Trade Bill - Second Reading

Part of the debate – in the House of Lords at 4:36 pm on 11th September 2018.

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Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy) 4:36 pm, 11th September 2018

My Lords, let me from these Benches join in the welcome extended to the noble Baroness, Lady Meyer. Sometimes in this House we have a Member who gets to their feet and speaks deeply from the heart; she did that today, and I hope that she will continue that passion into her future speeches.

I have the great advantage of speaking in the middle of the batting order, so I can now select just a few topics on which to focus. I think that it will not surprise the Minister that I want to talk about rules of origin. She said that that she would address that issue in her summation. Unfortunately, it will be difficult to challenge her at that point in the discussion, so I hope that she will be comprehensive.

In the continuity FTAs that are to novate—as the noble Lord, Lord Lilley, phrased it—the 40 to 43 existing deals that the EU has with 70 countries, rules of origin become critical. As this House will know, the right to reduce a tariff to zero is in many cases dependent on the content of the good being exported. Local content has to reach a pre-agreed threshold. In the example often used, of the sale of automobiles to South Korea, the required local content threshold under the EU agreement with South Korea is 55%.

The UK is a major exporter of cars to South Korea. It has no difficulty using that definition of EU content in reaching the 55% threshold. However, the UK alone has content that is far lower. From reading speeches of Mike Hawes of the SMMT, which is basically the automobile trade association group, I understand that the core UK content is on average about 20%. Through various other mechanisms, that number can for some vehicles be raised to about 40%. To get to 55% or 60% is generally acknowledged to be impossible. The rationale for that is simple: it is economies of scale. Major manufacturers are not going to want to have multiple ball-bearing parts in every country from which they export; they are not going to want to replicate the construction of tyre wheels, or whatever else. It is the supply chain, collectively, that delivers that final product to the UK for onward export to Korea.

My understanding is that it would be very difficult to get a variance from that 55% to 60%, for the simplest of reasons: the benchmark is used in trade deal after trade deal across the globe, and many of those trade deals include a clause that says that if more favourable terms are offered to another country, then automatically that more favourable benchmark is included for each country that is engaged. You know that if the UK were able to get a benchmark reduced to 20%, for example, the EU would enjoy that, as would many other countries that have free trade deals with South Korea, so we create a problem. The answer that the Minister often gives is that we will have a triangulation system that allows the UK to treat EU content for these purposes as if it were UK content and vice versa. However, my understanding is that that would last only to the end of the transition period even under the Chequers agreement, and if there is no deal then there is no possibility that that arrangement will even be in place late on 29 March next year. Perhaps the Minister will take us through those various issues.

I took a look at a very handy chart derived from world import-export tables—these are 2016 numbers—produced by a company called Absolute Strategy Research. That 55% to 60% benchmark is quite common for a wide variety of goods: we are not talking just about automobiles. It may be lower for some: there is an agreement in aerospace, for example, that there will be no benchmark. I looked at this and at UK content of its exports. In electrical equipment we just about get to 20%, in food products we are below 10%, in rubber and plastic products we are at just about 20% again, and in chemicals at just over 20%, so there is a very wide range of our exports in which we could not meet the local content benchmark in these free trade deals that we intend to novate. We could if we included other EU products, but that requires agreement with the EU and requires the EU to renegotiate every one of its existing free trade deals, because of course it has to make that adjustment as well.

I would really like some realistic comment from the Government, because I have a sense from my discussions that they think it will be an absolute no-brainer to get an agreement to bring the thresholds down to something like 20% or 30%, because Britain is Britain—that seems to be the logic, as far as I can see. For the reasons I have described, including the impact on trade deals all over the globe, I cannot see that that is likely. I certainly cannot see that it would ever happen without reciprocal giveaways. I shall give this House the example of Korea. The South Koreans basically said that if they were to change the threshold and allow EU content to be considered as local UK content, they would wish to do the same for Chinese products. As I understand it, the automotive industry in the UK has now said that if that door were opened, essentially it is the end of automobile production in the UK, because it would allow such a flow of cheap Chinese automobiles into the UK and it would be so damaging to our manufacturing that every investor would have to fundamentally reconsider. Spread this across industry sector after industry sector and we deserve a better answer. want to pick up one other issue around rules of origin. It is a point that I made in debate on the customs Bill, but that was such a truncated debate that it would be wrong not to make the point in this context as well. The noble Lord, Lord Lilley, said that tariffs are not really such a problem—they have been coming down all over the world, so it really does not matter if we do not have a zero-tariff regime: our competitors might have it but we can still do fine. But rules of origin have a huge non-tariff cost. The estimate given by the Government—perhaps the Minister will confirm it—is that a single certificate for rules of origin will cost £30 to produce. I have previously used the example of a small stationery supplier in Northern Ireland, who imports his goods from the Republic of Ireland—he has no choice; there is a wholesaler only in southern Ireland—and the shipment comes every week. The cost to him for that shipment would be £30 for the pencils, £30 for the white paper, £30 for the blue paper, £30 for the filing cabinet, £30 for the pens, and so on. The slightest difference creates the requirement for a new certificate of origin.