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April 1, 2024

Trade Talking Points | Latest insights from EY's Trade Strategy team (March 2024, no. 2)

This edition of our semi-weekly Trade Talking Points includes updates on: UK Free Trade Agreement (FTA) negotiations; new UK tariff suspensions; recent EU legislative developments covering supply chain due diligence; sustainable packaging and forced labor; European Union (EU)-UK due diligence on Rules of Origin; the EFTA-India Trade and Economic Partnership Agreement; the Indo-Pacific Economic Framework for Prosperity ministerial meeting; and the Digital Economy Partnership Agreement.

UK FTA negotiations

The UK launched upgrade negotiations with Turkiye on 14 March 2024 to modernize the existing 2020 UK-Turkiye Trade Continuity Agreement, which was rolled over after Brexit. The negotiations will begin on 10 June 2024 and are expected to deliver a comprehensive Free Trade Agreement. While the Continuity Agreement focuses on goods trade only, the negotiations for the new agreement will also cover trade in services, investment, digital trade and agricultural incentives.

A modernized agreement would provide new opportunities for UK businesses to increase services exports and to benefit from increased access to Turkish goods. Businesses should monitor the progress of negotiations and may choose to engage where possible with government to provide input on the outcomes they seek from a comprehensive agreement.

The UK Parliament passed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) Act and it has now received Royal Assent. The UK Government will now introduce technical secondary legislation and formally accept the terms signed in 2023 with New Zealand by mid-2024. Six of the CPTPP Parties must ratify the UK's accession before it can enter into force.

Continuation of UK tariff suspensions

The UK Department for Business and Trade is set to announce a suspension of tariffs on more than 120 product categories to support small and medium-sized enterprises (SMEs). Following a consultation in Summer 2023, tariffs were suspended for a range of products, including fruit juices, flowers, starches, and certain ceramics, chemicals, leathers and car parts. The temporary tariff suspension is expected to last from 11 April 2024 to 30 June 2026.

UK businesses importing any of the products included in the tariff suspension from anywhere in the world should consider assessing their supply chains to make most effective use of the tariff suspensions. SMEs in particular should monitor any further government announcements of support, such as loans and equity to combat regional disparities.

EU supply chain due diligence, sustainable packaging and forced labor

The Council of the European Union approved the Corporate Sustainability Due Diligence Directive (CS3D) on 15 March 2024. The Directive will require businesses to conduct the necessary due diligence and take relevant steps to identify and prevent any human rights and environmental issues in their supply chains. Among several changes to the initially proposed version, some business requirements have been relaxed to allow more time to comply, and a provision to force firms to offer financial incentives to managers for achieving climate targets was removed.

Also on 15 March 2024, EU Member States reached a deal on sustainable packaging to reduce the amount of plastic packaging waste produced by the EU and set packaging reduction targets. The deal includes a mirror clause enabling EU companies to use plastic waste recycled outside the EU to meet their recycling targets if it adheres to EU regulations.

The Council of the European Union and the European Parliament reached a provisional agreement on 5 March 2024 to ban products made with forced labor from the EU market, including products intended for export that contain parts produced with forced labor. The European Council hopes to establish a forced labor single portal through which relevant information and guidelines will be made accessible. The proposed regulation specifies that a risk-based approach should be taken toward any investigative processes around the use of forced labor and that the burden of proof lies with the relevant business for any products deemed as high-risk by the European Commission. It remains unclear whether the regulation will be finalized before the European Parliament elections in June. The regulation's impositions will apply 24 or 36 months following its formal adoption, depending on the mandate provided by the European Council.

Businesses should familiarize themselves with the requirements under the new supply chain regulations and consider undertaking a comprehensive review of the business' supply chain to identify any potential risks or gaps in existing practices. A monitoring and reporting process allowing continuous review of business operations can help ensure that appropriate due diligence is undertaken.

EU-UK due diligence on rules of origin

The UK tax authority (His Majesty's Revenue and Customs) and the EU Customs Authorities have begun to focus on verifying that goods traded between the UK and EU under the Trade and Cooperation Agreement (TCA) meet the relevant rule of origin to qualify for duty-free access to the UK or EU. Following Brexit, we initially saw a few verifications by the customs authorities that tended to focus on ensuring that a statement of origin was held by the importer at the time of import. However, subsequently, we have seen an increase in detailed verification audits of suppliers because the customs authorities require evidence held by the supplier demonstrating that (1) the goods exported under the TCA meet all the requirements of the rule of origin and (2) the statement on origin has been correctly issued. If the requisite evidence cannot be demonstrated, customs authorities may refuse preference claims already made and assess the importer for the duty relating to that product.

Both the EU and the UK have introduced additional auditing processes to ascertain the origin of imports, leading to an increase in requests from both customs authorities to audit relevant importers and their suppliers.

Businesses are advised to thoroughly assess statements on origin and to conduct their own due diligence of suppliers and wider supply chains. Businesses need to be aware that rules of origin are complex, as these could be distinguished by value rules, change of tariff heading rules, process rules or a combination of these. It is therefore essential to ensure that the supplier correctly understands the rules of origin for each product and that exporters only issue statements on origin when evidence of meeting the rule of origin is held.

EFTA-India Trade and Economic Partnership Agreement

On 10 March 2024, the Member States of the European Free Trade Association (EFTA) — Iceland, Liechtenstein, Norway and Switzerland — signed a Trade and Economic Partnership Agreement (TEPA) with India. Currently awaiting ratification, the agreement will facilitate investment opportunities between the two parties and enable Indian and EFTA businesses to expand in the respective markets through simplifying customs procedures and building supply chain resilience. Indian businesses will benefit from duty-free exports to EFTA Member States for approximately 99% of goods, with 80-85% of goods from EFTA Member States receiving reduced tariffs. The agreement also contains provisions for Mutual Recognition Agreements in professional services, intellectual property rights and government procurement.

On 15 March 2024, the UK closed the fourteenth round of trade negotiations with India after slowing discussions. Ongoing EU-India FTA negotiations are also unlikely to see any breakthrough until the latter half of 2024, as elections are due to take place in both jurisdictions.

EFTA or Indian businesses trading with the "other jurisdiction" should review the agreement and assess their operations to see if they can benefit from reduced tariffs and other provisions. Those not yet trading with the other jurisdiction should consider whether the agreement poses direct or indirect opportunities for their operations.

IPEF Ministerial outcomes

The Indo-Pacific Economic Framework for Prosperity (IPEF) Ministerial was held on 14 March 2024. Ministers welcomed the entry into force of the Supply Chain Agreement and made public the texts of the Clean Economy Agreement, the Fair Economy Agreement and the Agreement on the IPEF Framework for Prosperity, which were substantially concluded in November 2023.

The agreements aim to ensure that businesses in IPEF partner jurisdictions will benefit from a reliable supply of critical goods, a reduction in supply chain disruption and assistance in the transition to net-zero emissions. Grant funding is proposed to be made available to climate infrastructure projects to provide technical assistance and capacity building support.

IPEF Ministers will continue to discuss the agreements at the next meeting on 6 June 2024 and the necessary domestic processes are currently being undertaken to fully ratify the three proposed agreements.

Businesses operating in IPEF partner jurisdictions should review the published text of the agreements and assess how their operations might benefit from them. Any outcomes, announcements or policy decisions arising during the next IPEF Ministerial should be followed. Businesses undertaking climate infrastructure projects should monitor the announcement of any grant fundings.

Digital Economy Partnership Agreement

The Protocol to the Digital Economy Partnership Agreement (DEPA) between Chile, New Zealand and Singapore entered into force on 19 March 2024. The Protocol converts DEPA's provisions into legally binding commitments to strengthen its legal certainty. DEPA includes commitments to promote cross-border data flows and to prevent forced technology transfers and the discrimination of digital products. Businesses are expected to benefit from reduced barriers to digital trade through enhanced business predictability and lower operating costs.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young LLP (United Kingdom), London

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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