Richard North, 28/12/2020  

It is worth stepping back from the media rhetoric on the EU-UK TCA (or TCA, for short) and consider briefly that Johnson's original model for a trade agreement was the Canada deal (CETA).

And while we see many general references to that agreement, we see very little detail on its application and performance. But what we do see is not very encouraging. For instance, there is this piece from Euractiv last month, which enigmatically states that "the EU has sometimes succeeded in the race for international trade, like in the case of the EU-Canada free trade agreement (CETA), it has also failed".

A more detailed, if somewhat older, piece can be found here, which notes that "CETA's failure is evident in the example of True North Foods, a Canadian beef processing plant".

This plant apparently spent $100,000 obtaining certification to export its products to Europe, only to see vastly insufficient return, having sent only a single shipment of beef to the EU in 2019. The owner of the plant, Calvin Vaags, said the company wasn't motivated to export to Europe and had no immediate plans to increase shipments.

Thus, this report says, "despite the promises of improved trade following the implementation of CETA, agricultural exports from Canada to the EU fell by 15 per cent in 2018 and those numbers are not improving in any meaningful way".

This is not the first time we've seen adverse reports on CETA, having posted this piece back in 2017. Describing the broader situation, last January, Canada was said to be set to run a $150-million trade deficit in red meat with the EU in 2019. In the first 10 months of 2019, Canada had exported more pork and beef to the EU than in 2018, but the Europeans were also selling more red meat to Canada.

What brings this to mind, and makes it highly topical, are the similarities between Johnson's TCA and CETA, not least aspects of Part 2, Chapter 2, which deals with rules of origin. In particular, what caught my eye were the rules on "insufficient production", which is a straight takeout from CETA.

These are to be found in Article ORIG.7, which contains "an exhaustive list of operations which are insufficient to confer origin on a product". These describe operations which, "when carried out either individually or in combination, are regarded as being of such minor importance that they cannot confer the originating status of the goods".

The point here is that, while the TCA generally provides for tariff-free trading between the UK and EU Member States, one of the key exceptions are made for goods brought in from the rest of the world which are not subject to sufficient added value by way of processing or other operations, to change the originating status. If exported to EU Member States, these goods become subject to tariffs at the prevailing rates.

Such operations include preserving operations such as drying, freezing, keeping in brine and other similar operations, where their sole purpose is to ensure that the products remain in good condition during transport and storage.

They include the breaking-up or assembly of packages; washing, cleaning; removal of dust, oxide, oil, paint or other coverings; ironing or pressing of textiles and textile articles; and simple painting and polishing operations.

They even run to simple placing in bottles, cans, flasks, bags, cases, boxes, fixing on cards or boards and all other simple packaging operations; and then include "affixing or printing marks, labels, logos and other like distinguishing signs on products or their packaging".

But the crucial issue here is that even if they add up to substantial proportion of the value, the no matter how many "insufficient production" operations are performed on a good, they still add up to "insufficient production" and tariffs become payable.

Of the products currently exported by British businesses to EU Member States, to which this will apply cannot be known. No records are kept. But this is another example of another barrier arising from Johnson's version of Brexit. And, as we will see, there are many more.

What is not going to show up in any evaluation of Johnson's deal, though, are the things which are not in the Agreement. One of the key changes is that, with the UK outside the EU customs/Single Market area, it will no longer be possible for exporters to the EU to load goods onto a vehicle and send them to their destinations.

That much is pretty obvious and has been widely signalled, with the requirements that, in accordance with the Union Customs Code (UCC), a customs declaration must be lodged with the customs office where the goods are to be presented.

But what is less well understood is that, in accordance with Article 170 (2) of the UCC, the declarant must be "established in the customs territory of the Union". As the UK government helpfully advises, therefore, that: "Before sending the business your goods, check they can make the necessary import declarations".

It is the "declarant" which then becomes responsible for settling any tariffs and fees and for arranging the release of the goods into free circulation within the Union, including dealing with any inspection requirements and related payments. This is no longer under the control of the exporter.

Furthermore, after the 31 December, it will be the importer which assumes liability for defective products and the payment of compensation if the final buyer is harmed: death, personal injury or material damage to personal belongings.

Within the Single Market, the supplier retains some (and sometimes the entire) responsibility but, after 31 December, UK suppliers are outside EU jurisdiction, which is why liability falls on the importers. They are established in the EU and thus come within the jurisdiction of EU law.

In terms of competing for business in the EU, this will have a significant impact. Where an EU-based buyer has a choice, it is obviously safer to purchase goods from enterprises within the Single Market, where the liability will be reduced.

The same applies generally, as the importer has to assume responsibility for the cumbersome bureaucracy involved in procuring goods from the UK, compared with the ease of making purchases from suppliers within the customs area/Single Market.

Given also the financial risk, where the importer can end up having to pay inspection fees (and associated storage charges), and suffer any attendant delay, it becomes more difficult for a UK supplier to guarantee delivery dates, while product costs become extremely unpredictable.

These are just some of the non-tariff barriers which Johnson says do not exist. And yet, we've barely even touched on the problems traders will encounter.

Also published on Turbulent Times.

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