Trade Bill - Committee (3rd Day)

Part of the debate – in the House of Lords at 4:00 pm on 30th January 2019.

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Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy) 4:00 pm, 30th January 2019

My Lords, I have questions that arise from the previous speeches which I hope the Minister will be able to help me with. Perhaps I may say to the noble Baroness, Lady McIntosh, that I am sure she recognises that, while in a no-deal scenario, for example, we could make the decision that we would reduce our tariffs to zero, she is absolutely right that we could not make them zero only for the European Union; that would also have to be done for everyone else under WTO rules, but there is no requirement for us to be treated in a reciprocal way. In fact, we would be very unlikely to be treated in a reciprocal way, because if the European Union was to look at us and say, “We will be reciprocal and offer zero tariffs to the UK”, it would then be required under its various trade agreements to offer a whole raft of countries across the globe zero tariffs, thus convoluting its entire trading system. There is an imbalance in that argument which sometimes does not quite get heard.

I cannot think of a worse situation for our farmers than finding that they have high tariffs on their exports but no tariffs to protect them from imports flowing in. Some people have said that that is ideal because it means that food costs would fall, but they would do so at the cost of wrecking, frankly, a swathe of one of our much-loved industries.

I want to pick up on rules of origin in a slightly different way, and I will refer to the point that the noble Lord, Lord Lansley, has been making. When the Minister was kind enough to invite us around the table to ask questions ahead of Second Reading, I did try to press on some issues around rules of origin. As I understand it, for these rollover agreements, the UK would turn to the country with which it wishes to keep the trade agreement and say, “We would like you to treat goods made in the European Union as British content in the way you do now, in order for us to have zero tariffs when we export the goods”. I shall take a simple example, “When we export this car, we would like you to treat the European content in it basically as local content for the purposes of a zero tariff”. The officials were quite clear that the UK could do that unilaterally and that we would not need the permission of the European Union.

I then raised this with a number of people outside this environment who said, “You must be joking. Which country is going to infuriate the European Union by allowing its goods to be treated as local content for the UK unless there is some form of balancing agreement with the European Union on this issue?” In other words, the thought that you can cut the European Union out of this discussion and simply do it on a bilateral basis is incredibly fanciful. For most countries, keeping a good trading relationship with the European Union is, frankly, far more significant than having a trading relationship and rolling over the existing deals with the UK. The European Union is going to have to be engaged in some way or allow itself tacitly to be used in this way.

The Government are currently negotiating these deals, and we understand that they are currently in the process of establishing the rollover agreements. Can they tell us whether they have an understanding with the European Union that will indeed permit EU content to be treated as local content for the purposes of these trade deals, or will they be having some stern discussions with the various countries with whom we wish to have these ongoing continuity bilateral arrangements? It would be very interesting to know.

My understanding is that when South Korea was first approached about treating EU content as local content for goods whose final point of export is the UK, its answer was, “That is interesting and we think that it would be a fair thing to do, but of course we would expect goods originating in China and forming part of the content of South Korean goods to be given the same kind of benefit. We think that there is an opportunity to make sure that there is an equal playing field in this area, because negotiating with the UK is not the same as negotiating with the EU. We are now in different circumstances”. I wonder how many countries aside from South Korea which are involved in these rollover agreements have come back to the UK—I can see that Israel would not because it is not particularly in that situation—saying that they wish to have the new flexibility that we are requesting reflected in a change in the flexibility that they are being offered. It would be helpful if the Government could let us know if that is happening.

I also want to raise the issue of the cost of the whole process of trying to establish rules of origin—talk about a non-trade barrier. It is phenomenally expensive. I have given the example before of trade across the Irish border. At the moment, of course, rules of origin are completely irrelevant, but much of the economy of the island of Ireland has merged into a single economy over the last decade. I was in conversation with a small supplier selling stationery goods. The only wholesaler from which it can get its goods happens to be in the south, so a weekly truck comes over from the north. Rules of origin would require that every single item of different kind in that shipment has its own declaration. If a suit has one set of buttons, that is one whole set of declarations. For a different set of buttons, that is another. If there is a filing cabinet with black pens, blue pens, pencils and different sizes of paper, everything needs its own separate rules of origin certification. From asking around generally and talking with chambers of commerce, my understanding is that the cheapest you could get that certificate for is £30. So for this company that has maybe 20, 30 or 40 different types of product in that little truck, you are suddenly multiplying that by 30, just for that one weekly truck-load. It is a huge cost.

I also tried talking with lawyers about free trade agreements. I think a couple of other Peers were engaged in some of these conversations. I came to understand that rules of origin are such a problem that most small companies do not take advantage of free trade agreements, because to satisfy the benchmark of the free trade agreement they have to provide rules of origin certificates. Very big companies with an accounting department, a legal department, a procurement department, an IT department and whatever else, moving a large amount of identical product, can manage to do certificates of origin relatively easily. There is a cost, but it is manageable. But for a small entity the costs are phenomenal and extremely complex, because it involves intellectual property and how that is valued, the value of warranties and issues of royalties. It is an extraordinarily complex process, and therefore under many trade agreements only about 10% of the trade transactions that theoretically could benefit from the free trade agreement actually do. If a free trade agreement gets up to 40% of the eligible product taking advantage of it, that is extraordinary and an amazingly good free trade agreement.

I wonder if the Minister could help us through all this, to help us understand how much trade she thinks is dependent on being able to roll over these free trade agreements successfully; what the cost will be for companies that now attempt to use them to export directly rather than via the EU—which is how they used to stay out of having to fill these wretched forms out—but also, more fundamentally, the issue that the noble Lord, Lord Lansley, raised: how are these deals now captured in these free trade agreements?

Are we able to use EU content as local content, and does the Minister accept that the EU has to have given at least tacit permission for that to happen for this arrangement to be viable? This is one of the reasons why the amendment from the noble Lord, Lord Purvis, is important: it asks for a reciprocal arrangement, where we give our permission to the EU to use UK product as local content in any trade deals it wishes to pursue. That creates a problem: does the EU have to now renegotiate most of its free trade deals if it wishes to continue to use UK content in order to meet the benchmark? If that is true, there is a great advantage for companies inside the EU to divert away from UK suppliers in order to pick up EU suppliers whose content can qualify under rules of origin.