Brexit: EU advises businesses not to use British components because of Theresa May’s plan to leave customs union

'Rules of origin' to harm British manufacturers

The European Commission has advised EU businesses to think twice before using parts and components made in Britain, because of a decision by Theresa May to take the UK out of the bloc’s customs union.

The advice, which has the potential to seriously harm Britain’s automotive industry, instructs European businesses like car manufacturers to look elsewhere for parts if they want to continue benefiting from EU free trade agreements.

Most free trade agreements have “rules of origin” which mean a product can only benefit from the low tariffs the deal negotiates if it can be proven to mostly originate from the place that signed the deal – in this case the EU.

But because Britain is leaving the EU customs union as part of Brexit, anything made in Britain will no longer count as being made in the EU customs area.

For car manufacturers based on the continent, this means using British-made components could now harm their access to dozens of countries the EU has free trade agreements with – making their exports uncompetitive compared to businesses that use EU-sourced components.

“Economic operators are reminded of the legal repercussions concerning rules of origin for preferential treatment of goods, which need to be considered when the United Kingdom becomes a third country,” the note from the European Commission says.

“In particular, as of the withdrawal date, the EU preferential trade agreements with third countries in the field of the common commercial policy and customs no longer apply to the United Kingdom.”

Economic operators are reminded of the legal repercussions concerning rules of origin for preferential treatment of goods, which need to be considered when the United Kingdom becomes a third country

European Commission note to businesses

It continues: “EU27 exporters and producers intending to claim preferential tariff treatment in an EU FTA [free trade agreement] partner country as from the withdrawal date, are advised to treat any United Kingdom inputs as ‘non-originating’ when determining the EU preferential origin of their goods and take appropriate steps to be able to prove the EU preferential origin of their goods, in case of subsequent verification, without taking account of any United Kingdom inputs as ‘EU content’.”

If a company sources a significant part of its product from the UK, “appropriate steps” would entail sourcing those components elsewhere to keep benefiting from EU free trade agreements.

Sky News has also reported a separate note sent from the Dutch government to businesses echoing the European Commission’s advice. A car industry executive told the broadcaster that the change was a “catastrophe” for the car industry.

“The hard Brexiteers have built a bomb under the UK automotive industry and the EU have lit it,” they said.

Exit from the customs union and the subsequent changes to rules of origin are also likely to be disruptive for British businesses in other ways. UK exporters selling into the EU under any future free trade agreement would have to prove they originate from the UK, which can be a costly and bureaucratic procedure, reducing the competitiveness of British goods compared to EU ones. UK businesses that use components sourced from outside the EU may also not gain preferential access if they are found to be mostly worked on elsewhere.

In most cases, a manufacturer needs to show that around 55 per cent of its value was created in the EU. The rules, which are a standard feature of all trade agreements across the world, are in place to stop countries re-exporting goods produced elsewhere on favourable terms.

Staying in the EU customs union would remove all of these issues because the UK would continue to coordinate its trade policy with the EU.

Commenting on the new warning, the EU’s deputy chief negotiator Sabine Weyand said: “Preferential rules of origin were the subject of my very first meeting on my very first day in the European Commission back in 1994. They have not become any simpler since.”

A UK government spokesperson said: “This is simply dealing with what would happen in a ‘no deal’ scenario.

“We are in the process of discussing our future partnership with the EU, and in March we reached agreement on the terms of an implementation period that will start on 30 March 2019 and last until 31 December 2020, which will see our market access continue on current terms.

“A clear priority is to maintain continuity in our relationships with third countries as we exit the EU, and we’ve agreed with the EU that they will notify the other parties to international agreements that, during the implementation period, the United Kingdom is to be treated as a member state for the purposes of these agreements.

“This is in line with the draft withdrawal agreement text published before March European Council.”