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  • Writer's pictureEmily Dow

Percy the Poor Victim of Brexit Pig

Due to the time constraint when negotiating a trade deal with the European Union (EU), there have been many issues regarding the new trading regulations agreed. At face value, the new trade deal looks promising. It states no tariffs or quotas (the former being a tax on imports and the latter being a limit on the quantity of imports), two trade barriers which if imposed, would have detrimental impacts on UK businesses and the economy. However, due to time constraints, the intricacies of the trade deal fall apart in places, with particular discrepancies in places regarding the "rules of origin".

The rules of origin are a set of guidelines which determine the economic nationality of a product. When people refer to a 'home country', this is the country in which the product has been determined as coming from, and therefore the effective economic nationality. Apart from wholly originating from the UK, the guidelines also stipulate that a product can claim UK origin (and can therefore comply with the new trade deal) if its raw materials and components have been sourced within the UK or EU (this is known as bilateral cumulation, because although we have left the EU, materials from EU countries used in UK production can be deemed as originating from the UK) or the the good has been "substantially transformed", and this is regulated by Product Specific Rules (PSRs). This can include a product having sufficient value added (such as the combining of individual resources to create a more valuable product), a change in tariff classification (as the tariff regulations for the parts entering the UK may be altered to fit different tariff regulations when the final good exits the UK post production), or specific processes may have had to taken place within the UK to gain origin. Now, this may sound attainable and not too difficult to obey, but this part of the legislation is more stringent and restrictive than it sounds.

For example, the UK now have a Free Trade Agreement (FTA) with Japan, valued at around 2% of total UK trade, and are having trade discussions with the US, Australia, and New Zealand. However, the EU have negotiated a trade deal which places the UK in a similar situation to when it was a member of the EU in terms of UK-EU trade, but leaving the UK looking somewhat unattractive to outside nations. The UK can't benefit from their new trade agreements if they intend to sell their produced goods in the EU without now paying EU tariffs and imports, which would significantly reduce the competitiveness of UK exports in the EU market. And the EU know this. The EU is a massive market with just under 450 million consumers (almost four times Japan, for example). This means that any trade new trade agreements the UK make with other nations will be hindered by the restriction of the EU as the UK need to sustain access and competitive advantages in this market. Additionally, foreign investment in the UK may see a decrease because when we were a member of the EU, firms from abroad could produce in the UK and take advantage of the free movement of resources within the EU, as well as the benefit of no trade barriers. Effectively, gaining access to the UK gained access to the entire EU. Now, however, gaining access to the UK has no benefits in terms of access to the EU for foreign firms. This decreases the attraction for firms to trade with and produce in the UK instead of a country that is in the EU. Continuing to access the EU through the UK could prove cumbersome for firms and they may therefore move elements of the supply chain back into the EU to avoid having to comply with the (in places) byzantine UK-EU trade agreement.

Percy Pig is a great example of this and a way to visualise the situation. Percy Pigs are manufactured and packaged in Germany, but to let them reach the ROI (Republic of Ireland), a member of the EU, they are transported through the UK. As they are only being transported through the UK and not being "substantially transformed", this does not comply with the PSRs. This means that Percy Pigs could be subject to tariffs when going from the UK (thereby exiting the EU) into ROI (re-entering the EU), despite having been made in the EU and finishing transit in the EU. In this case, M&S, to avoid tariff, would likely cut out the UK as part of their transit. This could cause unemployment in the UK, which would have a knock on impact for demand and GDP if this happens on a large scale.

The impacts of the UK-EU trade deal are highly speculative and unknown (although positive compared to a no deal outcome), however if the UK do not make FTAs and other advantageous trade deals with other nations we could end up with a worse situation of decreased FDI (foreign direct investment) resulting in chronic reduced innovation, with a new level of decreased demand and little international opportunity for firms, impacting the labour market. All of this, too, is not even considering the substantial impacts of the pandemic. The UK needs to be seen by nations as its own attractive entity to ensure firms favour production and trade with the EU rather than switching to other countries who are members of the EU. To do this, we need favourable trade deals with multiple attractive markets and yes, Japan is a start, but more is definitely needed.

Sources used:

Introduction to rules of origin and claiming preferential tariffs

Technical Information on Rules of Origin

Trade: rules of origin

The UK's trade agreements

Brexit: what trade deals has the UK done so far?

What businesses need to know about trading goods under the EU-UK Trade and Corporation Agreement

Rules of origin: why are Percy Pigs a headache for M&S?

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