Elite Sourcing and Manufacturing: Rules of Origin, how are the new GB / EU Rules of Origin & Tariffs affecting your business? ES&M working with RISA are here to help.

In a perfect world, shipping goods across the globe would be a simple and easy matter but we all know that’s not the case and more especially with Covid-19 & Brexit considerations. We now find ourselves with new laws, regulations, taxes and tariffs to deal with, as well as a global pandemic to contend with.

With the recent exit of Great Britain from the EU, the way we ship goods to and from Europe has changed, and we are experiencing costly increases in bureaucracy and long delays.

The State of Freight

Simply put, trade agreements are mutually agreed terms. For example:

  • Item is shipped from point A.
  • Point A must have an agreement with point B for this to happen.
  • This agreement could include taxes, quality standards, inspections, etc,.
  • No shipping can legally happen between these points until the agreed terms are met.

In the case of shipping within the EU, trade and commerce is free to move. Items made in Germany can ship directly to France tariff free and without delay. This was a benefit GB had when it was part of the European Union.

The idea behind the Brexit Agreement was to allow goods to be shipped into GB from the EU without additional tariffs, (duty fee). This was to work in both directions for both GB and EU countries. However, the actual origin of the product, (or individual components, raw materials and assembly), can change a product’s status from duty free to being subject to swinging tariffs, all because of the “Rules of Origin” we have to adhere to. This has caused quite a stir in recent months as the rules are far more complicated than you might assume.

What Are the ‘Rules of Origin’?

While the official severing of GB from the EU has already occurred, the actual trade agreements are still being negotiated. As it stands, there are extremely complex agreements in place to determine fees and import tariffs on products. This may change in the future, but as of now things look to be convoluted.

‘Rules of Origin’ are a simple set of quality assurance guidelines that the EU has in place against the GB. This strict standard ensures that manufacturing companies in GB cannot source products from countries that are deemed to have an unfair competitive advantage. Products manufactured in certain countries will incur tariffs on top of their normal shipping fees to discourage this practice.

So, in essence, if a product is being shipped from GB into the EU the exporter must be able to prove the ‘origin’ of the product and in some cases it’s individual components, raw materials and its assembly. In the case of consumer electronics for example, this means the origin of each individual capacitor and plastic fastener has to be known and declared.

To put it simply, if a product is manufactured within the EU or GB, it is not subject to import tariffs. However, if more than 50% of the product supplied has been manufactured outside of the EU or GB, it is subject to some tariffs. Though, even this is not a hard and fast rule as there are some cases where this percentage can be higher or dramatically lower.

These overly complicated rules have added to the already new and uncertain situation, even for those familiar with the import/export process. Sara Hutchinson, Managing Director and Owner of RISA (UK) Ltd, has taken the time to lay out some of the more complex ways these percentages can be calculated. For example:

  • Raw earth materials such as salt, sulphur and stone is allowed have up to 70% of its mass originate from non GB or EU locations.
  • Fertilizers can have only 40%.
  • Vehicles such as cars, boats, and planes can have no more than 45%..

These are just some of the ways that the new ‘Rules of Origin’ trade laws have made life more complex for manufacturing and sourcing companies within GB. If you are not able to source the majority of your components and ingredients from GB or the EU, and prove their origin, things can get extremely difficult.

How Rules of Origin Affects Business

So, we know that products need to satisfy rules of origin to meet the GB/EU tariff free criteria. However, as with all complex trade agreements, there have been some oversights that have led to unnecessary complications in the export of goods manufactured in GB and to be shipped into the EU, where component parts have originated from the EU to enable them to be classified as tariff free.

It’s important to note that the ‘Rules of Origin’ only applies to one-way transactions. When a product is made in the EU and shipped to the GB, or the other way around it does not face any tariffs. But, if a product leaves the EU and has a ‘stop’ before being shipped into the GB, it can get quite complicated.

One example of this was mentioned by executives from Marks & Spencer. The famous sweet Percy Pigs is manufactured in Germany. If it is shipped to the GB, there are no tariffs due to the ‘Rules of Origin’ agreement. However, if those sweets are later shipped to the Republic of Ireland, there is an issue. This is because the products left the EU and are now re-entering the EU from a country where they did not originate. This ‘stop’ along the way creates the problem. However, if they were to be unpacked and placed onto a cupcake, for example, there would then be no tariff because they would have been ‘transformed’ enough to meet the guidelines.

This may sound overly complicated and unnecessary, but it is the current situation. If a company is to adhere to the strict regulations of the EU/GB trade agreements, as they are currently written, this will create a lot of headaches for EU/GB shipping and manufacturing companies. If an item is made in the EU, and is shipped to the GB for sale and redistribution, it cannot then re-enter the EU without being considered of ‘Non-GB origin’. So, what is to be done about this?

Ways Around the ‘Rules of Origin’

Details of the current trade agreement on the Rules of Origin can be found in 50 out of the 1,200+ pages of the trade agreement itself. There are no easy ways to navigate around these rules and standards.

The ‘Rules of Origin’ are hitting the food industry harder than any others. This is because the easiest way ‘around’ the problem is to change the product in some way, in many circumstances, such as fruit, it is an impossible task.

However, if only a small  change to an item is made, it may not be enough to circumvent the Rules of Origin. For example, simply changing the packaging of a product is not enough to make it fit within the parameters of the agreement. The item has to fundamentally change, a simple change or rebranding isn’t enough.

An example of this can be seen using raisins. If grapes are imported into GB from Greece, there is no tariff because they originate from the EU. But, in order to redistribute them back to the EU there has to be a change of some kind. Drying them and changing them into raisins will change the texture and flavour of the grapes–thus, they are now a new item that originates primarily from GB.

Unfortunately, the grape example can’t be regarded as a ‘hard-and-fast’ rule. But, it is currently the only way that sourcing and manufacturing companies within GB can avoid the hefty tariffs imposed by the EU/GB trade agreement. An item must fundamentally change in order to re-enter the EU without a tariff being imposed.

What Are the Fines?

The actual tariffs levied against those who break the current ‘Rules of Origin’ can vary. There is a long list of fines and tariff rates outlined in the agreement that can change, based on the type of product being shipped.

In most cases, for non-food items, the tariffs imposed are less than 10% of the value of the import. However, for food items the tariffs can exceed 12-15%. All of this can be found within the guidance information from the GB government. However, some of the tariffs are pretty hefty. This is why so many manufacturing and sourcing companies within GB are doing their best to find ways to adjust, and work around these new rules.

It’s simple enough to avoid products that are made or sourced from countries deemed to have a competitive advantage or allow unethical working conditions. It’s more difficult to navigate the complex web of rules that surround sourcing products that are from the EU itself. That’s why it’s important to familiarise yourself with the new trade agreement, as well as how the ‘Rules of Origin’ can apply to you and your business moving forward.

RISA – Great With Freight

Sara Hutchinson from ‘RISA’, (https://www.risauk.com), has provided some great information on the GB-EU Trade and Co-operation Agreement Rules Of Origin:

  • GB now has a bilateral cumulation agreement whereby GB and EU material content can be added together for calculating the origin of goods moving between GB and the EU.
  • In most cases product specific rules of origin state, they must not exceed a maximum amount of 50% of non-originating GB or EU material.
  • So, for example if the finished product contains more than 50% content from say USA, China, India, etc, they cannot be declared as GB origin goods.

The formula to calculate the % of maximum non-originating material is:
Landed value of non-originating material divided by the ex-works selling price x 100

There are some exceptions where the maximum amount of non-originating material is not 50%, for example:

  • Tariff Heading 25.01 covering salt, sulphur, earth and stone = 70%
  • Tariff Heading 31.05 covering fertilisers = 40%
  • Tariff Heading 87.05 covering vehicles, aircraft, vessels & associated transport equipment = 45%

NB: This information is for guidance purposes only and should be used in conjunction with the specific rules that can be found at: https://www.gov.uk/government/publications/rules-of-origin-for-goods-moving-between-the- uk-and-eu

Working together Elite Sourcing & Manufacturing and RISA (UK) can handle your sourcing, manufacturing and shipping needs. For further information contact ES&M on +44 (0)7770 820 998 (UK) or via email at charles@elitesourcingandmanufacturing.com or RISA (UK) on Tel: 01784 252444 or via email at: enquiries@risauk.com

Sara Hutchinson, RISA (UK) Limited

Charles Firbank, ES&M