Most Favoured Nation: In Liz We Truss?
Rules of origin, anti-circumvention measures, Pokemon and China joining CPTPP
Following a cabinet reshuffle, the UK has a new trade minister. For the record, I hate reshuffles. Particularly of ministers working on trade. Expertise is a good thing, but it takes a while to build. So the idea that you rotate politicians out of a role just as they’re really getting on top of it seems a bit mad to me.
But anyway, politics. And the reshuffle has led to some people on twitter debating whether former trade secretary now foreign secretary, Liz Truss, did a good job or not. My view is … yes? I mean, she managed to get a whole load of EU trade deals rolled over, including pretty tricky ones with Canada and Mexico, and since the UK left the Brexit transition period has concluded a new FTA [in the sense it is very different from the deal that existed before. Not better. Different.] with the EFTA /EEA bloc and has an agreement in principle with Australia, and another with New Zealand close to being concluded. That’s pretty good going …
I suppose the general complaint is that there doesn’t seem to be much in the way of strategy behind the decisions being made, with the priority being getting shiny new trade deals trophies, no matter the cost. And yes, there is absolutely an element of that, as UK farmers will tell you (mainly down to the Prime Minister deciding to give the Australians absolutely everything they wanted in order to hit an arbitrary G7 deadline). But the British government does have a trade policy: it wants to join CPTPP as part of its strategic pivot towards Asia. And in that context prioritising CPTPP members Australia and New Zealand for bilateral FTAs, and getting them done fairly quickly kinda makes sense. Now you might disagree with these priorities … but she delivered on them.
And the whole going round the world talking up the UK and how great it is, doing photoshoots with Union Jack umbrellas thing … well that’s the job. I know people like to pretend trade policy is all grand and intellectual, but in reality it is mainly about making it easier to flog your stuff abroad (and yes, economists, also making it easier for others to flog their stuff to you too).
Anyhow, new trade secretary Anne-Marie Trevelyan is walking into a pretty sweet gig. While there are a few problems bubbling beneath the surface (trade remedies authority, I’m looking at you … more on that soon) there is still some low hanging fruit to be picked: she will get to announce the New Zealand FTA, re-announce Australia, and at some point there will be renegotiated deals with South Korea, Canada, Mexico etc. that she can pretend are new and much much better than the ones that came before.
I’m a little bit jealous, truth be told …
A ruling on origin
Just because a trade agreement exists doesn’t mean you can use it. In order to export your sandwich, for example, under the terms of one of the UK’s trade deals you have to be able to prove you sandwich is actually from the UK and not from, I dunno, Tahiti.
So called rules of origin provisions exist in every trade agreement and set out the conditions, product by product, which determine whether the thing you want to export is local enough to qualify for tariff-free trade. And they can be a right pain in the backside.
As such, rules of origin can lead to exporters not using trade agreements, either because their products don’t meet the specific criteria, or because finding out whether their product meets the criteria is too expensive/complicated, or because the potential savings on offer from a trade agreement’s tariff-reductions are too small to make working out the origin of a product worthwhile. Rules of origin are not the only reason exporters don’t use trade deals – other reasons include the applied MFN tariff already being zero, or because they don’t know a trade deal exist – but they are certainly a big one.
Anyhow, Yohannes Ayele of the UK Trade Policy Observatory has a new bit of research out looking at whether UK exporters are actually using the EU-UK trade and co-operation agreement or not. Looking at the utilisation rate in the table below, we can see that by April, around 70 per cent of exports that were eligible for the TCA, and would have been subject to tariffs otherwise, made use of the trade deal.
(The utilisation rate is different from the total tariff-free trade figure because it focuses only on products that would have been subject to tariffs in the event they did not trade under the terms of the trade deal. The tariff-free trade figure also takes into account goods that trade tariff-free anyway because the EU’s applied WTO tariff is zero, such as most pharmaceuticals.)
70 per cent is okay, but over time the UK will be hoping that figure gets much closer to 100.
But I have a theory.
I think at this moment in time, 70 per cent is probably higher than it should be. The reason: there is currently a rules of origin grace period in place, which means companies claiming preferential treatment for goods traded under the TCA are not being asked to present supplier declarations, which are essentially the evidence base for their origin claim. So I reckon a load of people trading between the UK and EU are claiming their goods meet the rules of origin requirements, when in practice … they might not.
At the moment no one is checking, so it’s fine. But that is meant to change next year. So whether companies can keep getting away with erroneous origin claims will become a question of enforcement. Or rather, whether the respective EU and UK customs agencies …
a) Start looking for infractions; and
b) Start penalising infractions
My suspicion is that the UK will continue to be pretty lax when it comes to enforcement (which will benefit EU exporters to the UK), but I’m less convinced about the EU side of things …
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Chart of the week
This chart from Claudia Sahm’s recent substack piece is such a good one. With the caveat that it is US focused, it puts the recent supply chain disruption, and price increases in perspective. Maybe global value chains are alright, after all.
NO MORE CIRCUMVENTION, thank you
Say you were a big British exporter of Pokemon cards, and then the US put tariffs on all Pokemon cards being sold into the US from the UK, you’d be pretty annoyed. But perhaps there is a way round it! What if, instead of exporting your Pokemon cards from the UK, you put them in your suitcase, got on a plane, and exported them to the US from Ireland instead? No more tariffs. You genius, you.
So this sort of thing happens quite a lot. During the Trump trade wars, China put a retaliatory 25 per cent tariff on US lobster, and, would you believe it, all of a sudden Chinese imports of lobster from Canada skyrocketed. Canadian lobsters? American lobsters pretending to be Canadian? Who can say.
Anyway, the EU will no longer stand for these kind of shenanigans. And as such is on the hunt for imports pretending to be from somewhere they are not. This has led to it applying anti-dumping measures to imports of aluminium household foils from Thailand because they are pretty confident these imports of aluminium household foils from Thailand are actually not from Thailand but in fact from China.
See the tweet from EU trade enforcement chief Denis for more:
Speaking of China, it has only gone and formally applied to join the CPTPP. Which will inevitably unleash a whole lot of politics. And give me a lot to write about over the coming years.
As ever, do let me know if you have any questions or comments.