The UK/EU Trade & Cooperation Agreement: New rules for trading with EU after 1 January 2021
5th January 2021
The UK/EU Trade and Cooperation Agreement (TCA) agreed on 24th December 2020 will usher in big changes as to how UK businesses trade with the European Union as from 1st January 2021.
After that date, the UK left the EU Single Market and the Customs Union, and the UK and EU formed two distinct regulatory, legal and customs territories. Although the TCA provides for zero tariffs and quotas it will grant the UK substantially reduced market access to EU markets in exchange for greater UK autonomy. However as will discuss below this autonomy is not completely unconditional as the EU retains certain rights to remove or modify tariff and quota free access if the UK brings into force “unfair competition” measures which might harm the EU ‘s economic interests.
The TCA runs to 1,246 pages and took effect provisionally on 1 January 2021 before being fully ratified by the European Parliament and the Council. The UK has already fully ratified the Agreement.
The overall reaction in the UK to the signature of the TCA has been one of relief and the fact that the UK has been spared being plunged into a “No Deal” scenario.
However, the Agreement will create a very different relationship between the UK and the EU. There is likely to be a significant increase to new trade barriers for UK business after the turn of the year with traders facing increased customs documentation, inspections and delays and industries having to replicate regulatory processes for the UK market that only previously existed for the EU. Not only that but the restrictions have now been extended to within the UK between Great Britain and Northern Ireland.
In this article we look at the principal provisions of the TCA, highlight what areas it leaves out and what the likely consequences are for businesses trading with Europe.
The TCA consists of three main areas: a Free Trade Agreement, a Citizens’ Security Partnership and an agreement on Governance. The parties also set up a separate Nuclear Cooperation Agreement and an agreement on Security Procedures for Exchanging and Protecting Classified Information. There is also scope for the parties to enter into additional supplementary agreements covering further areas of cooperation, for example, in the area of the mutual recognition of professional qualifications. This is an indication that for many areas covered by the Agreement this current accord is still very much a work in progress and not in its final form.
The main implementation mechanism will be a “Partnership Council” between the UK and EU which will oversee the matters covered by the Agreement. The Council will meet at least once per year. It also establishes a number of Specialized Committees and Working Groups including on Trade Partnership, Goods, Customs Cooperation, Sanitary and Phytosanitary Measures, Technical Barriers to Trade and others.
There is also an ambitious plan to create a “Parliamentary Partnership Assembly consisting of Members of the European Parliament and of Members of the Parliament of the United Kingdom. This is designed to facilitate an exchange of views on the operation of the TCA.
The TCA is a horizontal agreement between the EU and the UK, and its terms can only be enforced by one party against the other. There is no vertical direct effect. So, unlike the Treaty for the Functioning of the European Union its provisions cannot be enforced by corporate or natural persons against the contracting party in whose territory they are based.
There is also an independent dispute resolution mechanism for the parties to enforce the terms of the deal. There is no role for the European Court of Justice. Initially any disputes are referred for consultation. Both parties will try to resolve the issue informally. Failing resolution of the dispute the complaining party can refer the matter to an independent arbitration tribunal which the TCA will establish. Each contracting party will pick three independent arbitrators jointly. The arbitrators’ decision will be binding and delivered in a set timeframe. The tribunal has the power to order a range of remedies from rectification through to the award of compensation and their rulings are binding. If the defaulting party fails to comply the complaining party can suspend various obligations under the TCA. The TCA also provides for an overall review after four years.
It is important to note that there is a special redress mechanism separate from the general dispute mechanism discussed above which applies to the introduction by either party of “unfair competition” measures which are discussed in more detail below.
One of the great success stories of the TCA is the agreement between the UK and EU that the vast majority of goods will be subject to zero tariffs and quotas. This was widely heralded as the main benefit of reaching an agreement with the EU. It also avoids the introduction of customs duties, export duties, taxes or other charges on goods moving between the EU and UK as long as they are of EU or UK origin. What goods count as EU or UK origin will be assessed according to the appropriate rules of origin as defined in the TCA. In addition, there are no quantitative restrictions. So there will be no quota limits for the volume of imports or exports between the UK and EU 27.
However, freedom from tariffs and quotas in the TCA are tied to the UK keeping broadly regulatory equivalence to the EU under the unfair competition provisions.
Non -Tariff Barriers
The real issue about the ease of post Brexit trade between the UK and the EU was never really about customs duties or quotas but about non- tariff barriers.
Although there are specific terms which address in part customs and trade facilitation (including allowing traders to self -certify the origin of goods) a concern remains about how much an impediment non-tariff barriers will represent to UK/EU trade. An example of one of the main non- tariff barriers is the new customs controls and other border control requirements that will apply from 1 January 2021. The UK is phasing in its customs controls over the next six months, but the EU controls take effect immediately from the beginning of the New Year. It is unclear how much of an obstacle these new rules will be and even if they cause an issue at the start whether they will settle down to a workable system. One commentator has suggested that traders may face up to a 50% increase in the amount of red tape and bureaucracy in the form of new forms and checks when going through customs. The expectations are that this is likely to lead to long delays and ultimately to increased costs which are likely to be passed on to consumers.
Technical Standards & Trade
One of the biggest areas of concern relates to conformity with technical standards. Technical standards are those standards that goods must comply with before they can be put on the market in each of the EU and the UK. The application of different technical standards will add additional non-tariff barriers to trade.
From 1st January 2021, the UK and EU formed two distinct regulatory, legal and customs territories. Therefore, traders can no longer rely on the harmonized EU approach when supplying products in the UK. Goods will have to be separately assessed for conformity to UK standards. However, the TCA does provide provisions to simplify market access. It allows companies to self-certify conformity assessment with appropriate standards and allows them to re- mark and re- label products in traders’ depots/warehouses in order to comply with relevant requirements.
The TCA does allow some mutual recognition of standards in certain sectors. But this is not across the board. For example, certain agricultural products such as raw meat products may be subject to import bans into the EU. So, this agreement ushers in a new regime which is far more restrictive than the one traders have learnt to live with pre- Brexit. The areas allowing mutual recognition certifications and approvals include some organic products, motor vehicles and medicines. The TCA also has separate annexes on the treatment of wine and chemicals. However, traders are advised to obtain legal advice to ascertain the appropriate treatment for their own particular sector to ensure their goods can still be marketed lawfully in the market of their destination.
There will also be extensive market surveillance measures to enforce standards in each jurisdiction and to exchange electronic information on non-compliant products. These provisions are relatively common in recent Free Trade Agreements. However, many of the arrangements in the TCA are set out in outline and will need further work before fully implemented.
The TCA also establishes that there will be separate Sanitary and Phytosanitary regimes for the UK and the EU.
In many ways the real significance of the TCA is not so much what is included but what is left out. In the realm of Services there will be a very substantial reduction of market access for UK traders to be able to provide services between the EU and UK. However, the TCA does contain a number of specific provisions relating to Services which mirror similar provisions contained in other trade agreements that the EU has struck recently. These agreements include “national treatment” obligations which provide as follows:
Market Access, service suppliers and investors will not face limitations such as economic needs tests, restrictions on corporate form and foreign equity caps.
National Treatment, there will be non-discriminatory treatment between UK and EU service suppliers and investors.
Local Presence, this obligation ensures that cross-border trade is not inhibited by establishment requirements. This is only the second time the EU has agreed a separate obligation on Local Presence.
Prohibition of performance requirements, investments will not subject to conditions such as domestic content requirements or export restrictions.
Senior management and boards of directors, nationality restrictions will not apply to senior personnel; and
Most Favoured Nation Obligations, obligations are included to ensure that the Agreement gives the parties the best terms agreed by the other party when entering into future Free Trade Agreements.
These commitments apply to all services except those which are explicitly carved out by the TCA. An example of such an exclusion are audio-visual services. It will be up to traders to comply with national member states legislation on the provision of services on their territory subject to adherence to the above principles. Therefore, a trader providing services over many different EU countries will potentially be faced with a patchwork of different regulatory requirements.
The TCA provides for specific treatment for certain service sectors such as legal services and financial services. In terms of legal services, the TCA retains a system of home country control for UK lawyers (solicitors and barristers) and allows them to operate as lawyers under their respective titles when advising on UK or private international law throughout the EU subject to any local law restrictions.
For financial services, the provisions of the Agreement are very limited and are less generous than the recent EU/Japan Trade and Cooperation Agreement. Therefore, as from 1 January 2021 UK incorporated financial services providers will lose their EU passporting rights. From early on in the negotiations, the EU had ruled out the extension of passporting rights. The EU Commission instead insisted that UK financial services sector would be subject to unilateral equivalence decisions for different types of financial services.
The parties can now unilaterally recognise a third country regulatory regime as equivalent to their own for market access and other purposes. In the EU, financial services are not subject to one set of regulations and so equivalence decisions would need to be made by the EU in respect of each specific area of business transacted which will facilitates UK firms’ market access for that particular area of service. It is estimated that there are about some 59 areas where equivalence decisions could be made. However, it is important to note that even if an equivalence decision is made this is very different to passporting rights. It depends upon the exact scope of the equivalence decision as to the freedoms it confers. Few findings of equivalence enable third-country firms to provide services to EU clients without an authorisation in the EU. Furthermore, it should be noted that findings of equivalence can be withdrawn at any time. So, there is little security or continuity even if a finding of equivalence is made.
A vital part of being able to provide services freely throughout the EU is free movement of persons. This will be severely restricted after the New Year. The TCA permits UK and EU business visitors from the other’s territory to stay for a period of up to 90 days in any six-month period. Any longer stays will involve the need to apply for visas or residence permits dependent upon the laws of the relevant member state.
One of the crucial elements of doing business today is the security of, and ability to transfer, data internationally. In many cases servers hosting and processing data are located in other countries. Therefore, being able to transfer data to and from the EU for UK companies will be an essential need in being able to transact business unhindered post 1 January 2021.
At the present time, the UK is currently subject to EU data protection laws including the General Data Protection Regulation (the GDPR). In so far as they have not been already implemented into domestic law by virtue of primary or secondary legislation, they have been incorporated into UK law by virtue of the provisions of the EU Withdrawal Acts. Therefore, UK data protection rules are currently aligned with EU data protection laws. Future EU data protection laws will, however, no longer apply in the UK from 1 January 2021. Consequently, therefore, there is the prospect of divergence in the future between the two trading blocs.
Under the GDPR rules the European Commission can deem that non-EU countries equivalent in that they provide adequate protection for individuals rights and freedoms for their personal data. Such a finding would facilitate transfers of personal data to that third country. Therefore, if the UK kept its laws close to those of the EU, the EU could deem UK law equivalent and accordingly allow transfers of personal data to the EU from the UK or vice versa.
In the Revised Political Declaration signed by the EU and the UK in 2019, the EU committed to begin its assessment of the ‘adequacy’ of the UK data regime with a view to coming to a decision by the end of 2020. However, it was clear that time had run out for such an assessment. Accordingly, the TCA provides for a period of four-months, extendable to six months, during which transfers of data from the EU to the UK can continue if the UK maintains its current rules.
The EU will, in the New Year, continue to undertake its adequacy assessment with a view to coming to a decision by the end of the interim period provided for in the TCA. This assessment will, by necessity, also take into account the concerns which have already been raised about over-reaching surveillance laws which among other things gives intelligence agencies unprecedented access to personal data. These laws cut across privacy rights and, in particular, two recent CJEU decisions in Case C-311/18 Schrems II and Case C-623/17 Privacy International.
In this regard, therefore, the concern remains that the UK Investigatory Powers 2016 (also known as the “Snooper’s Charter”) could make it difficult for the European Commission to award adequacy status to the UK. If the UK fails to achieve adequacy status, organisations will need to rely on other adequacy measures to move personal data from the EU to the UK such as Standard Contractual Clauses (although, in light of the Schrems II decision, this is far from straightforward where the country to which the personal data is to be exported – the UK – is considered to have excessive surveillance laws).
At the same time the UK Government has said that it will consider how data is regulated in the UK. If in so far as the UK may depart from EU rules this could heavily influence the Commission’s adequacy process.
The UK will leave the Internal Market for Energy after 1 January 2021. As the UK and its EU energy grids are closely integrated this is vital to keep energy supplies flowing. The Agreement therefore provides for the continued flow of energy across gas and electricity interconnectors. Northern Ireland, given its geographical position, maintains a special position and will remain part of the Single EU Electricity Market under Article 9 of the Protocol on Northern Ireland.
The Agreement commits both Parties to develop and implement new, efficient trading arrangements by April 2022. These will ensure that capacity on the interconnectors is maximised and that there is implicit trading in how this capacity is allocated (i.e., capacity and electricity are sold together). The Parties have also agreed under the provisions of the TCA to cooperate on the development and uptake of renewable energy and to maintain compliance with climate changes obligations under COP 21 Paris Agreement.
The TCA does have a pronounced effect on freedom of UK transport operators to provide transport services in the EU which will be curtailed post 1 January 2021. In terms of road haulage, the deal allows UK and EU road haulage operators to continue to move goods to, from and through each other’s territories. However, limits are placed upon the services or number of additional operations they can provide in each other’s territories. The TCA also permits passenger travel by road between the UK and the EU but prohibits road passenger transport operators of either the UK or EU to operate “regular or special regular services with both start and terminate in the territory of the other party”. There are also limits placed on the provision of aviation. Operators can still provide unlimited point-to-point traffic between the EU and the UK. However, airlines authorised in the UK cannot provide passenger or cargo flights between EU destinations.
The TCA ensures that the UK can maintain a separate and independent procurement regime and will enable the UK Government to enact reform of the present procurement regime which it has started to do through the recent publication of its Green Paper entitled “Transforming Public Procurement “.
The TCA provides for a transparent and non- discriminatory framework of rules for trade in public procurement. These rules are based on the WTO Government Procurement Agreement (GPA) to which the UK is in the process of acceding. However, the TCA goes further than the GPA by agreeing an extension of market access coverage to include the gas and heat distribution sector, private utilities that act as a monopoly and a range of additional services in the hospitality, telecoms, real estate, education and other business sectors. The UK Government hopes this will provide businesses with additional opportunities and present contracting authorities with the benefits of increased competition, creating better value for money for the taxpayer.
Unfair Competition & Retaliatory Measures
This area proved the most contentious part of the negotiations between the UK and the EU. The UK’s central contention was that they must have the ability to legislate as they saw fit in their role as a sovereign country. On the other hand, the EU wanted to ensure the UK did not undercut EU regulatory standards to gain an unfair trading advantage- so called “regulatory dumping”. Of particular concern were the areas of state aid, labour and social, environment or climate protection law.
Accordingly, the TCA permits either party to take protective measures if they are being damaged by measures taken by the other party in subsidy policy, labour and social policy, or climate and environment policy. So, for example if the UK approves lower standards of protection in these areas which may economically hurt the EU, the TCA allows the EU to take unilateral countermeasures which could include the introduction of tariffs or quotas. The TCA states that if such retaliatory measures are used too frequently either side can trigger a review of these provisions and the overall trade aspects of the TCA. This would allow the parties to agree a different balance of rights and obligations.
Essentially this signals that the present agreement are the terms of trade for now but the whole agreement could be reopened in conditions where the UK maintains its own independent regulatory policy in the sensitive areas mentioned which causes economic damage of the EU.
The introduction of these measures will be subject to special arbitration dispute procedures separate from the normal dispute settlement provisions of the TCA.
Status of Northern Ireland
Northern Ireland has a special position in the new UK/EU trading regime. The Protocol on Northern Ireland agreed between the parties puts Northern Ireland on a different footing to Great Britain. The Protocol creates a customs and regulatory border between Great Britain and Northern Ireland requiring goods to be cleared by customs moving between Northern Ireland and the mainland UK. Northern Ireland stays within the EU Single Market for the purposes of goods so the TCA will not govern trade in goods between the EU and Northern Ireland. However, goods entering Northern Ireland from Great Britain and vice versa will counted as imports and exports respectively from the EU. As far as services are concerned Northern Ireland will still be treated as being under UK rules.
Traders from both the UK and the EU will have to get used to trading under the new regulatory system. There is still considerable uncertainty as to how the new systems will work in practice and both the EU and UK will continue to work on the rules for implementation.
As the new rules have been agreed with only days to spare before the end of the transition period businesses have not had the time to adequately prepare for the change. Businesses are therefore advised to seek legal advice to ascertain how they will be affected by the new rules at the earliest possible opportunity.