You can chew on this.
All trade deals include a “most favoured nation” (MFN) clause, which mean that if one partner signs a better trade deal with another country, all previous trade partners are entitled to the same upgrade. Some of the EU’s FTAs were signed many years ago. By rolling over the newer, more comprehensive deals, the UK could trigger MFN clauses in older, narrower ones, prompting governments to demand a parallel upgrade.
A further problem is presented by “rules of origin,” a feature of all trade agreements. These rules establish the proportion of a product that must be produced domestically in order to qualify for free trade. A common threshold is around
40 per cent. Many products include some imported parts—the UK imports
$80 billion worth of goods from third countries for use in British production (excluding precious metals and stones).
Where two countries with an FTA supply a lot of components and commodities to one another, they often agree that their components can be added together, or “cumulated,” to meet the threshold. It is likely that the EU and UK will agree to cumulation between themselves. But when third countries are also involved, it becomes more complex. When the UK and EU are no longer one entity, the UK will be unable to cumulate domestic components with those from the EU and meet, say, Canadian rules of origin, without a cumulation agreement with Canada. Many British products would no longer satisfy Canada’s threshold, and so producers would be forced to pay Canadian tariffs on imports.
There are two possible solutions. First, the EU, Canada and the UK could rewrite the Canada-EU FTA to enable “diagonal” cumulation between the three parties. This would need to be negotiated for all of the EU’s agreements, and would require consent from both the EU and the other country. But the EU may not be willing to renegotiate its rules of origin agreements with other countries for British benefit, especially because its own exporters might be able to take market share from British ones in countries outside Europe.
Second, the UK could go it alone, and negotiate lower local content rules. The other countries, if they agree, would then also have a lower threshold, with potential benefits for their exporters. But governments may refuse to relax the rules in those sectors where British exporters are more competitive.
