UK & Europe
Written by Robert Parson, Jennifer Greengrass, and Iris Kyriazi
Last week, the UK Parliament granted the EU’s request for more time to ratify the EU-UK Trade and Cooperation Agreement (“TCA"). The initial agreement by both parties was that the TCA’s provisional application would end by 28 February 2021.
On the UK side, the UK Parliament already passed the European Union (Future Relationship) Act 2020, which gave effect to the TCA’s provisions into domestic law on 31 December 2020. On the EU side, the Council, acting on behalf of all 27 EU Member States, adopted the decision which allowed the signature of the TCA and its provisional application from 1 January 2021. However, for the EU this is not the end of the process. The European Parliament and the Council are still required to ratify the TCA. For this to happen, the EU needs to finish the legal-linguistic revision of the Agreement in all 24 languages for its scrutiny by the European Parliament and the Council. In order to do that, it has requested two months additional time.
Such a possibility was foreseen during the negotiation process, when the parties agreed that the date of 28 February 2021 could be subject to future amendments. Hence, in response to the EU request for an extension, the UK agreed to postpone the end of the provisional application to 30 April 2021 with the hope that this would be enough and that no further extensions would be sought by the EU.
The TCA represents a single instrument, which includes three main pillars:
The governance of the TCA will be directed by a set of bodies established by the TCA that will be co-chaired by an EU and a UK representative to allow agreements to be reached through a mutual decision process. As such, the TCA sets up a "Partnership Council" between the UK and EU that will ensure the TCA’s objectives are met and to enable its implementation. It also establishes a Trade Partnership Committee to support the Partnership Council as well as various Specialised Committees and Working Groups covering various areas of competence such as on Goods, Customs Cooperation, Sanitary and Phytosanitary Measures, Technical Barriers to Trade and others.
The TCA also provides for the potential set up of a Parliamentary Partnership Assembly consisting of Members of the European Parliament and of Members of the Parliament of the United Kingdom, as a forum to exchange views on the partnership.
In addition, the TCA provides for potential future agreements between the EU and the UK to supplement the TCA and to cover further issues, such as, most importantly, financial services, governmental subsidies, and taxation.
The TCA only covers areas that the EU has competence on, which means that each EU Member State does not need to individually ratify the TCA. However, it also means that many areas (such as, for instance, cultural and educational policy) will depend on individually negotiated bilateral agreements between the UK and EU Member States. Significant areas for bilateral talks are those of external security, foreign policy and cooperation in terms of defence issues, not covered by the TCA.
The TCA creates a free trade area between the EU and the UK for goods and services based on the World Trade Organization (“WTO”) rules. It establishes preferential measures in areas which include trade in goods and services, digital trade, intellectual property, public procurement, aviation and road transport, energy, fisheries, social security coordination, law enforcement and judicial cooperation in criminal matters, thematic cooperation and participation in Union programmes.
Since 1 January 2021, the UK exited the EU single Market and the Customs Union which effectively ended the free movement of goods, services, persons and capital between the EU and the UK. As a result, the EU and the UK stand as two distinct markets in two different regulatory and legal environments. For trade, this means that goods traded between the EU and the UK will have to undergo customs checks and be subjected to new measures. Traders will no longer be able to count on a harmonised EU system of requirements when trading goods between the UK and the EU.
The TCA is mostly comparable to other free trade agreements concluded by the EU such as the ones entered into with Canada (CETA) or with Japan (EPA). The main difference and perhaps the least controversial part of the negotiation was the agreement between the EU and the UK to allow for zero tariffs on all qualifying trade in goods. This precludes the imposition of taxes, customs duties, export duties or any other quotas for goods traded between the EU and the UK. Nevertheless, to be eligible for a tariff free treatment, exporters will have to prove that their goods follow the origin requirements set out in the TCA, the so called “Rules of Origin" and provide evidence that their goods are manufactured in the EU or the UK. For instance, goods imported from India which have only undertaken little further processing in the UK will probably not be eligible for a tariff free treatment when distributed across the EU. This was not an issue UK exporters had to face before. Therefore, despite claims to the contrary, tariff-free access to the EU market is not automatic and will very much be reliant upon acquiescence with the Rules of Origin.
Notwithstanding the UK government's ardent wish for uninterrupted trade, since 1 January 2021 customs controls as well as other administrative requirements for import and export declarations for cross-border trade have been in application. This has already caused a trade slowdown as the “volume of exports going through British ports to the EU fell 68% last month compared with January 2020”. Part of the slowdown can undoubtedly be attributed to teething problems but another part, perhaps the more significant one, is due to systemic changes that are here to stay. However, the TCA does include measures to facilitate the customs process and simplify the customs related procedures by making use of common recognition schemes in the EU and UK such as ‘Trusted Trader’ or ‘Authorised Economic Operators’. The UK government has, for example, reduced the requirement for traders to post Customs Comprehensive Guarantees to cover import duty (although those considered an insolvency risk may not be exempt).
Nevertheless, the small print of the TCA will throw up plenty of new red tape to replace the red tape that Brexit vowed to banish. For example, the ban on import into the EU of UK shellfish harvested from class B waters (almost everywhere outside Scotland unfortunately) – which proceeded largely without interruption before Brexit – shows that we can "take back control of our waters", in the words of the government's TCA summary, but we cannot force anyone in Europe to eat what we catch without mountains of new paperwork.
The impact of COVID on delays in supply chains is currently distorting the lens through which the TCA's effect on trade is viewed. A more accurate measure might be taken in Q3/Q4 of 2021.
One of the most controversial parts of the negotiation, apart from fisheries, was the discussion regarding the level playing field. The EU’s argument was that, for the UK to keep quota-free and tariff-free trade cooperation, it had to commit to ensure its laws were equal to EU rules in the areas of state aid, consumer protection laws, climate and environmental issues, as well as in the areas of social and tax rights. The EU was keen to avoid giving the UK market access whilst also permitting it to potentially trade more competitively by de-regulating standards in these areas and undercutting, as a result, European businesses. On its part the UK wanted freedom to legislate on these areas independently and did not wish to abide by EU regulations, which it can no longer influence because it is no longer an EU Member State.
The TCA reflects the compromise that was reached by including significant level playing field requirements while also allowing the parties to function in autonomous regulatory regimes. As a result, neither party is obliged to fully align with each other's regulations for the areas of environmental or climate protection, labour laws and tax matters. Nevertheless, both parties have pledged to strive for high regulatory standards or, in some areas, to not lower the current standards. The TCA also established a range of detailed principles in relation to state aids and subsidies. Disputes arising under the provisions relating to the level playing field will be resolved through arbitration rather than being subject to the usual dispute resolution provisions.
Services and investment represented a big part of trade between the EU and the UK. For the UK, more that 40% of its exports to the EU Member States was in services.18 The services sector as well as financial
Services and investment represented a big part of trade between the EU and the UK. For the UK, more than 40% of its exports to EU Member States was in services. The services sector, including financial services, represents around 80% of the UK’s GDP. When the UK was a member of the EU, UK service providers had an automatic right to offer services freely across the EU. This is no longer the case.
The TCA, following the WTO's General Agreement on Trade in Services (“GATS”), includes provisions for a variety of service sectors such as professional and business services including legal, auditing, telecommunication services, digital services, research services, transport services and environmental protection services. Similarly to other recent trade deals such as the EPA made between the EU and Japan, the TCA includes national treatment requirements, which prevent either party from discriminating against incoming businesses. The TCA also includes a "most favoured nation" provision which guarantees that if either party proposes more advantageous terms to another state, those terms would also apply to the EU and the UK.
In terms of financial services, it would be wrong to say that they are not included in some respect in the agreement. Indeed, the TCA does include some general provisions in relation to cross-border financial services between the UK and the EU. For example, no limitations can be placed on the amount of services supplied. New financial services that are incoming in either the UK or the EU (which are not already established in either the UK or the EU) will have to be accepted by either party if they would otherwise be accepted under the domestic laws of such party. Also, payment and clearing mechanisms operated by public bodies will have to be approved.
Nevertheless, the TCA does not fully liberalise financial services in terms of market access. This is mainly because both the UK and the EU agreed to reserve their right to pass new laws and to safeguard existing laws for prudential reasons (the so called prudential carve-out), in order to protect financial stability and the financial market’s integrity. The TCA fails to resolve essential issues arising as a result of the loss of market access. It does not compensate for the fact that UK-incorporated financial service providers lost EU passporting rights which allowed them to offer their services freely within the EU. As a result, UK financial services can only obtain market access rights regarding certain services, on the basis that UK laws and supervisory frameworks are deemed ‘equivalent’ to the EU’s. The TCA does not incorporate any provisions relating to an “enhanced” equivalence framework for financial services. This means equivalence will depend on the bilateral agreements reached by the UK with EU national governments. In addition, the TCA does not include any "most-favoured nation" clause specifically for financial services. As such, the UK will not be able to benefit from a more favourable treatment on financial services the EU could potentially grant to another non-EU country in any future negotiations. This could affect the future competitiveness and opportunity for growth of UK financial services.
When it comes to financial services however, there is potential for better cooperation in the future. In their Joint Declaration, the UK and the EU have expressed their wish for a structured regulatory cooperation on financial services to ensure transparency and appropriate dialogue in the process of adoption, suspension and withdrawal of equivalence decisions. The parties aim to agree by March 2021 a Memorandum of Understanding establishing a framework on how to progress in terms of equivalence determinations.
Trade – The TCA was certainly preferable to the possibility of a no-deal scenario which would have caused significant disruption and uncertainty. It sets a strong basis for safeguarding the long-lasting cooperation between the UK and the EU and, in some respects, it does go beyond more traditional free trade agreements. Nevertheless, it is undeniable that the UK’s position under the TCA is by no means comparable to the level of economic integration that the UK benefited from as an EU Member State. The TCA clearly results in less market access for the UK. Ultimately, it raises barriers in relation to trade in goods and services as well as in terms of cross-border mobility that did not exist previously and will clearly affect just-in-time supply chains for both food and general merchandise.
Financial services – The TCA allows for more market access for financial services between the EU and the UK than would have been achieved under the WTO and GATS rules in a no-deal scenario. However, the TCA currently fails to fully liberalise the financial services in a manner comparable to the UK’s previous position in the EU Single Market. The provisions in relation to financial services under the TCA remain limited and include even fewer commitments than the EU and Japan’s EPA. Ultimately, it leaves a lot to be negotiated still and the danger that other competing countries may be offered equal or better access to EU financial markets in the future is one to be taken seriously.
New trading possibilities – The UK government emphasised the importance of the UK’s newfound freedom to negotiate with and to enter into trade agreement with non-EU countries faster than the EU and on its own terms. The UK is currently looking to negotiate new trade deals with various countries such as Australia, New Zealand, countries in Africa and the US. In that sense, the TCA offers certainty and stability, facilitating any potential negotiations between the UK and such future trading partners, as the advantages of future trade deals with the UK can be more readily assessed now. Nevertheless, it is uncertain whether any potential economic benefits achieved under these new deals could compensate for the loss of market access to the various EU countries which made up a significant part of the UK’s main trading partners. Replacing with non-EU exports any substantial portion of the 43% of all UK exports that currently go to the EU (predominantly to Germany, France, Ireland and the Netherlands) is not a realistic ambition.
Legislative freedom – A key objective of the UK government was to strive for greater oversight over its own domestic regulations and to be able to diverge from EU regulations. In this area, the TCA does offer UK policy makers more control over some specific aspects of EU regulations. This could very well allow the UK to attain "first mover advantage" in emerging sectors, in circumstances where it could act quicker than the EU. Nevertheless, under the TCA, the UK has undertaken to uphold certain regulatory principles in many different areas such as e.g. competition law, tax as well as social and environmental standards, as explained above. The enforcement provisions included in the TCA cover many of these areas. This will prevent the UK, to a certain extent, from adopting fundamentally different legislation which would alter existing standards or change the current safeguards. More often than not, UK policy makers will have to be cautious of any future significant divergence of approach between the UK and EU regulators, as this could give rise to tariffs or the removal of other benefits under the TCA. EU based financial firms, in particular, will observe with some concern that Brexit has resulted in the wholesale onshoring of EU regulation with the added burden of dual oversight by EU and UK prudential authorities.