The UK and EU should cooperate to modernise trade rules, in particular around climate change
As suggested above, Free Trade Agreements do not represent modern trade particularly well, focused as they mostly are on tariffs relating to the production of a good in one country and sold to another. As well as focusing on regulations, the UK should also prioritise updating international goods trade rules in areas of common interest. These could include :
- Reshoring manufacturing, which could be supported by more flexible rules of origin for zero tariffs,
- Encouraging climate friendly trade, e.g. the introduction of carbon border adjustment measures to ensure imported and domestically produced goods meet similar environmental standards
- Updating animal trade rules similarly to ensure issues such as antimicrobial resistance are considered for imports as well as domestic production
Rules of Origin and other bilateral issues
The absence of tariffs should help UK and EU manufacturers to compete against imports, which should be assist the plans of both to encourage domestic industrial production, or rebalancing. However, tariffs are zero only if they meet rules of origin requirements and are claimed as such by importers. Only 78 per cent of EU goods exports to countries covered by its network of Free Trade Agreements use the reduced tariffs within them. There are a number of reasons why this may happen, such as the difference between the tariff and preferential rates being higher than the cost of certifying qualification for preferential rate, not meeting the required qualifying rules of origin, or the complexity of meeting different qualifications in different agreements.
One way to encourage greater use of preferential tariffs is to arrange for cumulation, basically meaning that products can be considered to qualify for zero tariffs even if significant percentages come from elsewhere. Thus the EU is at the centre of the Pan-Euro-Mediterranean (PEM) convention on cumulation of rules of origin, which means that, for trade between member countries, which consists of nearly all European countries (Belarus and the UK will be the exceptions), goods from any of them can count towards meeting appropriate rules of origin thresholds. Joining this system should considerably facilitate UK trade and our role in European supply chains, though there are concerns that some UK goods using non-European ingredients may not qualify under these rules.
As an alternative, the UK-Japan and EU-Japan Free Trade Agreements both contain provisions which could ultimately create a situation where materials from any of the three could be combined and still qualify for preferential tariffs. At this stage it is the EU which has been resistant to this idea, but that could be tested if the UK and Japan can find incentives for the EU. This and PEM should, however, be seriously considered by the UK Government in the future to reduce barriers to trade as part of a modern approach.
One of the prime benefits of an FTA will be customs cooperation between UK and EU border agencies. This should be particularly useful for the heavily used Dover-Calais and Holyhead-Dublin routes. One win for the UK in talks was to mutually recognise UK and EU Authorised Economic Operator (AEO) schemes, to ensure that trusted traders, typically those passing through borders most regularly, are able to take advantage of fewer checks. In the past, UK businesses have been slow to sign up for AEO status, and this is one of many areas of implementation that the Government needs to focus on.
Wider Goods Trade Issues
The UK and EU share a number of trade policy challenges where cooperation should be beneficial. These include emerging issues, such as the extent to which domestic action on challenges such as climate change and antimicrobial resistance should also be reflected in rules for imports, and the future of the WTO, which has been struggling for some time in various ways. It should be noted that, like many other issues already discussed, bilateral UK-EU action is not exclusive: both parties can choose to work with others. However, it should be easier in a number of ways to work together than with others.
It is likely that one of the biggest issues in trade policy in the next four years will be climate change, in particular carbon border adjustment mechanisms. The principle behind this is to ensure that domestic carbon pricing does not penalise domestic production at the expense of imports, which are thus subject to a similar mechanism. This is complicated and still under discussion in the EU, but implementaton looks more likely with a US President also concerned about the issue. The UK should seek to work with the EU on the issue, particularly given the Prime Minister’s stated commitment to carbon neutrality.
A similar issue (of ensuring domestic regulation does not incentivise imports produced to lower standards) comes in agriculture, in particular animal welfare and the overuse of antibiotics, creating antimicrobial resistance. The Trade and Cooperation Agreement includes loose commitments to cooperate on both issues which could easily be lost among other issues. However, these seem to be UK priorities, and working with the EU could help set new rules which others could in turn adapt. This should then help UK producers as well as meeting UK policy priorities.
Beyond directly bilateral cooperation, initiatives to revive the World Trade Organisation (WTO) will require EU and UK engagement. It is disappointing that, as yet, the UK has chosen not to join the interim replacement for the WTO appellate body, the Multi-Party Interim Appeal arrangement. This should be a priority unless the new US administration quickly moves to unblock the appellate body, reversing President Trump’s policy. The UK should similarly seek, where possible, to assist in stalled plurilateral initiatives including the EU, such as the Environmental Goods Agreement to reduce tariffs on climate friendly goods. It should also be noted that the UK’s first independent goods schedules at the WTO, covering goods and in particular agricultural quotas, have yet to be approved by other members. The EU deal should allow this to be swiftly concluded.