This article was first published in the Spring 2018 edition of World Trade Matters.
As the UK negotiates its exit from the EU, rules of origin are becoming a key topic. How will the exit from the customs union impact the current production patterns in Europe in industries where hundreds of parts move across national borders every day? How will origin be dealt with in what is promising to be a unique and bespoke trade relationship with the EU? Strict rules of origin limit companies’ sourcing options. Flexible rules of origin grant access to a wider range of inputs from outside a trade agreement but can lead to trans-shipments from third-party countries.
One of the ways to address the question of origin would be to allow the addition (‘cumulation’) of origin from multiple locations. Cumulation of origin allows for greater flexibility when it comes to using raw and semi-manufactured materials in the production process. It allows a member of a trade agreement to use inputs from other members and move stages of production while maintaining the originating status. One example of cumulation could be the Europe’s cumulation zone known as the Pan–Euro–Med (PEM) zone. Cumulation of origin requires two conditions to be fulfilled:
- All participating countries need to be linked by a trade agreement; and
- The rules of origin under these agreements need to be identical.
Cross-cumulation, also known as third-party or expanded cumulation, allows the cumulation of origin between three or more countries which are not necessarily joined by a trade agreement or are joined by agreements with disparate rules of origin.
Cross-cumulation has to date been used in a number of agreements worldwide, for example in the Canada-Colombia, Canada-Peru and Colombia-US trade agreements as well as the EU-Vietnam and EU’s Generalised Scheme of Preferences programme.
Due to its specific characteristics, cross-cumulation is slowly becoming a staple of many newer trade agreements. It acts as a de facto extension of the market access provisions under a trade agreement and could be viewed as a mutual recognition of rules of origin. It introduces more flexibility in terms of the choice of supplier by extending the originating status for particular goods to selected countries. As such it can support integrated supply chains.
In the post-Brexit trading model, cross-cumulation could support the UK’s participation in global value chains by introducing more flexible origin provisions and expanding origin zones. It could be applied, gradually, to certain sectors or goods. It could also be applied either unilaterally or with full reciprocity.
It could also be used as a temporary measure during the transitional period while the UK negotiates its own trade agreements with current EU partners. For example, the EU and Canada could agree to apply cross-cumulation on UK inputs while the UK negotiates a new agreement with Canada. This would only address a part of the problem as UK producers would still not be able to export or import from Canada under preference. However, UK inputs could continue to be used by EU producers. Cross-cumulation could also be applied on a fully reciprocal basis between Canada, the EU and the UK once a Canada-UK deal has been negotiated.
Full article can be found here: http://www.freetradeagreements.co.uk/publication/brexit-and-origin-a-case-for-the-wider-use-of-cross-cumulation/