Preferential rates: arrangements with countries or territories outside UK

Taxation (Cross-border Trade) Bill – in a Public Bill Committee at 2:15 pm on 25th January 2018.

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Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader 2:15 pm, 25th January 2018

I beg to move amendment 107, in clause 9, page 6, line 24, leave out “may make regulations” and insert

“must make regulations following consultation with relevant stakeholders”.

This amendment requires the Treasury to consult relevant stakeholders before making regulations giving effect to an arrangement for a preferential tariff.

To explain the reasoning behind our amendment I need to mention a couple of things in the clause. It is headed, “Preferential rates: arrangements with countries or territories outside UK” and the explanatory note explains more about those:

“This clause broadly covers any arrangements, international agreements or memoranda of understanding”.

Therefore it relates to whenever there is a move away from a most favoured nation tariff into a free trade agreement, or some other form of preferential tariff rate.

This short amendment would make two changes to the Government’s intentions around the clause. First, it would leave out “may make regulations” and insert “must make regulations”. In subsection (1), the Bill states that,

“the Treasury may make regulations to give effect to the provision made by the arrangements”.

If there has been an international agreement, surely the Treasury must make regulations, because that would be sensible. That is the first change we suggest.

The second change we suggest is on consultation. It is clear that there has not been the right level of consultation. The Government have said that if they are varying the rate of import duty downwards rather than upwards, there should be a less rigorous procedure, but if the rate of import duty is varied downwards, that may have a greater effect on our local producers and manufacturers. The amendment asks for there to be “consultation with relevant stakeholders” in advance of not just international agreements, but any of these changes.

When the Government are deciding to make international regulations, it would be useful if they first consulted the House using the existing processes. I understand that most Governments across the world make trade regulations with the authority of the House, rather than simply by the authority of the Executive. In the absence of those kinds of changes, which are outside the scope of the Bill, we are asking for the Government to definitely make the regulations—if they are bound by an international treaty or agreement, it would be sensible to do so—but to consult with relevant stakeholders. We want to put that duty of consultation on the Government.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

The points that the hon. Lady makes hit the nail on the head in relation to engaging with those who will be affected by the legislation. I fully understand where she is coming from.

The clause allows the Government to introduce through regulations a lower preferential rate of duty applying to goods originating from specific territories. It also covers a broad range of situations, including arrangements between the UK and a British overseas territory, free trade agreements negotiated with Britain and other countries, and a possible customs arrangement with a large economic regional organisation such as the European Union. Preferential trade agreements comprise a variety of arrangements that favour member parties over non-members by extending tariff and non-tariff preferences. PTAs, particularly free trade agreements, have proliferated in recent years. In the post-war period, the EU has developed the largest network of PTAs in the world. The explanatory notes state:

“The ability to use a preferential rate under an arrangement may be subject to any conditions specified in the arrangement, including…quotas, rules of origin or safeguard measures.”

Given that context, it is important that stakeholders are taken into account, as the hon. Lady says. There could be a wide range of stakeholders, and the proposal suggested by the Minister did not go far enough. He almost seemed to suggest that everybody is included, but everybody is not included if the Secretary of State does not want to include them. The clause presents another example of the litany of delegated powers found throughout the Bill. The Treasury takes immense powers without proper consultation right across the board.

Clause 9 is beyond vague when it comes to explaining what consideration the Treasury will make when introducing regulations that will pave the way for offering preferential rates. The clause leaves a range of questions unanswered, particularly around the test that the Treasury will put in place before preferential rates can be included.

I am sure that all members of the Committee agree that reciprocal preferential rates are the foundation of free trade agreements. Again, that goes to the heart of who is to be consulted on this one, and the clause gives a free hand to introduce regulations that will create preferential rates and seem to open the door to the Treasury to—

Order. This is a narrow debate on amendment 107. There will be a debate on clause stand part later. I ask the hon. Gentleman to confine his remarks to the amendment proposed.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

I will, Mrs Main, and I will come back to the clause later if that is appropriate. I am just trying to support the contention made by the hon. Member for Aberdeen North that stakeholders are crucial to making the measure work. Having tried to set out the context, I am happy to sit down and to come back later to talk about the clause more generally. However, I support the hon. Lady’s contention.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

As the hon. Member for Aberdeen North has said, the amendment seeks to do two things. It would require the Treasury to consult before giving effect to a trade arrangement that has been agreed with another territory or country, and to make regulations in such circumstances.

To take the first of the points, any consultation on regulations made under clause 9 would not be meaningful as the Government would not be in a position to take account of the views received without withdrawing or renegotiating the agreement reached. As set out in the trade White Paper, the Government have committed to engaging stakeholders throughout the process of negotiating new trade arrangements.

On the proposed requirement for the Treasury to make regulations, it goes without saying that the Government are required to meet their international obligations in the trade agreements that they have entered into. The word “may” is used, however, because there might be unforeseen circumstances that make it inappropriate for the Treasury to be obliged to lay regulations. As I say, however, the Government will of course be bound their international obligations.

On that basis, I urge the Committee to reject the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to consider:

New clause 2—Preferential rates under arrangements: enhanced parliamentary procedure—

(1) This section applies to—

(a) the first regulations to be made under section 9 in respect of a country or territory outside the United Kingdom, and

(b) any other regulations under that section the effect of which is an increase in the amount of import duty applicable to any goods set by any regulations to which paragraph (a) applies.

(2) No regulations to which this section applies may be made by the Treasury in exercise of the power in section 9(1) except in accordance with the steps set out in this section.

(3) The first step is that a Minister of the Crown must lay before the House of Commons—

(a) a statement of the terms of the arrangements made with the government of the country or territory outside the United Kingdom; and

(b) a draft of the regulations that it is proposed be made.

(4) The second step is that a Minister of the Crown must make a motion for a resolution in the House of Commons setting out, in respect of proposed regulations of which a draft has been laid in accordance with subsection (3)(b), the rate of import duty applicable to goods, or any description of goods, originating from the country or territory.

(5) The third step is that the House of Commons passes a resolution arising from the motion made in the form specified in subsection (4) (whether in the form of that motion or as amended).

(6) The fourth step is that the regulations that may then be made must, in respect of any matters specified in subsection (4), give effect to the terms of the resolution referred to in subsection (5

This new clause establishes a system of enhanced parliamentary procedure for regulations setting lower import duties as a result of an arrangement made with the government of another country or territory, with a requirement for the House of Commons to pass an amendable resolution authorising the rate of import duty on particular goods.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

My new clause 2 would require a vote in the House on regulations that lower import duties as a result of an arrangement between the Government and another country. I will wrap that up with speaking to the clause in general, with your permission, Mrs Main.

The powers the Government have given themselves under the Bill to offer preferential rates to other countries through free trade agreements, and with no regard to the House of Commons, should concern us all. I will return to time after time to the theme of parliamentary accountability. The lowering of import duties, if done carelessly and without consultation of key industries, can have disastrous economic consequences that can destroy whole sectors and cost jobs and livelihoods. The Government have made it clear that this is a money Bill, as I said earlier, and will therefore not be subject to further scrutiny.

In that regard, the raising and lowering of tariffs are in effect the taxation of goods coming into the country. As far as I am concerned, it is crucial that we maintain frictionless negotiation of free trade agreements, instead of risking the scenario that I am afraid the Bill will almost inevitably enable or provide for. It appears that the powers outlined in the clause, as in other clauses, comprise a huge accretion of power to the Treasury, which will give it a hegemony in Parliament, notwithstanding the issue of negative or affirmative resolutions. Ministers will be left to their own devices to introduce regulations where they see fit, with no parliamentary oversight of any significance, and no requirement to consult industry or the relevant stakeholders that the changes will affect. Similarly, there is no inkling about what considerations or conditions the Treasury will agree to when it comes to entering into preferential rate agreements, particularly whether industries will be protected by the use of quotas or rules of origin.

There are two types of rules of origin: non-preferential rules of origin, which apply under World Trade Organisation rules in the absence of a preferential trade arrangement—for example between the EU and the USA—and preferential rules of origin, which apply to countries that have concluded a preferential trade arrangement. The latter apply to trade with countries with which the EU has an FTA, such as South Korea and Switzerland, and to non-EU members of the EEA, such as Norway. Under such agreements, only originating products are given preferential tariff treatment. Each preferential agreement specifies a set of rules of origin, which has a direct impact on processing times, customs duty and, perhaps just as importantly, the domestic market. That was touched on in some detail in the witness evidence.

Preferential trading agreements generally specify a minimum percentage of own-origin product for a product to qualify. The calculation of own-origin is currently EU-wide. Post-Brexit, unless an appropriate arrangement is reached with the EU, it will be only UK-produced components that will be deemed own-origin. That could cause a problem for the car manufacturing industry, where it is normal in the sector for a country to have 60% of own-origin product in the export content. In the UK, that is usually around 10%, with a maximum of about 43%. Therefore, will we be able to deem UK car parts as UK origin?

Similarly, in relation to our future trade deal with the EU, the question of preferential rates is important when considering the proof of origin. Leaving aside the obvious difficulties of consignments that incorporate parts that are sourced from multiple countries when certifying origin, once the UK leaves the EU, it is highly possible that the UK and the EU could differ on the preferential duty rates that they give to products from certain countries, and they would need to document the origin for that purpose.

Let us consider for a minute an export situation where a UK business is exporting goods to a customer in a country that allows preferential duty rates for goods of EU origin, but not to the same extent for the UK. The foreign customer would demand that the EU origin of any included parts is certified, so that they can at least pay some at the lower duty rate. The UK business would then need to ensure that it gets that EU origin certified to pass the certification to its foreign customer. The rules of origin that the Treasury will set through regulation alone present huge difficulties for stakeholders in the UK, who will have to face the challenge of deciding whether qualifying as EU origin will be more important than qualifying as UK origin. This consideration will likely be based on where manufacturers’ key markets are.

The second difficulty will be in the reorganisation of manufacture supply chains, moving either from Europe into the UK or out of the UK. Again, that will depend on how UK manufacturers currently structure their business and the agreements that the Government reach with the EU and other countries. In both these instances, there need to be clear lines of communication between the Government and UK manufacturers and producers. We keep coming back to the point made by the hon. Member for Aberdeen North. Her amendment would have required the Treasury to consult relevant stakeholders and it is regrettable that it failed. I hope the Government take on the spirit of her suggestion.

The consideration of concerns of key stakeholders could be the difference between the Treasury issuing a preferential rate that upends a whole industry and costs the UK economy thousands of jobs, and the Treasury pausing and choosing not to follow through on that. If the Treasury was forced to consult with key stakeholders, for they would have an opportunity to make the case against whatever crude economic test the Treasury has set. After all, UK manufacturing remains a huge employer, employing 8% of the UK workforce, amounting to almost 3 million jobs. Those jobs are distributed across the country and are in key industries such as minerals and ceramics, paper, steel, glass and glass products, chemicals and other fertilisers. We had representation just two days ago from witnesses who were deeply concerned for their industries, including steel, which my hon. Friend the Member for Scunthorpe is also deeply concerned about. Ideally, the Opposition would favour a mechanism of consultation that goes beyond written evidence. We would like to see a situation where Ministers consult in a much wider sense—I take that point.

As far as we are concerned, as we leave the European Union and undertake free trade agreements with countries all over the world, we want to avoid situations where arrangements do not work—a situation that could see the UK Government negotiate a free trade agreement with America, with part of the agreement being a preferential rate being given to US machine parts entering the UK. While the Treasury may see the economic benefits of businesses being able to access cheaper machine parts, in that scenario it does not take the consideration of UK machine part suppliers into account. The UK machine part suppliers are then undercut by the flooding of cheap machine parts from the US. That in turn would lead to job losses, and the loss of a whole industry and all the knowledge and skills that go with it. We have seen so much of that over the past three decades, and the Bill potentially makes the situation worse.

Photo of Nicholas Dakin Nicholas Dakin Opposition Whip (Commons) 2:30 pm, 25th January 2018

Does my hon. Friend think that, in line with the Government’s industrial strategy, it would be a missed opportunity if we end up hollowing out UK industry in the way that he describes, rather than securing its future as we all wish to do?

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

My hon. Friend makes a very important point. There is a danger that we are walking into this with a bit of a fuzz around us. We just do not know the impact this will have on us. If the Government do not get it right, as in spot-on, it is potentially very dangerous for our industries. That is why we are concerned, which is another of our themes in relation to the Bill: one is about democratic accountability, and the other is about how the Bill will protect our vital industries, from manufacturing right the way through the whole ream.

The scenario I referred to earlier is far from absurd and reflects the reality that, when it comes to negotiating and signing free trade agreements, there are always winners and losers, particularly when negotiating with countries that are larger both in population and economic size.

The free trade agreement negotiated between Australia and the United States in 2004 was negotiated in a relatively quick period, and it was so bad that officials refused to recommend it to the Australian Parliament. John Howard, the then Prime Minister, was forced into signing it by President George W. Bush, who essentially reminded him of the close security collaboration between the two countries. After signing, John Howard was often and repeatedly chided by political opponents who would shout, “Where’s the beef?”—a reference to the failure of the free trade agreement to stimulate beef exports for Australia.

We do not want to be in that situation. The UK could easily find itself in a similar scenario whereby we will offer preferential rates to the USA or China, with little in return. In November, we had Wilbur Ross, the US Commerce Secretary, saying that the UK retaining EU regulations on chemicals, genetically modified crops and food safety would represent “landmines” for a potential deal. The Secretary of State for International Trade is reported to have given him private assurances that this would not be a problem.

Stakeholders could find themselves shut out of the process. The Opposition’s concerns are not scaremongering, particularly when we have a Secretary of State who has already made it clear that he supports a race to the bottom, with cheaper consumer goods and weaker regulations and standards. Again, our witnesses spoke about how it is not consumer against producer—the two are almost interchangeable. If we look at the trade remedies outlined in the Bill, we see the Government have ensured there is a clear economic interest test for the Treasury to follow that does not consider the interests of UK manufacturers or key industries, which is unique among most World Trade Organisation countries.

If this Bill and the Trade Bill remain unamended, the Treasury will have to take the advice only of the Secretary of State in that regard, but it will receive a recommendation from a Trade Remedies Authority that will be appointed by the Secretary of State and no doubt made up only of people he trusts—that does not mean that anyone else does—unless its composition is amended in the Trade Bill. We saw that only yesterday, with a vote in the House of Commons in relation to the Electoral Commission. Parliament is entitled to express a view on such appointments, but in this case I do not think we will get that capacity. It certainly does not seem to be in the Bill. Key stakeholders will therefore bear the brunt of any changes to tariffs and again effectively be shut out of the process.

Those key stakeholders will be at the mercy of a Secretary of State who appears to be desperately attempting to negotiate free trade agreements at any cost and potentially to pay a price that most of us would not be prepared to pay. If hon. Members do not have the ability to challenge it, the Treasury will also have a free hand to introduce regulations that will set the framework for the lowering of tariffs which, if we are not careful, will change the UK economy as we know it. I exhort the Committee to think carefully on the proposals in the Bill and to take into account what we say in our new clause.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader

New clause 2 is, for a variety of reasons, one of the most important measures we will discuss in the three days of debate we will have on the Bill. The clause is very important. I mentioned earlier that reducing tariff rates could have a significant impact on manufacturers in the United Kingdom as well as on agricultural producers, which is a major concern, particularly in more rural parts of the UK.

This measure looks at preferential rates under conditions specified in an arrangement including, for example, quotas, rules of origin and safeguard measures. It is about not just reducing tariff rates for the total number of goods coming in from one country, but reducing the number of those under a certain quota or having a differential rate, depending on the amount of goods coming in—it is a bit more complicated than it may look.

The UK Government will go away and negotiate trade deals with other countries, and the Bill will allow the Treasury to put regulations into place. The UK Government would be more likely to negotiate better trade deals if they knew that they had to justify them to Parliament, get its approval and go through a more rigorous approval process after that. Given the concerns that the Scottish National party has raised consistently about changes that this and previous Governments have made in different areas that we feel have negatively affected either our constituents or manufacturers, producers and companies who work in the United Kingdom, and in Scotland specifically, we do not trust the Government to go away and negotiate trade deals that will be good for outlying parts of the UK, particularly those not in the south-east of England.

If Ministers had to justify themselves to Parliament more—if they had to convince us that they had struck a good deal—it may be that when they were sitting round the negotiating table, they would come up with a better deal because Parliament would be more likely to approve it. That is why new clause 2 is important. Any move by any country away from most-favoured-nation tariffs could have an impact on companies that work in our country as well as on consumers. As parliamentarians, we want to provide a level of protection for them, which is why we will support new clause 2.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 2:45 pm, 25th January 2018

Clause 9 allows the Treasury to implement preferential trade arrangements on the recommendation of the Secretary of State. That will enable the rate of import duty applied to goods originating from a territory covered by a preferential arrangement to be lower than the standard rate.

The clause ensures that the tariff-related part of any new or existing free trade agreement can be implemented and enables the UK to continue the treatment that the British overseas territories currently receive. The Bill does not give the Government powers to sign such agreements but to implement the tariff parts of them.

The clause is essential to ensuring that the UK can implement any tariff outcome from negotiations with the EU. The Prime Minister has been clear that our aim is to secure a tariff-free trade deal with the EU. As a member of the EU, the UK is part of around 40 free trade agreements with countries and territories outside the European Union. When the UK leaves the EU, the Government are committed to seeking continuity in our trade relationships, including those covered by the EU’s FTAs or other EU preferential arrangements.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

That is a specific question for the Department for International Trade, but think all the indications are that we have been out speaking to many potential trading partners.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Current trading partners and others. Obviously, as an EU member, we are bound not to enter into any other arrangements prior to our departure, but I am confident that we are having appropriate conversations at this stage of our withdrawal.

In addition, as set out in the trade White Paper, after leaving the EU, the UK will have the opportunity to

“look to forge new and ambitious trade relationships with our partners around the world”.

Clause 9 provides a basis for those aims.

The clause enables the UK to implement preferential import duties on goods originating in territories covered by a preferential arrangement. That will cover arrangements made bilaterally with a Government of another territory. A recent example is the comprehensive economic and trade agreement between the EU and Canada.

The Bill refers to making arrangements to allow preferential rates of import duties to apply before an agreement is ratified. That is common when implementing FTAs and is the case under the comprehensive economic and trade agreement, which has been provisionally adopted but is not yet fully ratified.

The clause will also enable the UK to continue to provide preferential tariff treatment to those British overseas territories, including the British Virgin Islands and the Falkland Islands, that currently receive that access under the EU via the overseas association decision.

As I was looking through new clause 2 during the hon. Member for Bootle remarks, my eagle eye spotted what I think is an error. Although subsection (1)(a) of the new clause would do what is intended—that the first regulations to be made under clause 9 will be subject to the provisions of the new clause—the explanatory statement and the points made in his speech suggest that subsection (1)(b) should relate to instances where there has been a lowering of import duties. In fact, as currently drafted, subsection (1)(b) refers to

“the effect of which is an increase in the amount of import duty”.

I can only imagine that that is a drafting error or has been lifted from new clause 1, which does refer to the increase in import duties. However, I fully understand what the hon. Gentleman intended, and I will deal with new clause 2 on the basis of its intention and of the way in which he describes it in the explanatory statement.

The new clause would put in place an additional parliamentary process for regulations giving preferential import duty arrangements to other countries. As I previously set out, for indirect tax matters, it is common to have framework primary legislation supplemented by secondary legislation. The Bill introduces a comprehensive framework for a new stand-alone customs regime. It ensures that the scrutiny and procedures that apply to the exercise of each power are appropriate and proportionate, taking into account the technicality of the regulations, the frequency with which they are likely to be made and how quickly the law may need to be changed.

Clause 9 allows the Treasury to give effect to the tariff section of trade arrangements once they have been negotiated. It is therefore appropriate and proportionate for the negative procedure to apply. Any delays in implementing preferential duties in trade arrangements could have significant impacts on UK supply chains or exporters who rely on the arrangements. As set out in the trade White Paper the Government are considering how to ensure that the process for negotiating new trade deals is transparent, efficient and effective, and we will ensure that Parliament is engaged throughout.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

It is a pleasure to see you in the Chair, Mrs Main. I have a couple of questions for the Minister. I am grateful for his comments. He seemed to suggest that the appropriate time to consider these matters might be at the time of ratification of any preferential trade agreement and that the provisions are merely enabling. How will we be able to scrutinise at that stage? Will we be able to have a developed and involved discussion at that stage? My understanding is that we would not be able to do that.

In his opening remarks—perhaps this is unfair—the Minister referred to the existing preferential trade arrangements that we have with the overseas territories and the EU and those between the EU and other countries, but, as many others have mentioned, we could be concluding new trade arrangements, particularly with the US, and there are all the concomitant problems that that might cause as well as potential opportunities. Have the Government considered whether the scope of the clause could be reduced so that it relates only to areas where we already have preferential trade arrangements?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

There are a couple of important points to make here. This particular clause enables the Government to put into effect the tariff-related elements of an FTA, for example. When it comes to the points that the hon. Lady understandably makes about treaties that we may enter into with other countries or with countries with which we already have existing arrangements that we wish to continue on our departure from the European Union, those kinds of debates and issues do not rest within this clause. As the trade White Paper sets out, they rest with the Government whose duty it is to make sure that we consult during the negotiation of those treaties so that we conclude them in an appropriate manner.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I find that very helpful because it has clarified that there is not a detailed parliamentary process for us to consider the matters that are covered by the clause. We believe that they will not be scrutinised in an appropriate and thoroughly democratic manner. Also, there will not be much opportunity for parliamentarians to engage with the issues raised by free trade agreements.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I do not think my response to the hon. Lady earlier suggested that there would not be any parliamentary scrutiny of the provisions in clause 9. Indeed there will be, as she knows. If we are going to change duties or introduce tariffs, such matters will be subject to secondary legislation and statutory instruments in the normal manner.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I did not say “any”. I said that there would not be scrutiny of the type that is necessary and of an appropriate thoroughness, which would not be of a one-shot nature whereby it is difficult to have the kind of debate that we all think is necessary, given the impact that the provisions could have on major sectors of our industry.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Clause 10