Asymmetric Access

EU-UK relations, EU-CPTPP rules of origin, and the mystery of the dissapearing tariffs

Last week, the UK’s Chancellor of the Exchequer, Rachael Reeves, said [emphasis added]:

As the Prime Minister has said: where it is in our national interest to align with EU regulation, we should be prepared to do so – including in further areas of the single market.

The principles we apply when we judge our national interest are crucial, so let me tell you exactly what they are.

First – that a decision to align should mean higher growth and investment, more jobs and consumer benefits for the long term.

Second – that the future direction of policy should be sufficiently stable and compatible in terms of values and objectives.

And third – that the UK’s economic and national security and resilience should be preserved or enhanced.

When those principles are satisfied, alignment should be forward looking and durable, providing the certainty that businesses on both sides need to invest and grow.

All reasonable. But it misses the point.

And, yes — divergence from EU rules for the sake of divergence (i.e. performative divergence) has always been pointless.

But alignment isn’t the problem. The UK has continued to align with, or at least recognise, EU rules in most areas since Brexit.

Because businesses overwhelmingly prefer a single rulebook across Europe — even a bad one — to managing a separate UK regime. And they tell the UK government as much.

The challenge for the UK is maximising the benefit of said alignment with the EU, and seeing trade barriers come down as a result.

This is where the asymmetry bites. EU exporters still access the UK market on broadly pre-Brexit terms. The reverse is not true.

Some examples:

• Conformity assessment. As well as continuing to recognise CE marking of products in most cases, the UK continues to recognise independent third party conformity assessment certification granted by notified bodies based in the EU member states. The EU does not recognise UKCA marking or third party conformity assessment certification granted by notified bodies in the UK (well, Great Britain … Northern Ireland is complicated). You have a similar dynamic in place for, e.g., medicines and medical devices.

• Financial services. The UK’s approach to post-Brexit financial services access has been more permissive than the EU’s, but it does not amount to a continuation of passporting. Through the Temporary Permissions Regime, the UK allowed EEA firms to continue operating within the scope of their previous passport permissions on a time-limited basis while seeking full UK authorisation, preserving continuity of activity but not the underlying legal rights. By contrast, the EU took a harder line: passporting ended outright, and EU supervisors made clear that EU clients could no longer be served directly from the UK, effectively requiring firms to establish authorised entities within the single market. The result is a persistent asymmetry in access, reflecting a UK model focused on continuity and openness, and an EU model centred on supervisory control and onshoring.

In practice, the UK is often asking for changes that matter a great deal to its exporters — and very little to the EU.

It is notable that the EU only seriously entertained an SPS agreement once the UK decided — eventually — to impose its own border controls on EU food imports. Until then, with the checks only happening in one direction (UK→EU), the EU didn’t have much incentive.

So, given this asymmetry, what can the UK do to improve its lot?

It could threaten to impose new, equivalent, restrictions on imports from the EU. However, the problem here is that there is a very good reason the UK hasn't done this already: it would be economically self-harming.

The other approach is to find things the EU does want, and ensure that on aggregate both sides get something they want. We are seeing this play out a bit at the moment in the current reset negotiations with its demands on youth mobility. You could also try to shift the conversation away from economics — for example, as per this Cancer Research UK paper there are good health-related reasons to reduce red tape in both directions.

But once you’ve done that … what else is there?

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CPTPP/EU, rules of origin, and diagonal cumulation

As long-term readers of this newsletter will know, I’m quite sceptical of EU efforts to do stuff with CPTPP. (I largely think it is displacement activity.) However, lots of smart people disagree with me.

One of the options that sometimes comes up is some form of alignment on rules of origin between the EU, its trade partners, and the CPTPP bloc.

Anyway, a while back, the good people of BlueSky asked what this could look like. So … here we go.

[Starting from the beginning … and yes, this is vastly oversimplified]

First, preferential rules of origin [i.e. the ones relevant to this conversation] are the criteria which determine where a product is from for the purpose of deciding whether it qualifies for a free trade agreement’s lower tariffs or not.

For example, EU-Japan requires that 55% of the value of an exported vehicle originates in either party for said vehicle to qualify for a 0% tariff instead of the usual 10% tariff.

However, what qualifies as “local” varies from trade agreement to trade agreement, country to country.

This is very annoying for businesses trying to trade internationally.

So, one thing you and your mates could decide to do is harmonise the rules of origin requirements across all, or many, of your free trade agreements. This would mean that companies only have to comply with one set of criteria, increasing certainty around supply chain planning and reducing administrative costs.

In addition, given you all have free trade agreements with each other anyway, and are in agreement on the rules of origin criteria (meaning you’re not worried that something from somewhere it shouldn’t be from will get preferential treatment) you could also then agree that inputs sourced from any of the countries in your group can qualify as originating for the purpose of qualifying for tariff free trade between any of its members.

More simply, a seatbelt from Vietnam could be treated as Japanese for the purpose of determining whether the Japanese car it is inside qualifies for tariff-free trade when exported to Australia.

What I have just described is referred to as diagonal cumulation and is the MAIN benefit and purpose of CPTPP. (Ignore all the foreign policy folk pretending it is some sort of bastion of the rules-based order.)

Take the UK’s accession. The UK already had free trade agreements with all of the CPTPP members minus Malaysia and Brunei. So what was the benefit beyond tariff reductions with these two countries? Why, the ability to include Mexican, Chilean, Canadian, Singaporean, etc, inputs in a local content calculation when determining whether your British product qualifies for lower tariffs when being sold to Vietnam, of course.

The EU has its own version of this: PEM. [Explainer: HERE] PEM harmonises the rules of origin requirements across the EU’s free trade agreements with nearly all (more on this in a second) of the countries in its vicinity, and their free trade agreements with each other. PEM, as a result, also allows for diagonal cumulation, similar to what I’ve described above.

So, could you have a mega tie up between CPTPP and PEM? Ummm, hold up now … let’s start a little smaller.

In the first instance, you would probably want to start with harmonising the rules of origin provisions in the EU’s free trade agreements with the 10 CPTPP members (no Malaysia or Brunei) it has with the CPTPP rules of origin.

This would require the EU to agree to change the rules of origin in its bilateral free trade agreements to match those of CPTPP, or CPTPP to change its rules of origin to match the EU’s.

This is probably not going to happen. The rules in the bilateral FTAs reflect, largely, the interest of the EU, but the rules in CPTPP most certainly do not.

Alternatively, I suppose, the EU could agree to recognise the CPTPP rules in parallel to those in its FTAs, and companies could choose. (This is what de facto happens in the UK, for example, where it still has the bilateral FTAs with most CPTPP members as well as CPTPP). But at that point the EU just may as well join CPTPP … which it’s not going to do either.

A softer version could be to allow for diagonal cumulation if and when the origin provisions in the EU’s bilateral and those in CPTPP just happen to be the same? Hmm, maybe.

Anyhow, is this all theoretically possible? I guess? But will it happen? Probably not. Why? Well … for now the EU won’t even let the UK join PEM (per my teaser above). And the UK is also in CPTPP. And given the EU won’t even do regional cumulation with the UK, CPTPP mega-cumulation looks like a stretch..

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The Trump Effect

This was missed by most people, but following an investigation in which the UK Trade Remedies Authority concluded the UK definitely need to put tariffs on biodiesel from the US, it then did a complete about turn and decided that actually the UK definitely shouldn’t do that after all.

Very mysterious.

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How to win a trade war

Pre-order Chad and Soumaya’s book!

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Trade jobs

I … don’t actually have any to promote at the moment. But I thought I could do a public service and start promoting openings in this newsletter. If you’ve got an opening — let me know!

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Best,

Sam