The following note highlights certain barriers to free trade flows between the UK and the EU that have arisen in the post-Brexit era, with particular reference to rules of origin and origin procedures. It assesses the consequences these new rules will have in determining market power, influencing supply chain practices, and the application of UK and EU competition law in the future.
The Trade and Cooperation Agreement
The UK’s continued membership of the European Union and Customs Union during the so-called “transition period” ended on December 31, 2020. During this period, UK businesses were able to export goods and products to the EU without the need for customs declarations. Since January 1, 2021, the UK has traded with the EU as an independent country, meaning that goods and products from the UK are exported to the EU as non-EU goods and products. The new regulatory landscape is bounded by the Trade and Cooperation Agreement (TCA) that has been entered into between the UK and the EU and that was published on December 24, 2020. Under the TCA cross-border services are constrained by local certification obligations, the free movement of people by a regime of “temporary entry” and trade in goods between the UK and the EU is subject to detailed administrative oversight.
The Rules of Origin
In order for goods and products from the UK (i.e., now a non-EU state) to be exported to the EU without being subject to customs duties, UK-based exporters will have to claim preferential tariff treatment for those goods in accordance with the rules set out in the TCA. The rules concerning preferential tariff treatment are called Rules of Origin (RoO). Under the RoO, goods or products will be considered as originating in the UK and vice versa (i.e., no customs duties are imposed), provided that they are:
- Wholly obtained or produced products in the UK (e.g., a live animal born and raised there or a product obtained from a live animal raised there such as a cow born and raised in Scotland and Angus beef);
- Products produced exclusively from materials originating in the UK (e.g., UK biscuits made of UK produced ingredients such as flour); or
- Products produced using non-originating materials but where these products satisfy all the applicable requirements under the product-specific rules of origin (PSR) The PSRs allow production from non-originating materials within a product category, e.g., UK cars produced using non-UK parts where they satisfy all the applicable requirements of the relevant PSR).
For example, if a UK-based exporter wishes to export women’s dresses to the EU tax-free, it has to ensure that the dresses satisfy all the requirements under the relevant PSR. Women’s dresses are classified under a particular category heading, meaning that, in order for them to be able to obtain preferential tariff treatment, at least two operations must be carried out in the UK when the dresses are being produced. Two operations could be (1) weaving and (2) marking-up including the cutting of fabric, or (i) printing and (ii) marking-up including the cutting of fabric. So, whilst it is permissible to procure materials from outside the UK (e.g., non-UK cotton) to make women’s dresses (for example), the UK-based exporter must make sure to carry out at least two operations to non-UK materials in order for the women’s dresses to qualify as originating in the UK.
The TCA provides that materials originating in the EU or the UK as well as production carried out within the EU or the UK on non-originating materials may be considered as originating in the UK (and vice versa). This is known as bilateral cumulation. In light of bilateral cumulation, and assuming that the relevant products are made from EU-originating ingredients, they can be imported from an EU state into the UK tax-free under the RoO of the TCA as they are considered as originating in the EU and can claim preferential tariff treatment. However, there are limits on the re-export of goods that may have been imported from the EU into the UK and where, for instance, no further process is applied to them. This is highlighted by a number of reported cases where the re-export of EU-origin products via the UK back to the EU has given rise to the imposition of customs duties. One UK supermarket’s own-brand sweets, manufactured in Germany and brought to the UK before being re-exported to Ireland, have been subjected to import taxes on their resale to Ireland. This seems a perverse outcome if the TCA intended to encourage maximum sourcing within the UK and EU as a free trade area.
There may be ways to avoid duties being imposed on the imports of products (such as sweets in this case) into Ireland.
- To export the sweets directly from Germany (or any other Member State of the EU) to Ireland;
- To place the sweets in a customs warehouse in the UK; or
- To carry out sufficient working or processing to the sweets in the UK so that they can qualify as UK originating.
In terms of origin procedures, a claim for preferential tariff treatment can be based on:
- A statement on the origin that the product is compliant with the origination requirements, made out by the exporter; or
- The importer’s knowledge that the product is an originating one.
Further, if a claim for preference is based on a statement on origin, the exporter must hold evidence that the products meet the relevant RoO by including information on the originating status of materials used in the production of the products.
Gathering information on the originating status of every piece of material used can be burdensome. The exporter or the importer may need to obtain a supplier’s declaration to prove the origin of materials used in the production process. To ease the burden, an exporter or importer is exempt from holding the supplier’s declaration at the time of claiming preference for goods exported from or to the EU until December 31, 2021. The UK has adopted a relatively ‘light-touch’ approach to goods entering the UK from the EU to date, but this approach is likely to be replaced by much tighter scrutiny in the summer. There is no carve-out for low-value goods and critical but relatively inexpensive items are subject to the trade regime. The fashion industry relies on rapid access to low-value items such as zips and buttons from, say, Italy for which there may be no exact substitute in the UK. Whilst of low value, these may be critical to the design and development of fashion goods but an exporter may be reluctant to engage in the red tape and other administrative efforts needed to export them.
Trade in Services
It is worth noting that industries are affected not only in terms of trade in goods but also trade in services. Now that the free movement rules have been tightened, it is harder, for example in the fashion industry, for designers, models, buyers, and photographers who are UK citizens to move freely to European trade events or for business purposes and reports have suggested that this is stifling the UK fashion sector. Similar barriers to the free movement of persons will apply across all service-dependant industries.
Export Decline and Market Dislocation
Exports from the UK to the EU have reportedly declined by 68% since the commencement of the TCA on January 1, 2021, with officials at the Department for International Trade advising British businesses that they should relocate to the EU, in order to avoid the additional costs, paperwork and customs duties that have arisen since then.
This major dislocation in trade is also potentially very significant in terms of future competition law analysis. The restriction of sales to more localised markets (as red tape and costs mount) is likely to lead to a closer antitrust examination of supply chain practices pursued within the more cramped pool to which trade flows have been confined.
Defining Markets and Determining Market Power
The definition of markets for products and services is a key step when determining market presence and power under both UK and EU competition law. The evaluation of relevant product and geographic markets is a crucial exercise in assessing whether any restrictions between commercial parties may have anti-competitive effects or whether a unilateral practice, when pursued by a single commercial enterprise with dominant market power, is an unlawful abuse. The narrower the market and the more heightened the market presence or power that a company possesses, the more tightly competition law will constrain its joint or unilateral practices and any company seeking to consolidate through acquisition may find itself subject to closer merger control scrutiny.
Familiarity with the impact of heightened border disruption on product flows and the cross-border provision of services will greatly assist in managing competition law issues. Relevant markets are generally ascertained by considering which other products or services would exercise a competitive constraint on those offered by the supplier.
Trade barriers may render geographic products more narrowly defined from a competition law perspective, with the consequence that a UK manufacturer may have a shorter reach (cannot easily reach the more lucrative EU market) and yet be deemed to have more muscle (due to competing against fewer rivals in the local UK market). The same could be true for a Danish manufacturer confined to the EU market; it would mean that each would have to relocate geographically to continue to compete on a cross-border basis.
The relevant geographic market for competition law analysis is the area in which conditions of competition are the same. This requires an assessment between regions, individual states, the EU, or worldwide markets, of factors such as price differences, transport costs and regulatory barriers (such as tax or technical differences) and possibly other aspects, such as consumer preferences, language differences and branding. Disruption in trade flows due to regulatory and tariff difficulties, if persistent, may call for a re-evaluation of geographic markets, and a re-assessment of the degree of market power that an enterprise may have in parts of this newly-reconfigured terrain.
Increased administrative and supply chain costs or tariffs will likely generate a trend towards local supply or wholesale relocation and may have other consequences. Companies must decide whether to absorb or pass on these costs (where they can). The ability to significantly increase prices, without losing market share, may itself be an indicator of market power. The capacity to raise prices will depend on the presence or absence of residual competition in the (more local) market. With falling demand, manufacturers may be tempted to reach an understanding with rivals that price increases should be passed on to consumers, with reduced levels of rivalry in local markets facilitating collusive outcomes. This would be an egregious infringement of competition law that will likely attract fines and could result in civil suits. In the UK, criminal sanctions and director disqualification orders could also come into play with respect to deliberate violations by executives.
Whither UK Competition Law?
Market compartmentalisation may also deter the application of EU competition law in the UK. If there is no prospect of re-exportation to the EU once goods are in the UK, then there will be no future impact on intra-EU trade and so (under the jurisprudence of the European Court of Justice), the commercial practices relating to the UK resale of those goods would only be covered by UK competition law. Freed from the risk that practices in the UK might also be subject to EU competition law, due to their lack of extra-territorial effect, the divergent application of UK competition law might accelerate. This policy evolution could lead to the inapplicability of principles of EU law that were rooted in the single market policy that underpins the prohibition of many vertical restraints (for instance, the prohibition of absolute territorial exclusivity within supply agreements). This, in turn, could create an additional compliance burden for those businesses that continue to trade in both UK and EU markets, where different antitrust rules will apply.
We’re Here to Help
As these developments unfold, Steptoe’s trade and competition law team is here to help businesses safely re-orientate themselves, in a shifting commercial landscape.