisting of multiple countries — let’s say the EFTA/EEA countries plus their new member, the UK— separate manufacturing work done in the different countries of the free trade zone on a non-originating good can be totted up so as to confer originating status.
Unlike diagonal cumulation, this approach allows for non-originating goods to be considered as input for cumulation purposes — all that matters is that the origin requirements are fulfilled within the preferential trade zone as a whole.
I know, none of that made sense, so an example:
Let’s say that for a good to qualify as being from the EFTA/EEA bloc — and therefore able to take advantage of the zero tariff preferential rate when exporting to the EU — the total value of non-originating inputs must not be more than 40% of the final price.
So, Iceland imports some non-originating metal worth €40 from Peru. Someone in Iceland bangs it about a bit, and it is now is worth €50. The value of non-originating inputs is currently 80% of the final price. It therefore does not qualify under the rules of origin requirements for the preferential zero tariff rate for exports to the EU.
However, instead of going to an EU country, it gets sent to Norway — a fellow EFTA/EEA member — for more work. Someone here bangs the metal around some more. It is now worth €100.
Non originating input: €40
Manufacturing work in Iceland: +€10
Manufacturing work in Norway: +€50
Total value of non-originating inputs: 40% of final price.
It can now be exported to the EU, taking advantage of the preferential zero tariff rate.
— — — — — — —
We’ve still got no idea what our future trading relationship with the EU and others will look like, but this is one of many issues that UK policy makers are going to have to get their heads around, and quickly.
Further reading: The World Customs Organization, Accumulation/Cumulation — http://www.wcoomd.org/en/topics/origin/instrument-and-tools/comparative-study-on-preferential-rules-of-origin/specific-topics/study-topics/cum.aspx