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Your Learning Module: Rules of Origin – Key access to preferential duty rates

The UK currently has over 70 Free Trade Agreements (FTA) in effect, some fully ratified, and some provisionally applied, which means they have not been signed but they are already available for traders to access and benefit from.

Although they are usually referred to as “trade agreements”, there are different types, each of them adapted to fit the strategic development areas that they focus on. For example, the UK-EU Trade Cooperation Agreement (TCA), the UK-Singapore Digital Economy Agreement, or the Continuity agreements with countries like Mexico, Canada, Israel and Switzerland.

What are trade agreements and what they are for?
They are agreements between two or more nations that set out the rules of trading goods and services between said countries. The main purpose is to reduce restrictions on trading. Trade Agreements bring many benefits to the importers and exporters of the trading nations, however, one of the most important benefits, or at least one that is more palpable to SMEs, is the access to reduced or nil rates of duty on imports.

Each trade agreement contains a set of specific and strict rules that determine how traders can access preferential import duty rates; here lays the importance of any company looking to import or export goods with a country with whom the UK has a trade agreement to become familiar with what those rules dictate and be fully compliant. These rules are known as Rules of Origin and are the rules used to determine the origin of the goods traded.

Although each trade agreement has its own particularities when it comes to rules of origin, there are overall three main categories used to determine the origin of the goods: Wholly produced, Last Substantial Transformation and Non-originating.

The rule most straight forward is “wholly produced”, these refers to goods of pure national origin, which means they don't contain any foreign ingredients. They usually apply to animals, vegetables and minerals.

The most complex rule on the other hand is “last substantial transformation” as this one has its own subcategories, and each of them on return have their own restrictions and specifications:

  • Change of Tariff: This rule requires non-originating materials to undergo a process that will change the tariff code from the goods that were initially imported into the UK to those that are being exported.
  • Value added: This rule requires a certain percentage of the total value of the final product to be added in the UK. Change of tariff and value added usually go hand-by-hand.
  • Percentage rule: This rule limits the value of non-originating material to a certain “acceptable” percentage.
  • Stage of production: This rule requires a specific process to be undertaken at a particular stage of the production process; it is usually applied to textiles.

It is important to underline that substantial processing does not include labelling, packaging, cleaning, sorting, fitting together, shipping, or simple assembly.

Finally, the rule of goods non-originating. This would apply evidently to goods that don’t comply with any of the aforementioned categories.

Traders must keep in mind that each individual country determines their own rules and therefore what applies with one country might not apply with others, this is usually because of other circumstances such as quotas, anti-dumping, countervailing duties, etc. For this reason, it is imperative that traders fully understand the trade agreement they are looking to access to ensure the successful import or export of their goods under preferential rates of duty.

Research and due diligence is key to the success. To ensure you smoothly navigate through International Trade, please reach out to our Trade Advisory services and check the training courses and webinars available at LCCI.