The new Developing Countries Trading Scheme (DCTS), due to be launched by the UK Government in early 2023, is said to demonstrate the UK’s commitment to building long-term and mutually beneficial relationships with emerging economies. The following guide to the DCTS looks at what this new scheme promises, compared with the UK’s previous Generalised Scheme of Preferences, as well as who can use the scheme and its rules.
What is the Developing Countries Trading Scheme (DCTS)?
In early 2023, the new Developing Countries Trading Scheme (DCTS) will replace the UK’s current Generalised Scheme of Preferences (GSP). The GSP is a scheme that reduces or removes rates of duty, or tariffs, on imports from eligible developing countries into the UK. The UK’s GSP was put in place on 1 January 2021, largely replicating the EU’s GSP, providing continuity of trade access to the UK for around 70 developing countries.
The UK Government introduced the DCTS to improve access to the UK market for multiple lower income countries, in light of its commitment to improving preferences for these countries after Brexit and the UK’s position as an independent trading nation.
The new scheme aims to support sustainable growth in eligible developing countries through reduced tariffs and simpler rules of origin requirements. By offering lower tariffs and less red tape for exporting to the UK, it is hoped that the scheme will help developing countries to diversify their exports and grow their economies, helping the world’s poorest nations to export goods to the UK and play a more active part in fast-growing global supply chains. Equally, in this way, it is hoped this will lower costs for UK businesses, and lower prices and increase choices for UK consumers across a range of everyday products.
By facilitating free and fair trade with developing countries, it is also hoped that the DCTS will strengthen supply chains, and create stronger trade and investment partners for the future. It is predicted by many that the new scheme could be a game changer for the UK, allowing UK businesses to source products from many more countries than they could before, making a business more competitive and its supply chains a lot more resilient.
The scheme builds on a wider programme from the UK to drive a “free trade pro-growth agenda across the globe”. This includes a new Platinum Partnerships initiative, designed to increase trade between the UK and certain lower and middle-income Commonwealth countries. The government also recently announced a new Trade Centre of Expertise, which promises to bring together the best of British expertise to give partner governments the tools needed to more actively participate in global trading.
Who can use the Developing Countries Trading Scheme (DCTS)?
The Developing Countries Trading Scheme (DCTS) will apply to 65 countries across Africa, Asia, Oceania and the Americas, where the DCTS will essentially apply to most countries that currently benefit under the UK’s GSP. This will include 47 countries in the GSP Least Developed Countries (LDC) Framework, also known as the LDC Framework, as well as 18 additional countries or territories that have been classified by the World Bank as ‘low income countries’ (LIC) and lower middle-income countries (LMIC). However, the new DCTS will not extend to countries and territories deemed by the World Bank as ‘upper-middle income’ for three consecutive years, or to LICs and LMICs who have a free trade agreement (FTA) with the UK.
The DCTS will provide duty-free and quota-free trade to LDCs on everything except arms and ammunition, and duty/quota-free trade on 85% of eligible goods to most LICs and LMICs, bringing more countries within scope of the most generous tariff reductions when compared with the UK’s GSP. However, powers to suspend a country from the scheme due to employment and human rights violations will be retained, with widened powers to include anti-corruption, climate change and environment conventions violations.
As with the UK’s GSP, the DCTS will have three tiers of preferences, with countries allocated to each one depending on which economic criteria they meet, although these are being re named. The GSP LDC Framework will become the ‘DCTS Comprehensive Preferences,’ the GSP General Framework will become the ‘DCTS Standard Preferences’ and the GSP Enhanced Framework will become the ‘DCTS Enhanced Preferences’.
What are the rules under the Developing Countries Trading Scheme (DCTS)?
Published 16 August 2022, the Developing Countries Trading Scheme (DCTS) policy paper sets out the government’s approach under the new scheme. This includes detail on the public consultation responses from individuals, businesses, non-governmental organisations and public sector bodies, and how these have informed the policy.
The report is organised into four sections: rules of origin, tariffs, goods graduation and conditions. Each section details how the consultation insights helped inform the policy. For anyone looking to further understand how the new trade scheme will work, this report represents the ideal starting point. Below we set out a summary of each of the four sections, from rules of origin to the scheme conditions.
Rules of origin
One of the primary aims behind the new Developing Countries Trading Scheme (DCTS) is to simplify complex trade rules, in particular the rules of origin. These rules are used to determine where goods are from, providing the criteria for testing whether goods are able to be considered to have been produced within a particular country. They dictate what proportion of a product must be made in its country of origin and whether goods qualify for any reduction in tariffs, availability of preferential trade arrangements or application of trade sanctions.
LDCs already receive duty and quota-free access for all products other than arms and ammunition under the UK’s GSP. The new DCTS therefore offers improvements for LDCs through the simplification of the rules of origin. LDCs make up approximately 13% of the world’s population, yet make up only around 1% of global trade in goods. It is hoped that by addressing barriers to trade, such as rules of origin, this will be a good way to support LDCs entering global supply chains, making it easier to bring goods into the UK.
Specifically, LDCs will see improvements in the DCTS because of the simplification of the existing rules of origin under the UK’s GSP by liberalising and relaxing product specific rules (PSRs). PSRs are the list of rules a product must meet to be treated as originating from the country that claims preferential tariff rates, with different sets of rules for different types of products. The new tailored PSRs are designed to minimise overly restrictive requirements and to make the rules easier for businesses to understand and use.
Full details of PSRs can be found in the PSRs schedule for LDCS at GOV. UK, although the main changes introduced by the DCTS can be summarised as follows:
- a new threshold, where half of all chapters will allow 75% non-originating content in the PSRs at the highest HS2 level. This new threshold recognises the limitations faced by LDCs when participating in global supply chains, including the fact that low labour and other costs can make it hard for LDC products to meet higher non-originating thresholds;
- almost all PSRs will also allow for alternative rules, helping businesses to meet UK requirements if one of the rules is difficult to either meet or measure;
- most chapters have been simplified into a single set of rules that apply to the whole chapter, rather than different rules within one chapter, meaning there are fewer exceptions, rules and variations depending on the type of product. This should help businesses to meet the rules of origin required to qualify for preferential tariffs.
Improvements for LDCs in the DCTS are also being made through extending cumulation. This means that material used from another country can be deemed as ‘originating’ if used in the production of a product, provided the final product has been processed beyond minimal levels, whereby cumulation can make it more straighfoward for countries to work to the non-originating content limits in certain PSRs.
Under the UK’s GSP, only 6 out of 47 LDCs are permitted to automatically take advantage of regional cumulation, although applications for cumulation with specific countries can be made on an individual basis. Under the new DCTS, extended cumulation will be allowed for LDCs with DCTS countries and Economic Partner Agreement (EPA) countries on materials that are duty/quota-free when traded between the cumulating partner and the UK.
The new extended cumulation rules will substantially increase the quantity of nations from which materials are allowed to be deemed as originating, where LDCs will be able to participate in supply chains involving raw materials from around 95 countries while still being allowed to export final products to the UK duty-free. These changes will especially benefit African LDCs. For example, an Ethiopian exporter will be allowed to use materials from Kenya (an EPA country), treating those materials as originating in Ethiopia provided they are duty-free in the EPA between the UK and Kenya, and they meet the EPA PSRs. However, LDCs looking to take advantage of the extended cumulation provisions must have administrative arrangements in place to meet verification of proof of origin and customs cooperation requirements.
Importers usually pay UK Global Tariff rates when importing into the UK, unless relevant preferential tariff rates apply, for example, through the UK’s GSP.
Under the UK’s GSP, LDCs benefit from 0% tariffs on everything but arms and ammunition, whilst LICs that are not LDCS, as well as LMICs without an FTA, benefit from either partial or total removal of customs duties on more than 80% of tariff lines. Under the DCTS, there will be several main changes in relation to tariffs, including:
liberalising extra tariffs for economically vulnerable LICs and LMICs: where the DCTS will lower or remove tariffs on an additional 156 products under DCTS Enhanced Preferences (as renamed under the DCTS). The result of this change is that 85% or more eligible lines will benefit from zero tariffs, covering trade worth in the region of £2 billion.
allowing all economically vulnerable countries to access the DCTS Enhanced Preferences: by removing the requirement for developing countries to ratify and effectively implement certain international conventions, this will result in 8 countries moving to the more generous tier. By allowing all economically vulnerable countries to access DCTS Enhanced Preferences, approximately £23 million of additional trade will immediately benefit from zero tariffs. By 2030, up to £2.6 billion of trade could benefit in this way, as a further 6 LDCs are expected to graduate to Enhanced Preference tariffs.
simplifying seasonal tariffs and nuisance tariffs: seasonal tariffs have different tariff rates applicable according to the time of year, where the DCTS will maintain all but 4 of the seasonal tariffs. Further, all 33 nuisance tariffs will be set to 0% for DCTS Standard Preferences (as renamed under the DCTS). These tariffs are already 0% under the GSP Enhanced Framework and continue to be 0% in DCTS Enhanced Preferences.
Goods graduation refers to the suspension of preferential rates of UK customs duty on certain imports. As these imports are deemed to be highly competitive, they no longer need preferences to compete in the UK market, where graduation means that imports of certain products originating in a given country lose preferences, while imports of other products from that country retain preferential treatment. This means preferences are removed from products that no longer need them, in this way providing greater opportunity for those countries in greater need of preferential access to UK markets.
The new scheme is graduating goods for DCTS Standard Preferences countries (as renamed under the DCTS), although only India and Indonesia are subject to goods graduation. However, by making graduation more objective, and by introducing a reduced 6% threshold to assess the proportion of total UK imports, this will ensure that a similar volume of imports graduate for both countries, while retaining the 3-year assessment period.
The GSP has conditions which, if not met, allow for either the suspension or variation of preferences from any beneficiary. The conditions on which suspension or variation decisions are based include serious or systematic violations of human rights and labour rights contained in certain international conventions. There are also conditions that cover World Trade Organisation (WTO) determinations, export of prison labour goods, illegal narcotics customs controls and requirements of regional fisheries management organisations.
The DCTS will preserve the power to suspend or vary a country’s preferences for serious or systematic violations of human rights and labour rights based on international conventions. The government is also expanding the list of international conventions that form the basis for suspension, with the new list to include conventions on anti-corruption, climate change and the environment. However, the new DCTS will not include suspensive conditions specifically related to WTO determinations, export of prison labour goods, illegal narcotics customs controls and requirements of regional fisheries management organisations.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.