A new relationship for the UK with the EU: the options examined

Transcription

1 A new relationship for the UK with the EU: the options examined EfB Perspective 6 by Ruth Lea, May What should Britain s response be to the changing global economy? In 1980 the EU28 s share of world GDP was over 30% of world GDP (Purchasing Power Parity terms), which had fallen to 24% by 2000 and was just over 17% in By 2020 the IMF expects the EU28 to be around 15½% of global GDP, a tad larger than the US (15%), but smaller than NAFTA (over 18%), the Commonwealth (18½%) and China (nearly 19%). 1 Further out, the secular decline in the EU s share of world GDP can only continue, reflecting mature and stagnant markets and adverse demographics in key EU economies. Growth markets overwhelmingly will be located outside the EU. The UK needs a new, looser relationship with the EU, which gives the UK freedom to fully benefit from the changing global economy. The UK needs to be better positioned to maximise growth potential and prosperity: Firstly, Britain should be able to repeal and/or amend business regulations currently imposed by the EU in order to improve its international competitiveness. 2 Fortune favours the flexible. Secondly, Britain should be able to negotiate its own trade deals with favoured trade partners. Membership of the EU s Customs Union currently precludes this. And, thirdly, Britain should be able to adopt a non-discriminatory immigration policy, treating EU and non-eu citizens on an equal footing. PM David Cameron has promised an in-out referendum on British membership by end-2017 following negotiations with our EU partners. 3 It is right to support the PM s plans to renegotiate our relationship with EU. But if the negotiations fail to deliver any substantive reforms, there is nothing to fear from leaving the EU ( Brexit ). On the contrary, if we achieved self-determination vis-à-vis business regulations, trade agreements and migration policy, as specified above, there is much to gain. 1 This paper reflects the views of the author and not the views of the Economists for Britain. 1

2 If there were a Brexit, the key question then becomes the feasible and desirable options available. This note considers these options: the WTO option, trade agreements with favoured partners, rejoining EFTA, the Turkish option and the non-eu member EEA option. 4 British option: the WTO option as default position There are four main points to note relating to the WTO (World Trade Organisation) option. The first point is that it would be the default option for the UK if Brexit, assuming no specific trade treaties. The UK would resume the full rights and responsibilities in all matters covered by the WTO Agreements including tariffs and other trade related matters. We would, of course, have to adhere to the WTO rules and trade internationally on non-discriminatory terms. Secondly, Britain s goods exports with the EU would face the EU s Common External Tariff (CET), unless there was some free trade deal with the EU. According to the House of Commons Library, however, the average weighted tariff is currently about 1%. 5 And there are, of course, no tariffs on services (about 40% of UK exports of goods and services exports were services in 2013). But tariffs would probably be an issue for the car industry, for example, where the CET is nearly 10%. Thirdly, trade under the WTO rules, without the benefits of preferential trade deals, is not unusual. According to trade expert Professor Richard Baldwin, quoting Carpenter and Lendle, 64% of world trade is covered by a Regional Trade Agreement (RTA) and 29.8% of world trade is subject to preference margins, with only 3.9% enjoying margins over 10 percentage points. 6-7 A third of trade is, therefore, not covered by an RTA and a handsome majority of trade (70%) is not subject to preference margins. 8 And as tariffs have fallen generally, the usefulness of RTAs in reducing tariffs has diminished accordingly. By way of digression, it is worth noting the variety of Regional Trade Agreements (RTAs). 9 They include: Free Trade Agreements (FTAs) for goods, where there is no internal tariff, but nationallydecided external tariffs. Customs Unions, for goods, where there is no internal tariff, but a Common External Tariff (CET) is applied. In an FTA the members, therefore, retain the right to decide their own tariffs against third countries whilst in a Customs Union they do not. Preferential Trade Agreements (PTAs) or Partial Scope Agreements (PSAs). These are trade pacts between countries that reduce tariffs for certain products. While tariffs are not necessarily eliminated, they are lower than countries not party to the agreement. Economic Integration Agreement (EIA) is any agreement, including a basic PTA, which also covers services. 2

3 Fourthly, much is made of the benefits to trade of being inside the EU s Customs Union and Single Market. But the explosive growth of, for example, Sino-UK trade over the past decade suggests that economic factors, including buoyant, growing markets, are far more significant than membership of the EU. Taking the decade , UK s exports of goods and services to China rose by 398% (nearly 5-fold), whilst increasing by only 47% to the EU and 74% globally. The equivalent import data show UK imports of goods and services from China rose by 280% (nearly 4-fold), but increased by only 52% from the EU and by 69% globally In conclusion, trade under the WTO rules can flourish, providing the economic conditions are right. And let us note that China does not pay for access to the Single Market. Neither does China have to comply with the myriad of social/employment regulations imposed on the UK as a member of the EU, though, of course, China does have to comply with product regulations. Conversely, when we export to China we have to comply, very understandably, with their product regulations. British option: the UK would be in an excellent position to negotiate FTAs The WTO option would not, however, be the optimal position for Britain or, indeed, for Britain s main trading partners. Britain would, however, be in an excellent position to negotiate FTAs if Brexit. And we would have negotiating clout. We are a large, prosperous market and run substantial trade deficits with many of our trading partners. The notion that we are too small to negotiate deals, and we need the EU s clout to negotiate deals, is frankly bizarre. Iceland has agreed a trade treaty with China. 12 Moreover, the UK would surely find it relatively straightforward to negotiate its own FTAs bilaterally compared with the EU28, where competing country interests and sensitivities can dilute, disrupt and delay the negotiations. In the current US-EU28 TTIP (the Transatlantic Trade and Investment Partnership), for example, France has insisted the audio-visual sector be excluded, as a cultural exception. 13 There are three groups of countries with which the UK should seek to negotiate trade deals. The first group comprises the EU. We would be in a very strong position to negotiate an FTA. The UK is a huge market for EU products and runs a huge trade deficit with the EU. No EU exporter would wish to see any diminution in, or disruption to, UK-EU trade. In 2014 Britain had a visible trade deficit with the EU of 77.0bn. More specifically the UK recorded goods deficits with Germany ( 30.4bn), Belgium-Luxembourg ( 8.9bn), the Netherlands ( 8.8bn), Italy ( 8.1bn), France ( 6.1bn) and Spain ( 4.4bn). 14 Negotiating an FTA with the EU should not be so difficult. The EU has negotiated many trade deals. Templates, therefore, abound. A trade deal for services should also be on the agenda. The second group comprises the non-eu counterparties in current EU FTAs, including Korea, Chile or Mexico. 15 We would be excluded from these FTAs if we left the EU. But we could use the existing EU agreements as templates for bilateral agreements, for example, for a new UK- Korean bilateral agreement. Korean exporters would surely be supportive. No Korean exporter would wish to see any disruption to UK-Korean trade. 3

4 The third group comprises non-eu countries that are not in currently operating EU FTAs. These include key Commonwealth countries, where we should have a potential trading advantage, and the US. Much, much more should be made of our Commonwealth links, which have been neglected over the past 40 years. Importantly, many Commonwealth countries have very favourable growth prospects. Starting with the Commonwealth: 16 Britain could adopt the EU-Canada Comprehensive Economic and Trade Agreement (CETA), as a template for a UK-Canada agreement. The negotiations have been completed for CETA, but formal approval of the draft agreement is still required. The EU has undertaken trade negotiations with India (launched in 2007), Malaysia (launched in 2010) and Singapore (the negotiations have been completed, but the draft agreement has not yet been ratified). Progress achieved so far could be used for the UK bilateral agreements. And surely the negotiations with India and Malaysia could be speeded up if they were straightforward bilateral negotiations. The EU has no plans for trade agreements with Australia and New Zealand. In addition: The UK could negotiate a bilateral deal with the US, instead of waiting on the EU-US s afore-mentioned TTIP. The US is a very important trading partner for the UK. Rather late in the day negotiations have begun with China (investment talks launched in 2013) and Japan (trade talks launched in 2013). If Brexit, the UK could push ahead bilaterally. Negotiations for a free trade agreement with the six countries of the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE), have been suspended. But there could be a good chance for GCC-UK agreement, given the important economic ties. British option: re-joining EFTA Britain, a founder member in 1960, left EFTA (European Free Trade Association) on joining the EEC in January If Britain were to leave the EU, there would be a good case for applying to re-join EFTA. Norway and Switzerland are important trading partners, Iceland and Liechtenstein less so. A successful application would, of course, need the agreement of the current EFTA members. There is a bonus in re-joining EFTA because EFTA has negotiated an impressive network of FTAs with third countries. 17 Conditional on the agreement of the third countries in question, Britain would then have preferential access to these markets as well as the EFTA markets. 4

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6 British option: resumé In conclusion, the preferred British option would be: The WTO option, under WTO rules, as a very viable default position. Britain should consider negotiating FTAs with the EU, non-eu countries in current EU FTAs and a much more extensive list of FTAs with other non-eu countries, including Commonwealth countries and the US. Britain should consider applying to re-join EFTA. Sub-optimal options There are two further options to consider, which may be regarded as sub-optimal. The first option is the Turkish option. Turkey is a member of the EU s Customs Union, with the EU s Common External Tariff (CET) and no internal tariffs. Membership of the Customs Union was probably useful 40 years ago when industrial tariffs tended to be high but, as tariffs have fallen, it is now much less useful. And there are no tariffs on services. The major drawback of CU membership is the inability of members to individually negotiate their own trade deals. The second option is the EEA option, outside the EU. The EEA (European Economic Area) currently comprises the members of the EU28 (the UK is currently an EEA member as a member of the EU) and Norway, Iceland and Liechtenstein. On Brexit the UK would have to leave the EEA, so the UK would have to apply to join the EEA in its own right, if that were its chosen route. EEA membership, outside the EU, provides access to the Single Market and its four freedoms of goods and services and capital and labour. And it commits members to adopting an extensive network of Single Market regulations, including social and employment regulations and financial services regulations. 18 If a non-eu member of the EEA: Britain would not be able to repeal and/or amend Single Market regulations currently imposed by the EU or block any future EU Single Market regulations. This would be a major drawback. Moreover, as a non-eu member of the EEA Britain would have no formal legislative role. Britain would not be able to adopt a non-discriminatory immigration policy, in which EU and non-eu citizens would be treated on an equal footing. 19 This would, arguably, be another major drawback. But Britain would be able to negotiate own trade deals. And Britain would be outside the Customs Union, Common Agricultural Policy (CAP), Common Fisheries Policy (CFP) and the Common Foreign & Security Policy (CFSP). 6

7 References 1. IMF, World Economic Outlook, database, April NAFTA (North American Free Trade Agreement) comprises the US, Canada and Mexico. 2. Business for Britain, Landmark EU poll finds British business leaders demand treaty change, November 2013, found that, by 46% to 37%, British business leaders said the costs of complying with the Single Market outweighed the benefits of being in the EU. 3. Prime Minister David Cameron discussed the future of the European Union at Bloomberg, January This note is based on a speech by the author to the ECR EU conference, Alternatives to EU membership: what are the UK s options?, 18 February House of Commons Library, The economic impact of EU membership on the UK, SN/6730, September Richard Baldwin, Multi-lateralising 21 st century regionalism, Global Forum on Trade (Reconciling Regionalism and Multilateralism in a Post-Bali World), February 2014, on OECD website. Baldwin wrote around half of world imports are covered by an RTA. However, only 16.7% of world trade is eligible for preferences. Moreover, the preference margins are low: less than 2% of world imports enjoy preferences over 10 percentage points. These numbers do not consider trade inside the largest RTA of all, the EU. Taking world totals to include intra-eu flows, Carpenter and Lendle (2010, reference below) calculate that 64% of world trade is covered by an RTA and 29.8% of world trade is subject to preference margins, with only 3.9% enjoying margins over 10 percentage points. 7. Carpenter, Theresa and Andreas Lendle, How Preferential is World Trade?, Working paper , Graduate Institute, Geneva. 8. Baldwin, Multi-lateralising 21 st century regionalism, Global Forum on Trade, February 2014, on OECD website. Baldwin explains the margin of preference created by an RTA is the difference between the tariff applied to imports from RTA partners as opposed to non-rta partners, i.e. the countries most favoured nation (MFN) tariffs. Tariff reductions in advanced economies (driven by GATT Rounds) lowered MFN tariffs to quite low levels, with the result that margins of preference automatically fell. [And] developing countries MFN tariffs have dropped more recently, although largely outside of GATT Rounds. This means that the scope for 20 th century RTAs to create large tariff preferences is now greatly eroded. 9. OECD, Regional Trade Agreements, OECD website. 10. ONS, The Balance of Payments Yearbook, the Pink Book, IMF, World Economic Outlook, database, October IMF data show that China s total exports of goods grew by over 250% ( ), whilst the Eurozone s grew by 44% and globally 65%. 12. WTO website, Regional Trade Agreements, comprehensive list. 13. France 24, EU reaches deal on French cultural exception, 15 June ONS, UK trade, February 2015, 9 April Trade with Belgium and the Netherlands is distorted by the Rotterdam-Antwerp effect reflecting UK exports routed through these ports for other destinations. 15. According to the ONS s The Balance of Payments Yearbook, the Pink Book, 2014, in 2013 the UK had a visible trade surpluses of 1.8bn (Korea), 0.5bn (Chile) and 0.4bn (Mexico). European Commission, Overview of FTA and other trade negotiations, updated March

8 16. European Commission, Overview of FTA and other trade negotiations, updated March WTO website, Regional Trade Agreements. Note that Swiss-EU trade is governed by an FTA (1972) and subsequent trade related bilateral agreements. Trade relations between the other three EFTA members and the EU are governed by the EEA Agreement. Neither of these agreements would be applicable to the UK if Brexit. 18. Note again the Business for Britain poll, November 2013, quoted above. This poll found that, by 46% to 37%, British business leaders said the costs of complying with the Single Market outweighed the benefits of being in the EU. 19. The Norwegian Directorate of Immigration website states all EU/EEA nationals are entitled to work, study and live in Norway. 8

9 Annex: members of the EU28, EEA (European Economic Area) and EFTA (European Free Trade Association) EU28 Eurozon e (18) EU Customs Union (32) EEA (31) EFTA (4) EU Schengen Area (26) Andorra Yes Austria Yes Yes Yes Yes Belgium Yes Yes Yes Yes Bulgaria 2007 Yes Yes Legally bound to join Croatia Yes Yes Legally bound to join Cyprus Yes Yes Yes Legally bound to join Czech Republic Yes Yes Yes Denmark: Yes Yes Yes [Greenland] Estonia Yes Yes Yes Yes Finland Yes Yes Yes Yes France Yes Yes Yes Yes Germany Yes Yes Yes Yes Greece Yes Yes Yes Yes Hungary Yes Yes Yes Iceland Yes Yes Ireland Yes Yes Yes No Italy Yes Yes Yes Yes Latvia Yes Yes Yes Liechtenstein Yes Yes Lithuania Yes Yes Yes Yes Luxembourg Yes Yes Yes Yes Malta Yes Yes Yes Yes Monaco Yes De facto Netherlands Yes Yes Yes Yes Norway Yes Yes Poland Yes Yes Yes Portugal Yes Yes Yes Yes Romania 2007 Yes Yes Legally bound to join San Marino Yes De facto Slovakia Yes Yes Yes Yes Slovenia Yes Yes Yes Yes Spain Yes Yes Yes Yes Sweden Yes Yes Yes Switzerland Yes Turkey Yes UK Yes Yes No 9

10 Vatican De facto 10

11 A new relationship for the UK with the EU: the options examined Annex on trade agreements The following tables show the UK s trade in goods with: Countries with Regional Trade Agreements (RTAs) with the EU. Countries of the EU28. Countries of UK interest that currently have no RTA with the EU. Countries with RTAs with EFTA. The broad conclusions are: Concerning the countries with which the EU has RTAs (table 1): most are not big UK export markets, not even Chile (UK surplus), Mexico (UK surplus) or Israel (UK deficit). Of those that may be considered important export markets, the UK runs deficits with Norway, Switzerland, Turkey and Canada (RTA not yet operative). Trade with South Korea has turned from UK deficit (2011) to surplus ( ), but no Korean exporter would want any disruption in trade with the UK. Trade with the major EU tends to dwarf trade with the countries with which the EU has RTAs (table 2). The UK has a huge trade deficit with the EU, especially Germany. No German car exporter, for example, would want any disruption in trade with the UK. Significant UK export markets with which the EU currently does not have an RTA include Australia (no talks), China (PRC, launched in 2013), GCC (suspended), India (stalled), Japan (launched 2013), Russia, Singapore (yet to be ratified) and US (the Transatlantic Trade and Investment Pact (TTIP), delayed and diluted). See table 3. The list of RTAs negotiated by EFTA (table 4) are, arguably, as significant (if not more significant) that the RTAs negotiated by the EU. Note that RTAs with Canada (2009), Singapore (2003) and Hong Kong (2012) are operative. The EFTA-GCC RTA has been negotiated (2009), but currently non-operative. 11

12 Table 1 UK trade in goods with countries with RTAs with the EU, mn 2011, 2012, 2013, exports 2013, Albania Algeria Na Na Na Na Andorra Na Na Na Na Bosnia & Herzegovina Na Na Na Na Cameroon Na Na Na Na Canada, Comprehensive Trade and , Economic Agreement (CETA), not yet operative CARIFORUM States, Economic Na Na Na Na Partnership Agreement (EPA) Central America (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua & Panama) Chile (comprehensive), FTA , Colombia & Peru: Na Na Na Na Colombia Côte d Ivoire Na Na Na Na Eastern & Southern Africa States, Na Na Na Na interim EPA Egypt Faroe Islands Na Na Na Na Macedonia (FYROM) Na Na Na Na Georgia Na Na Na Na Iceland (EFTA) Israel Jordan Na Na Na Na Korea (South), FTA Lebanon Na Na Na Na Mexico, FTA , Montenegro Morocco Norway (EFTA) Overseas Countries & Territories (OCT) Na Na Na Na Palestinian Authority Na Na Na Na Papua New Guinea & Fiji Na Na Na Na Moldova Na Na Na Na San Marino Na Na Na Na Serbia South Africa, FTA Switzerland-Liechtenstein: Na Na Na Na Switzerland (EFTA) Liechtenstein (EFTA)

13 Syria Na Na Na Na Tunisia Na Na Na Na Turkey (CU) Ukraine EEA, see Iceland, Norway, Liechtenstein Na Na Na Na Sources: (i) WTO website for EU RTAs in force; (ii) ONS, Pink Book, 2014 edition for trade in goods, which only identifies the main trading countries. The unidentified countries are marked above as na. Note: Caribbean Forum (CARIFORUM), comprising 15 Caribbean Community (CARICOM) States plus the Dominican Republic. 13

14 Table 2 UK trade in goods with the EU, mn 2011, 2012, 2013, exports 2013, Austria Belgium , Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France , Germany , Greece Hungary Ireland , Italy Latvia Lithuania Luxembourg Malta Netherlands , Poland Portugal Romania Slovakia Slovenia Spain Sweden EU , Source: ONS, Pink Book, 2014 edition for trade in goods. Note on Netherlands and Belgium: the data are distorted by Rotterdam-Antwerp effect. 14

15 Table 3 UK trade in goods with selected countries with no EU RTA, mn 2011, 2012, 2013, exports 2013, Australia Brazil China: PRC (launched 2013) , China: HK Gulf Cooperation Council Na Na Na (suspended): Saudi Arabia Residual Gulf Arabian countries India (stalled) Japan (launched 2013) Malaysia (launched 2010) New Zealand Russia Singapore (not yet ratified) US (delayed and diluted) 30,928 19,555 40,590 12,933 Source: ONS, Pink Book, 2014 edition for trade in goods. Note: Residual Gulf Arabian countries, excludes Saudi Arabia. 15

16 Table 4 UK trade in goods with countries with RTAs with EFTA, mn 2011, 2012, 2013, exports 2013, Albania Bosnia-Herzegovina Na Na Na Na Canada , Central America (Costa Rica & Na Na Na Na Panama) Chile (comprehensive scope) , Colombia (comprehensive scope) Egypt China, Hong Kong (comprehensive scope) GCC (signed, not operative): Na Na Na Na Saudi Arabia Residual Gulf Arabian countries Israel Jordan Na Na Na Na Korea, South (including goods and services) Lebanon Na Na Na Na Macedonia (FYROM) Na Na Na Na Mexico , Montenegro Morocco Palestinian Authority Na Na Na Na Peru (broad range of areas) Na Na Na Na Southern African Customs Union Na Na Na Na (SACU): South Africa Serbia Singapore (comprehensive scope) Tunisia Na Na Na Na Turkey Ukraine (comprehensive scope) Sources: (i) WTO website for EFTA RTAs in force; (ii) EFTA website, (iii) ONS, Pink Book, 2014 edition for trade in goods, which only identifies main trading countries. The unidentified countries are marked above as na. Note: (SACU) is a customs union, comprising Botswana, Lesotho, Namibia, South Africa and Swaziland. 16

17 A new relationship for the UK with the EU: the options examined: Annex on the rules of origin Introduction: rules of origin According to the WTO, rules of origin (ROO) are the criteria needed to determine the national source of a product. 1,2 Their importance is derived from the fact that duties and restrictions can depend upon the source of imports. Rules of origin are used: To implement measures and instruments of commercial policy such as anti-dumping duties or tariff quotas. To determine whether imported products shall receive most-favoured-nation (MFN) treatment ( non-preferential treatment ) or preferential treatment. Preferential origin is discussed below. For the purpose of trade statistics. For the application of labelling and marking requirements. For government procurement. The European Commission s website explains that there are two basic concepts to determine the origin of goods. 3 They are: Wholly obtained products. If only one country is involved the wholly obtained concept will be applied. In practice this will be restricted to mostly products obtained in their natural state and products derived from wholly obtained products. Products which have undergone a last substantial transformation. If two or more countries are involved in the production of goods, then the concept of last, substantial transformation determines the origin of the goods. The WTO explains that, whilst the requirement of substantial transformation is universally recognised, there is wide variation in the practice of governments with regard to the rules of origin. Some governments apply the criterion of change of tariff classification, others the ad valorem percentage criterion and yet others the criterion of manufacturing or processing operation. 4 Preferential origin and cumulation Preferential origin confers certain benefits on goods traded between particular countries, namely entry at a reduced or zero rate of duty. 5 The Commission s website provides the EC/EU s extensive list of preferential arrangements: Generalised System of Preferences. This facility is granted unilaterally to developing countries including the everything but arms initiative for Least Developed Countries (LDCs). The EEA (EC/EU, Iceland, Norway and Liechtenstein), which is considered as a single territory with a common EEA originating status. System of Pan-Euro-Mediterranean cumulation, see below. Western Balkans: Albania, Bosnia and Herzegovina, Macedonia (FYROM), Montenegro, Serbia and Kosovo benefit from preferential treatment as participants in the Stabilisation and Association process (SAP). 17

18 The Countries of Africa, the Caribbean and the Pacific (ACP): trade preferences are available to the African, Caribbean and Pacific States having concluded WTO-compatible agreements with the EC/EU. The Overseas Countries and Territories (OCT): the EC/EU grants unilateral trade preferences to the OCTs. These are constitutionally linked to four of the Member States (Denmark, France, the Netherlands and the United Kingdom). South Africa: the bilateral Trade Development and Co-operation Agreement established a free trade area between the EC/EU and South Africa. Latin America: there are agreements with Mexico and Chile. There are also agreements with the Faroe Islands, Ceuta and Melilla. The concept of cumulation ( accumulation, or sometimes cumulative rules of origin ) allows countries which are part of a preferential trade agreement to share production and jointly comply with the relevant rules of origin (ROO) provisions. This means that a producer of one contracting party of a free trade zone (e.g. Germany) is allowed to use input materials from another contracting party (e.g. Switzerland) without losing the originating status of that input (e.g. German) for the purpose of the applicable rules of origin. 6 Switzerland has, of course, an FTA with the EU. In other words, cumulation allows products of one country of a free trade zone (for example, Switzerland) to be further processed or added to products in another country of that zone (for example, Germany in the EC/EU) as if they had originated in the latter country (e.g. Germany). This promotes economic integration amongst member countries of a free trade zone. Cumulation can be seen as a deviation from one of the core concepts of origin legislations. The Commission s website provides examples of cumulation in action, including: 7 Bilateral cumulation, involving two countries. Milk, wholly obtained in Switzerland, is exported to Germany where it is processed into cheese for export to Switzerland. The milk is treated as if it were of EC/EU origin. As all the processes involved in producing the cheese were carried out on an originating product (the milk), the finished product has satisfied the rules of origin and has EC/EU origin. Diagonal cumulation, involving more than two countries. Norway has agreements with Switzerland and Turkey, which provide for cumulation and containing identical origin rules. Switzerland has a similar agreement with Turkey that contains the same origin rules it operates with Norway. Norway can, therefore, use originating products from Turkey and Switzerland to make a product that will have Norwegian origin. Note that in the first example, if the cheese were exported to another partner country of the pan-euro-mediterranean cumulation zone (for example Norway or Turkey), the cheese would still have EC/EU origin, though under the terms of diagonal cumulation. The system of Pan-Euro-Mediterranean cumulation The system of Pan-Euro-Mediterranean cumulation of origin is an extension of the earlier system of Pan-European cumulation. The key points to note are: 8 The Pan-European cumulation system was created in 1997 on the basis of the EEA agreement (1994) between the EC/EU, the EFTA countries, the CEECs (Central and Eastern 18

19 European Countries) and the Baltic States. It was then widened to Slovenia and to industrial products originating in Turkey (1999). The Euro-Mediterranean Partnership was launched with a joint declaration of the Foreign Ministers from the EU and Mediterranean Partners in Barcelona in November 1995 (the Barcelona Process ). The countries signing the Barcelona Declaration were Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia and the Palestinian Authority of the West Bank and Gaza Strip. The Pan-Euro-Mediterranean cumulation system (the Pan-Euro-Med zone ) currently operates between the EC/EU and the Member States of EFTA (Iceland, Liechtenstein, Norway and Switzerland), Turkey and countries which signed the Barcelona Declaration. The Faroe Islands have also been added to the system. Given the Pan-Euro-Med cumulation system, diagonal cumulation means that products which have obtained originating status in one of the 42 signatory countries may be added to products originating in any other one of the 42 without losing their originating status within the Pan-Euro-Med zone. If the UK were to leave the EU, there would be a very good case for the UK to negotiate a free trade agreement with the EU, as Switzerland, and hence benefit from preferential origin. Preferential origin: other points to note Given the complexity of some global supply chains and the range of preferential trading relationships the EU operates, determining where a good originated under the EU s ROO, and hence whether it should attract tariffs, can be a difficult, time-consuming, costly and often subjective process. There are, however, two points to note. The first point is that potential ROO compliance costs should be seen in the context of falling tariffs. 9 According to a House of Commons Library paper, the EU s average trade-weighted most favoured nation (MFN) tariff is currently about 1%. 10 Under these circumstances it is unsurprising to note that the US Congressional Research Service concluded in 2012: 11 The benefit conferred by the preferential schemes in certain cases becomes marginal in comparison with the administrative workload and cost to plan the product mix to comply with the preferential ROO. This often leads to instances where firms, although meeting the necessary conditions for origin, decide that it is simpler and cheaper to pay the most favoured nation (MFN) tariff rates. The second point to note is that for industries where there are significant tariffs (for example the motor car industry where the EU s Common External Tariff (CET) is nearly 10%) these industries are likely to be highly proficient in tracking their supply chains in order to comply with and benefit from preferential schemes. 19

20 References 1. WTO website, on rules of origin. 2. Another source of information on ROO is M Government, Rules of origin for imported and exported goods, 3. European Commission, Taxation and Customs Union, htm. 4. WTO website. 5. European Commission, Taxation and Customs Union. 6. WTO website. 7. European Commission, Taxation and Customs Union, 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, 8. European Commission, Taxation and Customs Union. 9. Baldwin, Multi-lateralising 21 st century regionalism, Global Forum on Trade, February 2014, OECD website, wrote tariff reductions in advanced economies (driven by GATT Rounds) lowered MFN tariffs to quite low levels, with the result that margins of preference automatically fell. developing countries MFN tariffs have dropped more recently, although largely outside of GATT Rounds. The margin of preference is the difference between the tariff applied to imports from Regional Trade Agreements (RTA) partners as opposed to non-rta partners (i.e. the countries most favoured nation (MFN) tariffs). 10. House of Commons Library, The economic impact of EU membership on the UK, Standard Note, SN/EP/6730, September US Congressional Research Service (2012), International trade: rules of origin, quoted in House of Commons Library, The economic impact of EU membership on the UK, Standard Note, SN/EP/6730, September