The Trade and Cooperation Agreement: What to do next

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The Trade and Cooperation Agreement entered into force on December 31, 2020. Brexit is widely expected to lead to lower trade with the EU, notwithstanding the Trade and Cooperation Agreement (ACT).

We recently published an article in which we recommended four changes to the ACT, which aim to mitigate the likely damage to trade, without undermining the purported overriding objectives of either party to the agreement. Some of these changes could be addressed by a reinterpretation of the ATT, but some would require renegotiation.

There are two main reasons why EU-UK trade is likely to decline under the Trade and Cooperation Agreement versus the free (frictionless) trade that was possible when the UK was doing part of the EU single market.

The first is that Rules of Origin (ROO) means that UK exports to the EU that require components in their production from outside the EU or UK above a certain threshold (fixed product by product) are subject to the relevant third country EU import tariff.

The second reason is that EU-UK trade is monitored and controlled by many documents which were not required in the single market. The ATT was supplemented by the Northern Ireland Protocol (NIP), which added new trade frictions, this time within the UK.

So how would we limit the damage the ATT will do to both EU-UK trade and the peace process in Northern Ireland?

First, we propose that the original rules, with their blunted cut-off ratios, be replaced by a modified system. These rules impose tariffs on an all-or-nothing basis, depending on whether the final good falls above or below the ROO threshold. Under our bespoke scheme, UK exporters could choose to pay the applicable EU import tariff on all non-EU/UK originating components of a final product, in order to benefit zero customs duties on this product.

This scheme would preserve the level playing field goal of the rules of origin, but do so in a graduated and less clumsy binary way. It would also prevent rules of origin – and in particular the choice of cut-off ratio – from being used as a covert tool to protect against, rather than enable, unhindered trade between ACT partners.

For example, during the negotiations, Michel Barnier aimed to set the rules of origin of the British car industry, which is more dependent on imported components than that of the EU, at a level intended to cripple it with customs duties, including including disqualifying Japanese components, even though Japan has a free trade agreement with the EU.

How would our system work? Already, when goods are imported from abroad, it is necessary to quote the import tariff code to determine whether a good is subject to customs duties or duty-free. The shipper can do this in advance and pay any tariffs due in advance, so that when the goods arrive they can simply be passed.

Under our system, something similar would be possible for exports from the UK to the EU, with tariff codes for all relevant intermediate inputs (i.e. those that do not meet the rules of origin) added to those of the finished product appearing on the customs form. The accrued tariff on these inputs would be paid up front (although the finished product itself would be duty free), and the final product would simply pass through EU customs when shipped with a sticker “import duty paid” on it (and a statement that the goods are being imported under the ROO waiver scheme).

The virtue of our system is that the final product would not be penalized by the full price simply because its entry ratio slightly exceeded the ROO threshold. This could be avoided by paying duties on imported inputs instead, with a much lower overall cost. Our scheme (which could be made symmetrical) would, of course, have to be agreed between the UK and the EU.

Second, where UK product standards and regulations have in fact not changed from what they were before Brexit (and are therefore EU compliant), the principle of equivalence would be granted to nullify much paperwork and the threat of customs duties. .

Should the EU judge that the standards have diverged at a later date, the Partnership Council – set up under the ACT – could be used to adjudicate and, if necessary, decide that corrective (and not punitive) tariffs ) would be appropriate. Such an arrangement would not require the UK to sign up to permanent adherence to EU standards. It would therefore not be contrary to the mandate of the British government to “regain control”.

But it would protect the EU from unfair competition. The corollary is that the UK would recognize EU standards and testing (unless it is clear they have become inadequate), as proposed by the new Brexit Opportunities Minister.

Third, the PIN could be managed more skilfully by accepting that the risk of wholesale smuggling of non-EU compliant UK manufactured goods is very low. Most UK goods destined for the EU market will be transported through ports such as Felixstowe or Dover to, for example, Antwerp or Hamburg, and will be subject to the usual controls.

Any UK goods entering the EU via the Republic of Ireland (hypothetically smuggled via Northern Ireland) would automatically be suspect (as the much more expensive route of transport would not be compatible with bona fide trade). Irish shippers to other EU countries would simply be asked to sign a form (and be subject to spot checks) stating that they are not transporting contraband UK goods (i.e. those that do not comply with EU standards or rules of origin or their equivalent).

The boundary would therefore shift (de facto if not de jure) from the politically toxic Irish Sea to the Celtic Sea, thus remaining in line with what had been agreed in the GFA. This revised “boundary” would impose very little friction.

Finally, we suggest that the Partnership Council (with representatives from both sides) be given a greater role in all EU-UK disputes. The Council, if it so decides, could defer to the European Court of Justice on questions of EU law. But it would be the Council, not the Court of Justice, that would be the final arbiter of trade disputes between the EU and the UK over the trade and cooperation agreement.

It must be in the interest of the UK and the EU – particularly in the context of a global security crisis where they have common ground – to seek better trading relations if these remain compatible with their political goals. We have outlined four ways to achieve this.

By David Vines, Professor of Economics and Fellow of Balliol College, University of Oxford and Adam Bennett, Research Associate, Global Economics and Finance Program at Chatham House. This blog is based on the authors’ research originally published in the Oxford Review of Economic Policy.

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