Policy paper

UK/Turkey rules of origin protocol update: April 2021

Published 31 December 2020

1. The United Kingdom of Great Britain and Northern Ireland and the Republic of Turkey signed a Free Trade Agreement (the “Agreement”) on 29 December 2020. This agreement replicates, as far as possible, the EU-Turkey trade arrangement which applied in the United Kingdom until the end of the Transition Period following our departure from the EU. The Agreement took effect at the end of the Transition Period, and included a temporary Rules of Origin Protocol.

2. On 15 March 2021, the United Kingdom-Turkey Joint Committee established under the Agreement adopted a Decision replacing the existing Rules of Origin Protocol with a revised Protocol. This report explains the changes adopted.

Rules of Origin

3. In free trade agreements, Rules of Origin are used to determine the economic nationality of a good. In order to qualify for preferential tariff rates, a good has to “originate” in one of the parties to the agreement. Trade agreements may also allow materials originating and/or processed in a country other than the exporting party to count towards meeting the specific origin requirements for preferential treatment, a process known as “cumulation”.

4. There are two main categories relevant to determining whether goods “originate” in the exporting country for the purposes of a free trade agreement:

a. Wholly obtained

These are goods that are wholly obtained or produced entirely in a single country. Examples include (i) mineral products extracted from the soil and (ii) live animals born and raised there.

b. Substantial transformation

These are goods that are made from materials which come from more than one country, and the origin is therefore defined as that of the country where the goods were last substantially transformed.

This can be determined in three ways:

i. Value added: this type of rule requires that a particular proportion of the final value of the product be added in the exporting country.

ii. Change in tariff classification (CTC): this type of rule requires that the final product be sufficiently different from the imported materials such that it moves to a different tariff classification altogether.

iii. Specific processing or manufacturing: these rules typically apply where value added or CTC rules may not adequately determine originating status, and where specific processes are required to meet originating criteria.

5. A number of legal instruments underpin the trading relationship between the EU and Turkey (collectively, the “EU-Turkey Arrangement”), which include the Agreement creating an Association between the European Economic Community Republic of Turkey, signed on 12 September 1963 (the “Ankara Agreement”), Additional Protocol signed on 23 November 1970, the Agreement between the European Coal and Steel Community and the Republic of Turkey on trade in products covered by the Treaty establishing the European Coal and Steel Community, and Decisions of the EU-Turkey Association Council, including Decision 1/95 establishes a customs union between the EU and Turkey (“EU-Turkey Customs Union”). Under the Ankara Agreement, all goods covered by the EU-Turkey Customs Union circulate freely between the EU and Turkey, meaning that Rules of Origin do not apply and therefore no such rules exist between the EU and Turkey for Customs Union goods. However, the EU and Turkey are currently contracting parties to the Regional Convention on pan-Euro-Mediterranean preferential rules of origin (PEM Convention) and apply the PEM Convention rules between them for Non-Customs Union Goods.

6. To meet implementation requirements necessary to avoid a gap in preferences with Turkey at the end of the Transition Period, from 1st January 2021 to 13rd April 2021, a temporary Rules of Origin Protocol to the Agreement was applied, which reflects the Revised pan-Euro-Mediterranean Rules of Origin (Revised PEM). This measure was applied temporarily to allow the UK and Turkey to adapt the UK-EU Rules of Origin agreement for use in the UK-Turkey agreement. This is because Turkey’s obligations to the EU under the EU-Turkey Customs Union mean that there is a need for certain Rules of Origin provisions in the Protocol to align with the provisions set out in the Trade and Co-operation Agreement (TCA) between the United Kingdom and the EU. These provisions are the General Provisions and Product Specific Rules (PSRs) (also known as List Rules).

7. On 15 March 2021, through a Decision of the United Kingdom-Turkey Joint Committee established under the Agreement, the temporary Rules of Origin Protocol were updated to align with the EU-UK TCA. The changes set out in the revised Rules of Origin Protocol take effect on 14 April 2021.

8. A large majority of the new Protocol simply transitions the TCA, with only a few technical differences. The revised Rules of Origin Protocol includes updated “Vessel Ownership” provisions, which seek to include vessels at least 50% owned by a business in either party or in the EU. The aluminium origin quota in the TCA has also been proportionally resized to 7,500 tonnes to better reflect our trade levels with Turkey. There are no origin quotas in the revised Rules of Origin Protocol related to fish or fishery products.

9. There are a number of other areas where the provisions in the TCA differ from those found in Revised PEM, some of which are detailed below. The key differences are found in the cumulation provisions, where UK and Turkish businesses will no longer be able to consider parts and materials from other PEM signatories as originating. This is because such provisions do not exist in the TCA. For PSR’s, HM Government and Turkey have updated the PSRs in the Agreement in order to align with the PSRs in the TCA. The updated PSRs are generally similar to or are more trade liberal than the existing PSRs.

10. The temporary Rules of Origin Protocol included administrative provisions that ensured predictable and low-cost administrative arrangements for proving origin. These provisions have remained the same in the updated protocol and have not be superseded by any equivalent provisions in the TCA.

11. The Protocol to the Agreement applies equally to non-Customs Union and Customs Union goods under the EU-Turkey Arrangement. This approach preserves as far as possible the major supply chains that utilise the EU-Turkey Customs Union.

Cumulation

12. During the Transition Period, all our content was considered as “originating” in the EU and our exports are designated as “EU origin”. This means that originating materials from, and processed in, the United Kingdom and the rest of the EU could be used interchangeably in bilateral trade with existing EU trade agreement partners. This was no longer the case at the end of the Transition Period when EU trade agreements ceased to apply to our exports. The designation of our exports shifted from “EU” originating to “United Kingdom” originating and EU content (unless specific provision is made in new agreements) no longer counts towards meeting the origin requirements for preferential treatment for either party. Furthermore, goods that were previously moved around the Customs Union without rules of origin requirements are now subject to preferential rules of origin. This has had implications for goods traded between us, the EU and Turkey.

13. To address these implications and to provide maximum continuity for business, it was agreed in the temporary Rules of Origin Protocol that EU materials could be recognised (i.e. cumulated) in Turkey’s and the United Kingdom’s exports to each other provided that there is some activity in the United Kingdom that goes beyond insufficient processing. EU processing, except when in relation to textiles, could also be cumulated in Turkey’s and the United Kingdom’s exports to each other. These provisions have been retained in the updated Rules of Origin Protocol. Our exporters must therefore continue to ensure that enough processing takes place in the United Kingdom, and this is consistent with both the temporary Protocol and the TCA.

14. The temporary Rules of Origin Protocol also allowed for extended cumulation of PEM country content. In line with the TCA, cumulation of PEM country content in the UK and Turkey’s exports to one and other will no longer be possible. This is because of Turkey’s obligations under the Customs Union.

Impacts

15. Due to cumulation of PEM country content ending, manufacturers exporting to Turkey who rely on a substantial share of their imports of inputs from PEM signatories may have to revert to paying MFN rates if they continue using PEM inputs, or they may have to review their existing supply chains.

16. Based on available data, it appears that there are a limited number of products where imports from PEM countries form a reasonable share (at most a quarter) of the our total imports of those products^{[footnote 1]}. However, even in these specific products the share of imports from the EU appears to be far greater than from PEM countries. This indicates that this change to cumulation rules should have a limited impact overall on exporters.

17. As the updated PSRs are generally similar to or are more ambitious than the existing PSRs, we anticipate that there will be minimal impact on trade flows as a result of changes to the PSRs.

18. There is a wide range of academic literature on the impact of rules of origin compliance on trade flows and a range of estimates on the potential associated trade costs to businesses. Academic studies estimate the tariff equivalent trade costs associated with rules of origin administration and compliance requirements range between 2% to 6%^{[footnote 2]}. These estimates vary considerably depending on the methodology, time period, and the countries under consideration.

19. The Agreement provides only for trade between the UK and Turkey and does not provide for either party’s direct trade with the EU, including, for example, where our exporters or exporters from Turkey use content from each other in exports to the EU.

1. These products include ignition wiring sets for vehicles, aircraft and ships (854430); electric conductors for a voltage <= 1,000V, insulated, not fitted with connectors, n.e.s. (854449); electric windscreen wipers, defrosters and demisters, for vehicles (851240); parts of machines and mechanical appliances, n.e.s. (847990); and electric conductors, for a voltage > 1,000V, insulated, n.e.s. (854460). This analysis uses goods trade data from HMRC, covering the years 2017-19. ↩

2. World Bank 2014, Ciuriak & Xiao ↩